Our Commodity Outlook Shifts as Bears Take Over

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Commodities gave important signals in April/May. The performance of commodity markets has a heavy impact on the price movements on any industrial metal. If you are a metal buyer, it doesn’t matter if you buy aluminum, copper, steel or tin. The information in this article is important for you.

Reuters/Jefferies CRB commodity index. Source: MetalMiner analysis of stockcharts.com

About a month ago I noted that while industrial metals were on the rise, commodities were range-bound, a sign of sluggish global demand. As I had written, “a healthy bull market in base metals should be accompanied by a bull market in other commodity markets.” Commodities not only have struggled to make new headway but in the past few days they weakened significantly. Recent moves in China have caused a significant shift of sentiment in financial markets.

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China Curbs on Credit

Interest rates in China have risen to the highest level in two years amid the country’s tough talks on curbing credit. China is putting on the brakes on credit growth, and the effects of those policies are already starting to be felt. As the Financial Times reported, “China Vanke, one of China’s biggest property developers, was [recently] forced to drop a bond sale… blaming changes in market conditions.”

The noticeable tightening in Chinese monetary policy is bad news for its property markets. The country has also pledged to halt risky local funding for the construction of infrastructure projects. Investors know that this will hurt demand for commodities and industrial metals.

Iron ore falls sharply in May after attempting to rebound

Iron ore prices attempted a rebound after a significant sell-off, but they failed. Bears took control in May, sending prices to the lowest levels in six months. Concerns over softening demand in China have also been fed by disappointing manufacturing readings in April. China’s Caixin manufacturing PMI fell to 50.3 in April, below expectations of 51.2. The reading signaled the weakest manufacturing expansion since September 2016. The PMI index is still in expansion territory, but I suspect we will see weaker readings over the next several months due to credit control.

Oil Prices Take a Dip

As I’ve written previously, “oil is not just a commodity itself, but also an asset closely followed by commodity investors. Falling oil prices cause investors to move away from commodities and, of course, industrial metals. In addition, oil is the main benchmark for energy prices. Lower energy prices mean lower transportation costs and lower production costs, especially for those energy-intensive metals like aluminum.”

Oil prices take a dip in May. Source: MetalMiner analysis of stockcharts.com

Oil prices took a hit in May, as investors believe that the ongoing production caps aren’t doing much to reduce the global oil glut. Inventories remain at high levels, and some analysts estimate that despite November’s deal, OPEC’s total output remains elevated and above the agreed-upon cap. Higher oil prices since the beginning of 2016 added fuel to a rising trend in base metals. But as oil prices fall to a five-month low, weakness is now spilling across the board.

What This Means For Metal Buyers

The bull market that commodities enjoyed since the start of 2016 might be coming to an end. That also means that industrial metals have lost that tailwind that prevented prices from falling. Recently, we started to see the first signs of weakness in base metals. The first metal showing this behavior was nickel, which hit a 10-month low. More industrial metals could follow and industrial buyers need to adjust their strategy accordingly.

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