Energy Transition

Why have commodity prices fallen so far?

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Commodity prices have fallen to their lowest level since the financial crisis and — by at least one measure — to the lowest this century. While the natural resources sector has been caught up in fears about China’s growth slowdown, each commodity still has its own market dynamics. Here is a quick guide to what is happening.


Growing signs that the oil glut will persist has unnerved traders and investors. But it is China that is spreading real fear. The country has been a bigger contributor to oil demand growth than any other in the past decade, so any slowdown in the Chinese economy may spell bad news for crude consumption.

The US shale industry has also been more resilient than expected, as has output from other non-Opec producers. Meanwhile, members of the Opec producers’ cartel such as Saudi Arabia and Iraq are pumping at near record rates.


Heading into September, the industry is keeping an eye on refinery maintenance as seasonal repair and upgrading work tends to lower oil demand in the autumn months.

Analysts at BMI Research said a sharp rise in hedge fund bets against the oil price had “added significant downside pressure on both Brent and WTI in recent weeks”. The oil rout, which began in June 2014, “has further to run”, they said.

Although demand had picked up since the start of the year, it has so far failed to soak up the additional supplies. Analysts estimate the overhang in the second half of this year to be as high as 2m barrels a day.

“With the macroeconomic picture deteriorating in recent weeks, the market cannot rely on improvements in demand alone to rebalance,” said analysts at Energy Aspects, a London-based consultancy. “A meaningful supply response from every producer” is needed for prices to stage a rally, they added.


Demand for copper in China has grown by about 2-3 per cent this year, weaker than many analysts originally forecast. Anticipation of that demand shift saw Chinese hedge funds push the price of the metal down rapidly in January. This month the metal, used in everything from wiring to power cables, hit six-year lows.

While analysts say physical trade in China has been quite active, with imports of refined copper rising 2 per cent in July, overall demand still remains relatively weak.

Copper producer and trader Glencore said last week that copper inventories were at historical lows and argued hedge funds had pushed the market lower. “You normally get high prices with the low inventory,” said Ivan Glasenberg, chief executive.

But many traders point to a slowdown in Chinese infrastructure investment, especially in the power sector — one of the biggest consumers of copper.

The price of the red metal is trading below the cost of production, with Macquarie estimating that about 17 per cent of mines are losing money at current prices. That could lead mines to cut output, which may eventually boost prices. Longer term, analysts say there are few new large mines to replace older output. Chile’s Codelco, the world’s largest producer, is investing billions just to maintain current output.


Aluminium prices have been hit by a wall of Chinese exports this year and are trading at the lowest level in six years.

But while the incentive for Chinese aluminium companies to export the metal has arguably fallen, the market is still oversupplied because no producer is willing to cut output.

Global aluminium supply rose more than 10.3 per cent in the first half of the year, according to the Aluminium Institute. In China, while there have been closures, many smelters have increased their capacity, according to consultancy CRU, with production in western Xinjiang province up 36.5 per cent in July.

Analysts expect growing Chinese production to force western producers to close, as the country moves from being a “customer to a competitor”.

“We feel that the road ahead for aluminium is likely to be very painful given the huge excess capacity that has been (and is still being) built in China,” Investec said. “The new Chinese smelters are state of the art and have very low costs of production. We therefore feel this will result in the large-scale closure of ‘western’ capacity over the next few years.”

Iron Ore

Iron ore prices have fared better than base metals over the past two months, rallying about 25 per cent since hitting a record low in early July.

The recovery to $56 a tonne came about because of lower exports from Brazil and Australia. But prices are still down 22 per cent this year according to the Steel Index, as supply continues to outweigh demand.

Iron ore futures traded in China fell 4 per cent on Monday, the maximum allowed in a single session under exchange rules.

While higher-cost mines are feeling the pressure, the world’s largest miners show few signs of cutting back. Miner Rio Tinto plans to deliver 20 per cent more iron ore to China this year than last, it said last week.


Gold has benefited this month on rising expectations that the US Federal Reserve will hold off on raising interest rates next month. Boosted further by investors looking for a so-called haven for their cash amid the global equity market rout, gold inched up 6 per cent this month.

The precious metal faced some pressure on Monday, however, as some investors cashed in their gold holdings to help meet margin calls in other market.

“Gold is holding its own well despite the heavy losses suffered by commodities across the board,” analysts at Commerzbank said.

“Nonetheless, gold has not been able to gain any further in spite of the sharp rise in risk aversion and a noticeably weaker US dollar.”

The buyers have mainly been in the west and the US, and not in the traditional centres of demand in India and China, analysts say. That means prices are likely to be heavily dependent on the US dollar and the signs coming from the Fed.


Read more:

Oil at 6-year low as commodities tumble

US oil export reform push gains pace

An iron ore civil war in Australia


This article is published in collaboration with Financial Times. Publication does not imply endorsement of views by the World Economic Forum.

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Author: The Financial Times covers, comments and analyses the latest UK and international business, finance, economic and political news.

Image: A worker walks past a pump jack on an oil field owned by Bashneft company near the village of Nikolo-Berezovka, northwest from Ufa, Bashkortostan, January 28, 2015. REUTERS/Sergei Karpukhin


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