Fra Commerzbank
A number of commodity prices have recently reached new multi-year lows. The latest poor economic data from China undoubtedly justify lower prices, but in our view this slump is exaggerated, and prices should stabilise again soon. At current price levels, a large part of present production is no longer profitable. We do not envisage a lasting recovery until next year, though, as the long-overdue closures in the mining and oil industries will have to occur first.
The retreat in commodity prices based on broad indices that began in 2011 has gathered further momentum in recent weeks. Most industrial commodities are meanwhile back down at prices last seen during the economic and financial crisis of 2008/2009. However, whereas the drop in prices in recent years can be attributed to weaker growth in demand and larger supplies, the latest decline is largely speculative driven, in our view.
Admittedly, Chinese economic growth has slowed even more of late, and it is China that accounts for roughly half of global demand for base metals. China has also accounted in recent years for most of the growth in demand for other commodities. It would be wrong, though, to talk of a slump in economic activity that would justify the latest price slide. On the contrary, growth should stabilise in the second half of the year, thanks to the measures introduced by the government and the central bank. The weekly CFTC and LME reports on how various market player groups are positioned in fact suggest that the latest price developments are largely speculative driven.
Money managers, for example, i.e. hedge funds and large investors, are already holding huge (net) short positions in a number of commodities (see chart 8). In the past, though, these investors have often taken a highly pro-cyclical stance: Close to price lows, they have often been over-pessimistic, and too optimistic close to price peaks. In other words, their current positioning might point to a shortterm counter-movement in prices. The supply-side situation also points to higher prices for crude oil, precious metals and base metals in the medium and longer term.
Many commodities are already so cheap that a large part of their production is unprofitable. Nickel and platinum are prime examples here: their marginal production costs are probable 30% – 40% above current price levels (see chart 9). Producers can of course absorb the resulting operative losses for a certain time, but with some commodities the gap between prices and marginal production costs is now so great that it cannot be overcome by raising efficiency and expenditure cuts. Consequently, production capacity will probably be scaled down drastically, thus fuelling a sustained price recovery
