Commodity rout near new low
Almost all commodity futures except cotton and sugar moved in one direction: down, down and down! Crude oil, natural gas, gold, silver, copper and iron ore had a shocker of a year.
The commodity rout is approaching an ugly new benchmark milestone, with losses across more members of a leading benchmark than in any year since the financial crisis (2008). We have seen a fundamental change in investor attitude towards commodities as an asset class. In a sign of commodities disfavour, last month, the US futures regulator declared it would stop publishing data on commodity index investment due to a low level of interest.
One reason why many futures have dropped is the slowdown in China, the engine of demand growth for commodities from iron ore, copper and soybeans. A stronger dollar has also pressured commodities in the index as they are priced in the US currency.
Unique factors have also played a part, with lean agro commodity softening due to expanding production and natural gas suffering from warm weather in US cities. Cotton and raw sugar are the only Bloomberg index member that is up this year, gaining a modest 5.76 per cent and 4.19 per cent respectively as the world harvest shrank by 15.4 million bales and more demand respectively. Some see it as a harbinger for other commodities as the prolonged price slide begins to cut into supplies.
We believe we will look back at the first quarter of 2016 as the bottom for commodity markets. If you were sceptical about commodities five years ago, you probably haven't gotten evidence to convince to change your mind. All except two of the 22 futures contracts in the Bloomberg Commodity Index are lower in the year to date, with negative returns ranging from -8 per cent for corn to a staggering -39 per cent plunge for oil.
Last year, several commodities fell below 2008 lows. The index is headed for the worst of five straight years of declines. The Bloomberg index is one of the two most widely used commodity indices, tracked, traded and invested with billions of assets. Continuing declines in commodities and a deprecating yuan could further feed into consumer prices and the Federal Reserve's plans to raise US interest rates this year.