Too much of everything spurs commodity exodus
Strong U. S. dollar, oil glut, slowdown in Chinese growth add to woes
Investors are bailing out of commodity funds at the fastest pace on record, and the exodus shows no signs of ending.
U. S. exchange- t raded f unds linked to broad baskets of raw materials saw a net outflow of $ 919 million US over the first three months of the year, the most of any quarter since the securities were created in 2006, data compiled by Bloomberg show. Bank of America Corp. says ample supplies have unleashed price wars, and Goldman Sachs Group Inc. predicts a 20 per cent drop for commodities already near a 13- year low. Morgan Stanley and Societe Generale SA also have cut forecasts for a whole range of items.
Rising supplies created bear markets over the past year as drillers unlocked more oil and natural gas, copper mines expanded and farmers harvested record corn and soybean crops. The strongest dollar in at least a decade encouraged countries with weaker currencies to export more. While the U. S. economy is strengthening, Europe is still contending with its debt crisis and growth is slowing in China, the top user of everything from iron ore to pork.
“This is not the best time to be making wagers on commodities,” Sameer Samana, a global strategist in St. Louis for Wells Fargo Investment Institute, which manages $ 1.6 trillion, said in an interview March 24. “Base metals and farm commodities are very sensitive to global growth, and most of these markets are oversupplied. China and the emerging markets have been pretty weak and are not growing fast enough to create demand.”
The Bloomberg Commodity Index of 22 raw materials is down 4.6 per cent since the end of December, after slumping on March 18 to the lowest since June 2002. Crude oil, which averaged almost $ 96 a barrel in the three years through 2013, touched a six- year low of $ 42.03 on March 18. Agriculture led the quarter’s retreat, with double- digit declines in the quarter for wheat, coffee and sugar.
The commodity index is heading for a fifth straight annual drop, the longest slide since the data began in 1991. The slump ended a decadelong super- cycle of demand fuelled by double- digit growth in China. After prices surged to records for everything from corn and copper to crude oil and gold, production surged.
Hedge funds are exiting commodities, based on futures and options for 18 U. S.- traded items. Since bullish bets reached the highest ever in April, net- long positions on March 24 are down 98 per cent to 37,708 contracts as of March 24, government data show. The measure tracks the number of contracts, not value, which ranges from about $ 120,000 for gold futures to $ 13,600 for sugar.
Commodity exporters have boosted shipments as their currencies weakened. The Bloomberg Dollar Spot Index surged 18 per cent in the past year, and on March 13 reached the highest since the measure began in 2004. Coffee exports from Brazil, the world’s top grower, are up 10 per cent in the eight months through February and the highest since at least 2011.
Weakening energy and mineral prices led Caterpillar Inc., the largest maker of construction and mining equipment, to forecast in January that sales would drop nine per cent this year to $ 50 billion. The company reiterated the forecast March 17.
In China, the government on March 5 forecast seven per cent growth this year, the slowest since 1990. While the U. S. is forecast to grow three per cent in 2015, the most in a decade, signs are emerging that a global slowdown may weigh on manufacturers as a strong dollar slows exports. Orders for goods meant to last at least three years fell 1.4 per cent in February, the government said March 25.
Not all commodities face surpluses. Standard Chartered says global demand for aluminum, zinc, nickel and tin will exceed output in 2015. Macquarie Group Inc. predicts the metals will rally.
Low interest rates and cheap supply may boost demand. To spur their economies, the European Central Bank pledged 1.1 trillion euros ($ 1.2 trillion US) in bond buying and Japan bought assets. Canada, Singapore, Denmark, Russia and Switzerland all eased monetary policy in January. In China, policy- makers will take action if growth drifts too low, Chinese Premier Li Keqiang said this month.
“Demand for commodities in the U. S. has stayed pretty strong, and if the stimulus works on the other side of the Atlantic, that could certainly help demand conditions,” said Christopher Burton, a fund manager at Crédit Suisse Asset Management in New York who helps oversee $ 10.1 billion US in commodity- related assets.
This is not the best time to be making wagers on commodities.