By Mark Melin. Originally published at ValueWalk.
A strong and persistent trend is taking place in commodities, a July 31 report from Capital Economics notes, and nothing is likely the change the “current malaise,” and this includes what is expected to be strong economic data released this Friday in the U.S. unemployment report.
As Capital Economics sees further job losses in both the oil industry as well as South Africa’s mining industry, a Bloomberg study coalesces with the commodity price trend. It notes a study of 16 key traders and analysts that point to continuing drop in the price of precious metals.
Oil commodity prices not just a victim of more supply
While many analysts have fixated on the increase in oil supply as a reason for the downdraft – initially the significant speculation was that U.S. shale production was the culprit, and more recently “the looming return of exports from Iran” have been credited with a faltering price of oil, there is another factor, Capital Economics notes. With the price of WTI Crude oil futures trading at $45.83 today, down from near $61 as recent as June 15, a bigger issue with oil’s price decline could be overall commodity momentum.
“Prices are likely to continue to be more influenced by sentiment towards commodities in general and by developments in China in particular,” the report noted, saying the possibility of a strong El Nino event this winter, ushering in higher temperatures, could lower demand for heating oil. That said, the El Nino impact is likely to have a “negligible” impact on prices despite the lowered demand as falling output and demand outside the U.S. could offset the weather effect in 2016.
Capital Economics Commodities: Precious metals weak but signs of strength ahead
Weakness in Mainland China’s gold imports from Hong Kong and Switzerland are a confirmed commodity trend, to a degree, by falling imports from India. The primary gold buying countries are weighing on prices but could see a pickup in the second half of the year as gold on sale could stimulate “a fresh wave of buying” in the Asian region.
Gold isn’t the only metal falling on hard times, the report noted. Platinum fell to its lowest price in six years as producer Lonmin reiterated plans to cut 6,000 jobs. However, labor discord might strengthen pricing. “With the situation between unions and miners becoming more tense, we believe that there is an increasing risk of strike action at South Africa’s platinum mines and any disruption to production should prompt a price rally,” the report predicated.
Iron ore prices surged, for instance, on a maintenance closing showing how supply constraints can quickly impact price, but the report said that “the rally should be short-lived” in the industrial metal. “Even though we have factored in a 15 percent year over year drop in Chinese iron ore production this year, the market can still be expected to record a huge surplus,” the report said, predicting a $45 per ton price by the end of 2015.
Capital Economics Commodities: Continued dollar rally expected to keep ag prices lower
Wonderful weather across the Midwest, a temperate mixture of rain and sun, is driving corn and wheat prices lower, but there is perhaps a more significant macro-economic factor at work: the U.S. dollar. As the dollar rises it makes U.S. agricultural exports less competitive around the world, lowering demand. When increasing supply meets weakening demand, one event is likely to occur. “We expect increased dollar strength as the Fed begins to raise interest rates will further undermine the competitiveness of US exports,” the report predicted.
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