Commodities have been motoring ahead thus far this year with iron ore the leader after its move yesterday; up 19%. This was the biggest one day gain since 2009; it now trades up at June last year’s level and is 66% up on the lows of last December. Spurred on by expected demand from China coming into the summer construction season, reported low supplies at Chinese steel mills and additional demand helped by government initiatives to spur the domestic economy, ore jumped on very little activity. Ore is not alone - Copper is up 14% from its mid-January low and Aluminium is up 12% from its 12th January low.
Precious metals are also posting impressive gains led by Gold up 19.5% so far this year ahead of Silver +13% and Platinum +11.85%, in fact it’s hard to find a commodity outside of agriculture which is not up this year.
So what has changed? The global economic outlook has been lacklustre for months and indeed the commodity markets were pricing in a lack of future global demand, more realistic than the current levels of stock markets. Strangely, every commodity has its own story, from Chinese demand to OPEC cooperation in the oil market however can these gains be maintained?
Goldman Sachs Group Inc. argue NO in their recent report, thinking that any increase in prices will just encourage further supply which will curtail the latest rally and cause the likes of Copper and Aluminium to correct 20% this year. They argue that a surge in Chinese credit, the gain in oil prices and a weaker U.S. dollar spurred the metals rally but that “the structural bear market drivers” of the last five years remain in place for commodities. “Deleveraging in China and emerging markets, further U.S. dollar strength, mining cost deflation and strong supply growth, particularly in Copper, because of a prior boom in capital expenditure are set to keep capex heavy metal prices under pressure” they said.
With prices rising significantly, they recommend producers and investors with longer term horizons begin hedging strategies and consider short positions. We are currently trading at the top of their forecast for oil at $40 per barrel for Brent arguing the oil market is still oversupplied and “only a real physical deficit can create a sustainable rally”.
It will be interesting to see what happens next in the commodity markets as the latest moves do appear more technical, a correction from oversold levels, shorts being covered, rather than buying due to expectations of a pickup in economic activity. Many analysts argue that the current high prices cannot be maintained, further supply will be forthcoming pushing prices down once again over the coming months.