Growth Fears Dent Commodities Prices
December 13 2018 - 5:55PM
Dow Jones News
By Ira Iosebashvili
Many key commodities are on track to notch declines this year,
underlining how fears of slowing growth, global-trade tensions and
a persistently strong dollar have hammered prices for raw
materials.
The Bloomberg Commodity Index is down by more than 6% this year,
led by a nearly 13% fall in oil prices. Other raw materials are
also headed lower: Copper is off almost 16% this year, while iron
ore has lost nearly 6%. Gold prices have declined by around 5%, and
lumber is down by almost 28%.
Those slumps have come as investors pulled just over $11 billion
from commodity-focused funds over the last six months, according to
fund tracker EPFR Global. Net bullish bets by hedge funds and other
speculative investors on oil prices stand at their lowest level
since August 2016, data from the Commodity Futures Trading
Commission showed.
Driving the declines are fears that trade tensions between the
U.S. and China will hit global growth at a time when expansion
outside of the U.S. is already lackluster. Investors worry that
slowing growth would likely dent demand for commodities, which are
used extensively in manufacturing and construction. A composite
index of global manufacturing activity produced by J.P. Morgan and
IHS Markit stood at a 23-month low in November.
Those concerns might not dissipate soon. China, a top consumer
of many raw materials, may be limited in the range of economic
stimulus measures it can deliver after months of fighting to rid
its economy of excess leverage, analysts said. The eurozone's
economy notched its weakest quarterly growth since early 2013 in
the three months through September, and some investors are
concerned that U.S. growth -- a standout among major economies --
may have peaked.
"The strength that we saw in the last two years is not there
anymore," said Michael Widmer, a commodities strategist at Bank of
America Merrill Lynch. "Large parts of the global economy are now
in a challenging environment."
Mr. Widmer believes commodity prices will keep drifting lower in
the first half of 2019, before stabilizing in the second half of
the year, when he expects China to deliver a limited stimulus
package.
Analysts at BNP Paribas expect global growth to drop to 3.4% in
2019, from an estimated 3.7% this year. That change doesn't bode
well for metals like copper, a key component in everything from
smartphones to refrigerators. Despite limited growth in global
copper supply, the slowdown will make it unlikely for prices to
recover next year, said Harry Tchilinguirian, the bank's global
head of commodity-markets strategy.
A stronger dollar has also weighed on prices for raw materials,
which are denominated in the U.S. currency and become more
expensive to foreign investors when the dollar appreciates. The WSJ
Dollar Index is up more than 5% this year, boosted by an outlook
for higher U.S. interest rates and expectations that the U.S.
economy will suffer less than others from trade frictions.
Forecasts of higher U.S. interest rates have also dented gold,
which struggles to compete with yield-bearing investments when
borrowing costs rise.
Further declines in commodity prices would be an unwelcome
development for countries like iron-ore exporter Australia and
Brazil, which produces oil and sugar. The Australian dollar is down
7.5% against its U.S. counterpart this year, while the Brazilian
real has lost nearly 15%. South Africa's rand is down nearly 13%,
while the Chilean peso is off nearly 8%.
Heartened by recent signs that a trade truce between the U.S.
and China may be sticking, some investors believe an end to the
drop in the price of commodities may be in sight. Other market
watchers are also convinced that the Fed may signal a new
wait-and-see approach to tightening monetary policy after a widely
expected rise in rates in December, a development that could slow
the pace of rate increases next year and limit further gains in the
dollar.
Meanwhile, a decision by the Organization of the Petroleum
Exporting Countries and its allies to cut output starting in
January may help curb a burgeoning glut of oil.
Hakan Kaya, a portfolio manager at Neuberger Berman, believes
that politically driven risk aversion has been the main factor
behind commodity-price declines and is increasing futures positions
that would benefit from a rebound in oil and metals prices.
"I don't remember any year when global politics impacted prices
this much," he said.
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Write to Ira Iosebashvili at ira.iosebashvili@wsj.com
(END) Dow Jones Newswires
December 13, 2018 17:40 ET (22:40 GMT)
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