The Commodity Bloodbath

Ladies & Gentlemen,

As we begin to make sense of the shocking lows in Commodities across the board, we must turn our eyes onto the Macro picture to find reasoning for the short-term and also look to consider the worst-cases for the coming years.

The "Demand-Destruction" story begins in China. The Chinese Economy is slowing down and the demand for commodities forming from the Chinese manufacturing sector is also on it's way down south - with the fall led by Material/Energy companies in the Asia Pacific (falling this year circa 13%).    This Market slump has shown the World how strong the in-elasticity of demand on price from China actually is.

Key Chart 1

Copper is trading at 6-year lows (chart below) & Nickel (the biggest loser on the LME) is at 12-year lows.

Key Chart 2

$BHP & $RIO all fell yesterday to 10-year lows as producers continued to slump across the global equities amid the bloodbath. $BHP is now looking at the prospect of having its credit rating downgraded in the next 12 months in response to further possible falls in Iron Ore & Oil prices. 

Another major reason behind the Commodity-glut is due to the Market concerns about further USD strength, starting with the first hike in December. Countries who do not use the USD as their primary currency will feel further heat as their currency begins to weaken amid prospective USD rallies. This will then make is cheaper to produce and create further over-supplies!

Will OPEC do anything about the Over-Supply in Oil? Well, further to comments made by the Saudi's yesterday - they are keen to work with other OPEC countries in stabilizing the market - however the facts remain & there is no quick fix! We will find out more on Dec 4th, when the OPEC heads all get together.... Meanwhile, the Glut continues as people talk about the biggest decline since the fall of the Soviet Union.

Can we really find a bottom?.. Let's take it back a notch. If we look at some charts, we can see stability over the last few weeks. and it is important to remember that the Commodity business is extremely cash intensive and producers will not be looking to cut supply but rather costs. Major Commodity producers still need the revenue.

I personally think, the actual effect of this fall will truly depend on how fast the US Economy can accelerate & how long the FED Rate Hike cycle will last for.

Take out your 3D Glasses and watch the rest of 2015 unfold.

Best of luck

Anish8FX @Atom8.com www.atom8.com

The Spectacular Collapse of Iron Ore

Falling commodity prices and a weak outlook for growth have increased the chances for a rate cut by the RBA next week - further applying downward pressure on an already weakened AUD. 

The ASX 200 fell over 30 points last night, as the prices of Iron Ore continue to feel the impacts - with mining & energy stocks leading the way. 

BHP has lost 2.2% & Rio Tinto ended the session 1.4% lower today.

Iron Ore at 10 year lows

The recent $13bn purchase of a Chinese owned mine in Australia have most definitely awakened this bear. Dubbed the "Sino Iron Project" it has been heavily criticized by the industry - as the Chinese plan to pump millions of tons or Iron Ore into an already over-supplied market.  

China in Peru, Africa & now Australia 

On Tuesday, Iron ore fell to $51 per metric ton. That is the lowest it has been since 2004. This now forces the likes of Rio Tinto & BHP to curtail output to boost prices. However, China is not stopping - as the state owned firm citic are planning a 30 year project expanding Worldwide. Even despite the Chinese GDP slowdown, the country still aims to protect it's future needs. 

Realities 

The iron ore price would have to hit about $30 before the two major corps would risk losing money. 

Many voices in the industry point towards a wall around $45... but let's see what happens following next weeks prospective rate cuts. 

Meanwhile... Iron Ore continues to slide... 

Thank you for reading.

Any feedback or comments would be greatly appreciated.

- Anish