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Less demand spells more glut in commodities – Economic Times

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By: Mark Burton

So much for the commodity recovery. After a 2016 rally that ended five straight years of declines, prices of everything from crude oil and zinc to sugar and soyabeans are once again mired in slumps. The outlook for industrial materials like iron ore and coal may get even worse, with slowing economic growth in China compounding global surpluses. The Bloomberg Commodity Index has dropped for three straight months, the longest decline in more than a year.

While demand for many raw materials remains strong, the growth and the tight supplies that supported last year’s rally are fading, according to Macquarie Group. Oil inventories are so large that Opec and its partners agreed in May to extend this year’s production cuts for another nine months. Global stockpiles of grain before the 2017 harvest are the biggest ever, and a London Metal Exchange price index is in its steepest decline since 2015.

“You can see weakness emerging in many parts of the supply chain,” Colin Hamilton, global head of commodities research at Macquarie, said by phone from London Thursday. Some investors are betting prices have peaked amid signs that industrial activity is slowing in China, the world’s second-largest economy and the biggest buyer of many raw materials.

The Caixin Manufacturing Purchasing Managers Index showed a contraction in May, the first in 11 months. The country’s imports of refined copper in April dropped by the most in six years and were the smallest since October. Among the worst hit in recent months was iron ore, one of the industrial metals and bulk commodities that are now past their cyclical peak, analysts at Macquarie said in a May 31 report.

The raw material used to make steel rallied 81% in 2016, and touched a two-year high of $94.86 a metric tonne in February, as China stockpiled supply and looser economic policy stoked demand.

Strong underlying copper demand in China has been masked by a surge in scrap supply after a jump in prices last year, Macquarie said. Still, copper fabricators in the country will face headwinds as usage in areas like real estate slows in the second half of the year. The bank sees copper averaging $5,600 a tonne in Q4, down from $5,619 on the LME on Friday.