By John Richardson
IRON ore prices are now down by nearly 40% so far this year to a level not seen since September 2009.
As for crude oil, Brent has now dipped below $100 per barrel, for the first time in over a year. WTI is trading around $92 per barrel, a 16-month low (see the above chart).
December futures contracts for copper have also fallen to a three-week low. China is the biggest factor driving the weakness in all of these markets.
The penny is now beginning to drop as people realise that there will be no big new stimulus package. And the commodities sell-off is also occurring as new capacity comes on-stream. For instance:
- Global output by the top five iron-ore producers – Vale, BHP, Rio Tinto, Anglo American and Fortescue Metals Group — is expected to grow more than 40% to over 1.5 billion tonnes by 2017, even though demand is expected to grow only 10-15%, according to Charles Bradford, a metals researcher.
- In June, the US produced 8.5 million barrels per day of crude, an increase of 500,000 barrels per day since the beginning of the year. Higher production continues to cut into imports, leaving greater supplies on the global market.
The immediate concern is that we will see a disorderly introduction of commodity volumes held in storage, when it is finally more broadly accepted China’s growth is not going to miraculously bounce back. Some 100 million tonnes of iron ore was recently estimated to ‘off-market”, as it was tied-up in commodities trading. This was enough to build 1,200 Empire State buildings.
Although we have no proof, we suspect a similar problem, but on a much smaller scale and only in China, exists in polyethylene. We very much hope to be proved wrong. Longer term, once the re-introduction of these volumes have had their inevitable disruptive effect on global commodity, and also equity, markets, it will be time for some sober reflection.
It will then become clear that estimates of demand growth in China, which have led to new capacities across many industries, are badly flawed.
The estimates are flawed because they are based on the idea that China’s old economic growth model will continue. Take iron ore is an example of this. Morgan Stanley is already projecting a global iron ore supply surplus of 79 million tonnes this year, 158 million tonnes in 2015 and 256 million tonnes in 2018. These numbers are likely to get worse.