(Bloomberg) — Persisting gluts in most commodities and the lack of a strong economic rebound that would drive demand will probably keep a cap on raw-material prices this year, according to Michael Coleman, chief operating officer of RCMA Asset Management Pte.
In a whole bunch of commodities, youre still in a bear market, youre still in an over-supplied, excess capacity, slow demand-growth environment and therefore, its a bit difficult to say why should it rally today, Coleman said in an interview on March 4 in Singapore. The commodities downcycle can only really end when global GDP growth accelerates.
Commodities returns have fallen to the lowest since the 1990s amid surpluses in everything from oil to iron ore and grains as economic expansion in China, the biggest commodities consumer, slows to the weakest pace in a quarter century. Slumping prices of raw materials have slashed profits at companies from Exxon Mobil Corp. to BHP Billiton Ltd. and Glencore Plc.
All the adjustment is having to come from the supply side and historically the supply side is not able to cut enough, quickly enough for long enough to actually turn things around, Coleman said. To take glut into deficit you need GDP growth to be stronger than it is today. The Merchant Commodity Fund run by RCMA Asset Management returned about 6.1 percent in February and has around $224 million in assets.
Crude Lows
The Bloomberg Commodity Index, a measure of investor returns from 22 raw materials, slumped the most in seven years in 2015, and is little changed this year. Banks including JPMorgan Chase & Co., Deutsche Bank AG and Barclays Plc have been scaling back commodities activity in the past three years amid rising regulatory scrutiny.
Excess supplies are the main driver for bear markets across commodities, Goldman Sachs Group Inc. analysts said in January. While prices will likely have to fall further to spur the production cuts needed to end gluts, markets will start to rebound later in the year, they said. Volatile prices are a sign oil doesnt have much further to fall, the bank said last month.
U.S. benchmark crude prices may revisit recent lows in the next four to six weeks if record stockpiles continue to increase in the U.S. storage hub of Cushing in Oklahoma, Coleman said. West Texas Intermediate will probably trade between $25 to $50 a barrel this year, with the outlook better in the summer and pretty grim in the fourth quarter as inventory builds, he said. Futures traded at $36.55 on Monday.
Rubber, Palm
While iron ore roared back into a bull market this year, climbing above $50 a metric ton, Coleman doesnt see scope for much more upside. Prices may trade between $30 and $50 for the rest of 2016 amid structural oversupply. Theres way too much iron ore capacity and the higher the price goes, the more that will be switched back on, he said.
Rubber has probably seen the bottom as the low output season has begun and producing countries have cut supplies, according to Chris Pardey, chief executive officer of RCMA Group, a physical trader and sister company of RCMA Asset Management. Futures in Tokyo have advanced 13 percent this year, recovering from the lowest in more than six years in January.
Other crop commodities have potential to rise because of supply disruptions from the weather, Coleman said. Palm oil climbed to the highest level since 2014 last month as El Nino- induced dry weather hurt crops in top producers Indonesia and Malaysia. A swing to a La Nina weather pattern could pose risks to corn in the U.S. Midwest, he said.
Cost Curves
This year commodity prices have started off quite volatile, and so we think theres going to be a good opportunity set from relative value trading, said Coleman, whos looking for more investors in the hedge fund. Some commodities are very deep into their cost curves and so the potentials there for at least some short-term rallies, but I think its going to be more a sideways trading environment.
The Merchant Commodity Fund, which started trading in 2004, has returned about 2.6 percent in 2016 after losing 3.2 percent last year and making a record 59 percent in 2014, according to company data.
–With assistance from Klaus Wille, Supunnabul Suwannakij and Jasmine Ng.
