Industrial Commodities: the End of the Collapse?

Laura Oliva Commodities Leave a Comment

Prices of many industrial commodities are at multi-year lows. In the eKuota infographic below, we see what happened to prices during 2015. Steel decreased by 56%, nickel lost 41%, palladium 30%. No price has the + sign in front of it as all industrial commodities fell during 2015.

Periodic table of Industrial Commodities prices - Yearly performance

Some commodities are still dropping in the first months of 2016. Steel by more than 54%, lead lost 2.4% while nickel lost 1.5%.

1. THE CAUSES
What about the causes?
Commodity prices, like all prices, are determined by supply and demand. Much of the commodities low prices are due to the economy slowing down in China, which is the biggest consumer of metals like copper.

Copper eKuota

The supply of metals has not yet settled down to the decrease in demand from China. China reported its economic growth data, +6.5% the slowest growth rate for 25 years. China’s economy is evolving: manufacturing and real estate investments (buildings, factories, and apartments) are being weakened, and services like consumer goods, healthcare, and financial services are growing.
The slowing growth and the economy’s changing is damaging companies and commodities linked to the Chinese manufacturing and real estate industry.
Now that China’s economy is slowing down, other countries are staggered.
Brazil is an example of how China’s slowdown is killing other countries. Its economy is expected to shrink more than 3% this year.
Brazil’s economy grew so well at the beginning of this century as it sold commodities like iron to China.
China is attempting to stimulate its economy. The question on everyone’s mind is if it will be effective. Lowering interest rates, devaluing the yuan and increasing government spending. All interventions to lend support to the economy. But the efficacy of these actions is debatable.
Of longer term importance is probably if and when China can successfully transition to a services-led economy.

In the past year, the top five mining companies (Glencore, BHP, Vale, Anglo and Rio) lost a combined 32 billion dollars.
But according to Ivan Glasenberg, CEO of Glencore, “Commodity markets have hit bottom. Global inventories have dwindled, indicating a potential shortening in supply. The company’s sales to China at the moment are pretty good. They continue to see good orders into China”.

All this optimism has not been reflected in the market prices. There are no significant signs of a drastic scenario change. Although, there are some attempts to strengthen.

Recently, nickel and tin prices recorded average prices higher than those of last year, a reversal trend signal for price strengthening.

Tin prices eKuota

Zinc eKuota

2. CONCLUSIONS
The exposure of the companies to fluctuations in commodity prices is a crucial issue because it has a direct impact on the profitability and the company’s liquidity. Last year we experienced a sharp decline in the prices of industrial raw materials. The new year is a difficult one, marked by strong price volatility. There are no reliable indications of price recoveries.
Don’t undervalue the risk of a sudden reversal. In this case, we must be able to react promptly. To be prepared, we need to frequently monitor the markets.
Being able to catch the end of the downward trend, meaning being able to buy at the minimum prices. A unique opportunity to make the difference when negotiating the finished products, to achieve a high economic margin for your sales.

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About the Author

Laura Oliva

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Co-founder of eKuota. Degree in Corporate Finance from the Universita’ Luigi Bocconi in Milan, she has more than a decade of experience in capital markets. She was Head of Debt Capital Markets within the Allianz Group, she worked at a number of international investment banks. She was Global Product Specialist, Head of Structured Finance and ABS team, Head of Syndication and Credit Analyst. She managed and executed bond issues and loans syndication for major italian companies. She is a Fixed income and Securitization expert, she deals with financial analysis and financial markets. Co-Author of the AdviseOnly blog. Mom of three, born in Rimini now she lives happily in Milan.

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