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DJ Iron Ore, Copper Keep Heading Down
30/01/2015 07:02AM AEST
By Biman Mukherji And Rhiannon Hoyle

HONG KONG--Two of the world's most heavily traded commodities, copper and iron ore, have plunged to 5 1/2 -year lows this past week as China's weakening growth, global deflation and the stronger U.S. dollar have intensified a selloff begun last year.

"It's a perfect storm of negative factors," said Robin Bhar, London-based head of metals research at Société Générale SA.

Both copper and iron ore suffered during 2014 as investors shied away from commodities, but their slide has deepened this year. Along with oil, both are among the world's worst-performing assets so far in 2015.
Copper, often seen as a barometer for global economic health, has fallen 14.4% on the London Metal Exchange in January, after dropping 14.7% in the whole of 2014. On Thursday, the three-month copper contract fell $89, or 1.6%, to settle at $5,395.00 a metric ton.

Iron ore, which is mostly traded bilaterally rather than over exchanges, halved in value in 2014. It is already down another 11.9% to $62.7 a ton in 2015.

While growing global supply of metals has long been a concern, prices had been somewhat supported by solid demand from China. For several years after 2000, an apparently relentless rise in Chinese metal consumption raised expectations of a "supercycle" that would juice up prices indefinitely.

Signs are mounting, though, that Chinese demand is now a less reliable prop for metals prices.
The poor health of China's property industry is weighing heavily on both iron ore and copper, with most analysts expecting any recovery to come only late in 2015 at the earliest. Iron ore is key to making steel, which is used heavily in construction, while copper is used in electrical wiring and pipes. About half of China's copper demand stems from the property sector.

China's domestic demand for steel was already stagnating last year. Its steel consumption fell 3.4% in 2014, government steel officials said Thursday, the first time in 14 years that demand hasn't risen.
As domestic steel demand faltered, Chinese steel mills were at least able to step up their exports, funneling output not needed domestically mainly to Asian neighbors such as South Korea, Vietnam and the Philippines.

But after China exported a record 10.2 million tons of steel in December, that outlet for its excess supply appears to have dried up. That, means iron-ore demand could decline further. Chinese steel prices have already dropped 12% since the start of the year, compared with a 14% drop in all of 2014.
"If steel prices continue to fall, more Chinese steel mills will be forced to cut production, which would cause the Chinese economy to slow even more," said Jeffrey Landsberg, managing director of U.S.-based Commodore Research & Consultancy.

The dollar's 2.5% rise this year against other major currencies is another headwind for the two metals, which are both priced in greenbacks. Though the dollar's rise isn't a big factor in Chinese metals demand, given that the yuan is effectively linked to the dollar, it does make the metals more expensive for other foreign buyers in their home currencies.

That has put further downward pressure on prices. More intangibly, industrial metals have been drawn into a crisis of confidence in commodities markets, primarily triggered by oil's slide since last summer.
"The drop in crude-oil prices has definitely been a factor weighing on metals prices," said Caroline Bain, senior commodities economist at Capital Economics. "It has led to some investors losing faith in commodities as an asset class and a general selloff."

Oil's fall could have a tangible effect on metals prices, too, Ms. Bain said. "Lower oil prices will lead to lower operating costs at mines, all other things being equal, which could also be a catalyst for lower metals prices," she said.

So far, weaker demand for metals such as copper and iron ore hasn't led to a significant pullback in production. Copper stockpiles in LME warehouses are rising. The market, where output exceeded demand as recently as 2013, is expected to be in surplus by 160,000 tons this year, say Barclays analysts.
Iron ore, meanwhile, has poured into the market as a result of expansions planned by major Australian mining companies such as Rio Tinto PLC and BHP Billiton PLC when prices were booming.
Chuin-Wei Yap contributed to this article.

Write to Biman Mukherji at [email protected] and Rhiannon Hoyle at [email protected]


(END) Dow Jones Newswire
January 29, 2015 15:02 ET (20:02 GMT)