China's slowing economy and stronger dollar signal end of the 'iron age'

“Beijing pushed up growth to 7.5pc in 2Q with a flurry of stimulus in April and May. But growth momentum eased quickly entering 3Q as the stimulus effects waned. As such, we expect more stimulus measures to be rolled out in the coming weeks, likely in the areas of railway, social housing, urban infrastructure, environmental protection and water projects. Moreover, with suppressed shadow banking activities, the PBoC might ramp up monthly bank loans in Sep to boost credit supply, as was the case this May and June.”

Regardless of what additional measures China takes to boost growth, iron ore markets are also being squeezed by the increasing volumes of ore that the big mining giants such as BHP Billiton, Rio Tinto and Vale are shipping. If supply tightens any reduction is likely to come from smaller mining companies. Rio Tinto’s chief executive Sam Walsh told Reuters recently that he expects 125m tonnes of supply, equal to about 10pc of world demand, to be pulled off the market by the end of the year.

Meanwhile, prices for industrial metals such as iron ore and copper are also being pressured by the strengthening US dollar as the Federal Reserve reins in its bond-buying.

According to research from Macquarie: “The US dollar is gaining partly as it is looking more attractive, thanks to a healthier US economy and more hawkish Fed, and partly because other currencies are looking less attractive, due to slower growth and more dovish central banks.

“This, as normal, is putting pressure on metal prices in dollars, though the large share of supply and demand in many metals accounted for by the dollar area lessens the impact, and in some cases other factors have been sufficient to outweigh the dollar move. When metal prices are measured in other currencies the stronger dollar does not seem to have a significant negative impact, suggesting the bearish impact is more mechanical than fundamental, though real enough for dollar-based investors.”

However, given the twin forces now bearing down on industrial metals, investors in both the mining sector and physical commodities should be adjusting their portfolios for the possible end of the Iron Age.

Oversupply Pressure on OPEC to cut production as oil prices fall below $100

The world suddenly appears flooded with oil and despite efforts by Middle East producers to secretly cut back on production, there appears to be little to prevent the price of Brent falling to a range of $90 per barrel by the end of the year.

“Contango in the futures markets means that oil firms are storing the commodity in tankers offshore, with the amount held on the seas moving back to levels not seen since April 2009. It would be difficult to find a clearer demonstration of oversupply in this market, and until the major producers decide to slash output this dysfunctional state of affairs will continue,” said IG in a note to investors.

Although the price of Brent ended last week at around $97 per barrel, attention is already shifting to the next move that is expected by the Organisation of Petroleum Exporting Countries (OPEC).

“The fact that OPEC has signalled its intention to prevent a lasting oversupply on the market by (potentially) cutting production may also ensure that the downswing comes to an end, however. After all, the OPEC states are also reliant on high oil prices. According to the International Monetary Fund, the so-called fiscal break-even price – the price at which a country can balance its budget – exceeded $100 per barrel in seven OPEC countries last year,” wrote Commerzbank.

Electric bikes put the pedal to the metal on lead prices

Lead prices have been supported over the last decade by an unlikely factor: the growth of electric bike (e-bike) manufacture in China.

In the last 10 years Chinese factories have increased production from 5m electric bikes to almost 40m expected this year. This huge surge in demand for lead to use in bicycle batteries had helped the metal establish a price premium over zinc.

“Moving a few years forward to the present, we can see that the growth in e-bike output is beginning to level off, and with it the importance to lead demand growth,” said Macquarie in a recent note to investors. Although demand for e-bikes is taking off in Europe these will use either lithium-ion or nickel hydride batteries.

more