Sure, few have been hit quite as hard as oil, crude prices are down 39% on the year’s highs. Nonetheless pain is being felt across the asset class. The Dow Jones-UBS soft commodities–coffee, cocoa, wheat and fruit–sub-index is down 25%, other agriculturals have lost 24%, the precious metals sub-index is down 18% and the industrial metals index is down 15%.Yeah, I probably should have stuck with my gut and not invested in iron ore, steel and coal stocks earlier in the year. Even more amazing, after considering shorting Continental Resources and other Bakken plays late in the summer, I decided not to. But after watching CLR get whacked over the holiday weekend, I decided to jump into it yesterday. I'm up a few percent, but I may get shellacked on that, too. Oh well, if I did too well in the stock market, I'd want to retire. Getting my ass kicked keeps me working.
But even that’s only part of the story. Losses on this year’s highs are marginal compared with the drop most of these classes of commodities have suffered from their peaks, generally hit in the spring of 2011.
Oil prices are down 42% from then–and down 53% from its all-time high in 2008. Softs are down 58% from the spring of 2011. Precious metals are down 47%. Industrials have lost 40%. Agriculturals are down 35%. Overall, non-energy commodities have tumbled a third from their April 2011 highs....What is a worry, however, is the degree to which firms in these commodity-producing countries borrowed in dollars to fund new investment to ramp up output. These investments tend to be massive sunk costs in expensive capital goods–think mines, earth movers the size of houses, railway spurs and port facilities.
Which raises another question: how willing will producers be to mothball expensive investments to reduce supply now that the money’s been spent and needs to generate a revenue to cover the financing costs?
Over the near and medium term, supply is fairly inelastic, which will keep downward pressure on prices. But at the same time, demand doesn’t look likely to ramp up. Not only is the global economy subdued–leading forecasters have been ratcheting down their expectations for growth in the coming year–but, crucially for commodities, China’s investment boom is sputtering.
Indeed, Chinese stockpiling seems to have been the primary driver of some classes of commodities, particularly the industrial metals. If falling prices force Chinese investors into selling off their holdings, the carnage might only just be starting.
Tuesday, December 2, 2014
MoneyBeat, via Ritholtz: