Commodity Rout Has Room to Run as Fund Sees Oil, Iron at $40

  • Faltering Chinese demand, supply may help prolong gluts
  • Iron ore may tumble to $35 a ton as miners' costs reduced

The rout in commodities is set to get worse as resilient supply and faltering Chinese demand will see global gluts persist, sending oil and iron ore below $40, according to Merchant Commodity Fund.

Prices are still trying to find a floor with excess supply in almost every commodity, said Michael Coleman, managing director of RCMA Asset Management Pte, which runs the $210 million fund. Any rally in raw materials will be probably short-lived as demand isn’t improving and production cuts are insufficient to stem surpluses, he said in an interview.

Commodity prices are languishing near a 16-year low as supplies outstrip demand amid forecasts for the slowest full-year expansion in China since 1990. Money has been flowing out of commodity funds as investors punish shares of oil drillers, miners and traders including BHP Billiton Ltd. and Glencore Plc.

“Periodically people get a bit more optimistic, they think okay, commodities are looking cheap, we’ll buy some,” Coleman said Monday in Singapore. “We still think that’s premature. You keep getting disappointed by the reality of structural oversupply.”

Prices Slump

The Bloomberg Commodity Index, a measure of returns for 22 raw materials, lost 17 percent this year having reached the lowest level since 1999. Spot iron ore at Qingdao bottomed at $44.59 a metric ton in early July and was at $49.50 on Monday. Crude futures in New York were 0.4 percent higher at $46.34 a barrel at 10 a.m. Tuesday in London.

Iron ore will probably sink below $40 a ton before year-end on seasonally weaker demand, Coleman said. Steelmakers tend to scale back production before the northern hemisphere winter lull, denting iron ore demand. Miners have been successful in reducing costs, which means the steel-making ingredient may plunge to $35 a ton, he said.

The raw material will decline gradually over the next few years as more supply is added in Australia and Brazil, with prices finding a new level well below $50, the Australian Financial Review reported on Tuesday, citing Alan Chirgwin, iron ore marketing vice president at BHP. The remarks were verified by BHP spokeswoman Emily Perry.

Merchant’s Coleman forecasts oil prices will tumble below $40 a barrel unless the Organization of Petroleum Exporting Countries cuts output that’s near the highest level since 2008.

Coleman’s view contrasts with the outlook from Pacific Investment Management Co., which said last month the worst of commodities’ collapse was probably over.

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