Commodities Plunge to 16-Year Low as Job Gains Fuel Dollar Surge

  • Catalysts for demand gains `now behind us,' Cordier says
  • Index of raw materials heads for fifth straight annual drop

The improving U.S. job market is making the commodity meltdown even worse, sending prices to the lowest in 16 years and dragging down shares of mining companies and energy producers.

The Bloomberg Commodity Index, a measure of returns for 22 components, tumbled to the lowest since 1999. The gauge dropped after gains for American payrolls sent to the dollar to its highest in data going back to 2005, cutting demand for alternative assets. The strong labor market is helping clear the way for the Federal Reserve to raise interest rates, which dim the appeal of raw materials because they don’t offer yields or pay dividends.

Investors are suffering through the worst commodity collapse in a generation. Bulls can blame the cooling economy in China, the world’s largest consumer of metals, grains and energy. The nation’s slowest pace of the growth in two decades is stamping out demand and leaving the world oversupplied with everything from aluminum to wheat. The prospect that U.S. borrowing costs will rise for the first time nine years is compounding concern that raw-material users will slow or abandon plans for expansion, eroding consumption.

“It’s all about the jobs report and the outlook for the Fed liftoff,” James Cordier, founder of Optionsellers.com in Tampa, Florida, said in a telephone interview. “The quantitative easing in the U.S. that began almost a decade ago boosted commodities, mainly because of the weaker dollar. The infrastructure spending in China has changed dramatically. Both of those are now behind us.”

The Bloomberg Commodity Index dropped 0.8 percent to 85.1664 at 12:37 p.m. New York time, after reaching 84.9074, the lowest since August 1999.

Annual Slump

The raw-material gauge is poised for a fifth straight annual loss, the longest slide since the data begins in 1991. It’s a reversal from the previous decade, when booming growth across Asia fueled a synchronized surge, dubbed the commodity super cycle. Farmers, miners and oil drillers expanded supplies, encouraged by prices that were at record highs in 2008. Now, that output is coming to the market just as global growth is slowing.

China’s factory gauges this week signaled that manufacturing hasn’t bottomed out amid faltering global demand and deepening deflationary pressures. In Germany, Europe’s largest economy, industrial production unexpectedly dropped in September, government data showed Friday.

At the same, the outlook for higher U.S. rates is threatening to end the era of unprecedented global stimulus measures that had helped to prop up economies. The Bloomberg Commodity Index jumped 35 percent from December 2008 through June 2011 as the Fed bought debt and held interest rates at a record low near zero percent. Traders in Fed-fund futures are now pricing in a 70 percent probability of a rate increase in December, up from 36 percent a month earlier.

With raw materials fetching lower prices, shares of commodity producers are tumbling. The Standard & Poor’s 500 Energy Index dropped as much as 1.9 percent. The Bloomberg World Mining Index slumped as much as 2.5 percent, the biggest intraday loss in more than three weeks.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE