Photographer: Dhiraj Singh/Bloomberg

Commodities Make Comeback as Bad Weather Meets China Demand

  • `The situation is better than people had given credit'
  • Bloomberg Commodity Index poised for best week since March

Commodities are roaring back.

Soybeans entered a bull market Thursday on bad weather in South America, and silver crossed that threshold earlier this week. Iron ore jumped above $70 a metric ton and copper is near a one-month high on signs of improving Chinese demand. A Vietnam drought boosted coffee prices. Oil is trading near levels not seen in five months.

Put it all together, the Bloomberg Commodity Index is up 15 percent since Jan. 20 and heading for a third week of gains. The gauge, which tracks returns for 22 raw materials, was little changed on Friday as wheat, soybean meal and zinc retreated. It’s still up 3.9 percent this week, poised for the biggest gain since early March.

"Commodities are coming back as the low prices have triggered the needed response from producers in terms of lowering supply," Ole Hansen, head of commodity strategy at Saxo Bank A/S, said by e-mail. "Worries about Chinese demand, a major engine for commodities, have also been reduced. Funds are returning to commodities."

Rare Gains

The gains are a rare occurrence for the commodities index that spent most of the last five years in steady decline, culminating in a 25 percent selloff in 2015. Slowing Chinese demand, along with massive gluts in everything from wheat to iron ore drove investors away and damaged economies in countries like Angola and Chile.

Now, there are signs the backdrop in China is changing. Policy makers have talked up growth and added stimulus this year, presiding over a revival in the property market. In agriculture, bad weather is fueling concerns of supply problems.

Oil has recovered as U.S. output dropped to the lowest since October 2014 and Iraq said producers plan new output freeze talks as early as next month. It’s headed for a third weekly advance as producers signal the door is still open for an accord on limiting supplies.

Iron ore, which plunged in the past three years, has rebounded to the highest since January 2015.

Iron Ore

"If iron ore is rallying in a market that’s been in a severe depression, slump for many years, it’s a clear read of the actual physical demand for raw materials from China,"  Vivienne Lloyd, an analyst at Macquarie in London, said by phone. "The situation is better than people had given credit."

Goldman Sachs Group Inc. is unmoved. The bank said Friday it doesn’t see a sustainable shift in raw-material fundamentals until the third quarter. It’s bearish on corn because of strong acreage in the U.S., is remaining negative on soybeans and sees a recovery in China already priced into copper. Still, it changed its energy outlook to neutral from underweight.

Here are a few highlights:

Gold and Silver

  • Both metals are up roughly 20 percent this year as speculation that the Federal Reserve will be slow to raise U.S. interest rates boosts demand for the metals as stores of value
  • Holdings of silver exchange-trade are near an all-time high
  • Bullish gold wagers are the highest since 2012, according to Commodity Futures Trading Commission data released last week

Oil

  • Brent in London has gained 21 percent this year 
  • Cooperation between producers is still possible, according to Saudi Oil Ministry adviser Ibrahim Al-Muhanna
  • Supply disruptions in Kuwait and an explosion at an oil facility in Mexico have countered bearish sentiments 

Soybeans

  • Prices up 17 percent since March 1
  • Dryness in Brazil and flooding in Argentina are damaging crops
  • With South American plants under threat, more buyers may turn to U.S. growers for supplies
  • Futures in Chicago have seen record trading volume this week and open interest is also at an all-time high.

Iron Ore

  • Ore with 62 percent content delivered to Qingdao climbed 8.8 percent to $70.46 a dry metric ton on Thursday, the highest since January 2015, according to Metal Bulletin Ltd. data
  • Steel-making material up 84 percent since bottoming in December
  • Chinese steelmakers ramped up production to take advantage of bigger profit margins that have boosted demand

Zinc

  • Best among LME industrial metals, with prices up 18 percent this year
  • Bull market fueled by prospects of shortages after mine shutdowns and a jump in refined-metals imports by China

Copper

  • Prices have risen 6.1 percent this year
  • Analysts, traders and brokers are the most bullish since December, according to a survey by Bloomberg News
  • Restocking in top user China and signs of improving demand there are boosting prices.
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