The worst commodity meltdown since 2008 probably isn’t the end of the pain for bulls, according to Citigroup Inc.
Excess supplies and a sluggish world economy mean that it’s “hard to argue that most commodity prices have reached their trough for the year,” analysts led by Ed Morse, the global head of commodities research, said in a report Tuesday. The bank is bearish on crude oil, aluminum, platinum, iron ore, cocoa and wheat in the next three to six months.
Returns from raw materials are languishing near a 16-year low as inventories climb just as demand growth slows in China, the world’s biggest consumer of everything from cotton to zinc. Money has been flowing out of funds linked to metals, crops and energy, while investors have punished shares of miners and oil drillers.
“Across energy, industrial metals, and agricultural products markets remain oversupplied, partially because of the sluggish world economy, but largely because of the over- investment in developing new supplies in the last decade and favorable weather conditions providing bumper row crops,” Morse said.
Citigroup isn’t alone in its pessimism, with banks from Goldman Sachs Group Inc. to Morgan Stanley also forecasting more declines for raw materials. The Bloomberg Commodity Index, a measure of returns for 22 components, has tumbled 15 percent since June 30, heading for the worst quarter since the end of 2008.
The gauge extended losses Wednesday as a measure of China’s manufacturing slumped to the lowest in more than six years. Crude futures in London slid 0.7 percent while copper dropped 0.4 percent after tumbling the most since July on Tuesday. Platinum led most precious metals lower amid a 23 percent loss this year while wheat in Chicago pared its slide to 16 percent in 2015.
The preliminary Purchasing Managers’ Index from Caixin Media and Markit Economics was at 47 for September, missing the median estimate of 47.5 in a Bloomberg survey and below the final reading of 47.3 in the previous month. Readings remained below 50 since March, indicating contraction.
China’s slowest expansion in decades is cutting demand just as farmers, miners and oil drillers expanded supplies, encouraged by prices that were at record highs in 2008. It’s a reversal from the just a decade ago, when booming growth across Asia fueled a synchronized surge across commodity prices, dubbed as the super cycle. Citigroup called the end of the super cycle in late 2012.
The glut in commodities may take more than two years to clear as lower energy prices help spur a period of cheap freight, according to Westpac Banking Corp., which said the selloff is a downturn within a continued super cycle.
Lower energy prices are eroding costs and cutting shipping rates, enabling producers to export to China on aggressive terms, Paul Gardner, global head of structured commodity finance at Westpac, said in an interview in Singapore. The excess supplies will take about 12 to 24 months to start clearing, paving the way for a rebound in prices, according to Gardner.