I have long banged the drum over the murky outlook for the commodity sector, and a steady stream of poor economic data — combined with rising supply levels across many markets — has continued to weigh heavily on resources companies during the course of 2015.
Indeed, led lower by mining and trading giant Glencore (LSE: GLEN), minerals and energy-related stocks have formed six of the FTSE 100’s top ten worst performing stocks during the past six months alone.
Diversified play Glencore has seen its value collapse 64% during the period, while copper miner Kaz Minerals (LSE: KAZ) has fallen by the same percentage. Fossil fuel explorer Tullow Oil (LSE: TLW), meanwhile, has conceded 47% since the same point in May.
This weakness has prompted many bargain hunters to pile back in during recent weeks in the hope of recovering commodity prices. But I believe such an investment strategy is foolhardy at best given the steady stream of bearish data concerning materials demand.
Copper-bottomed concerns
Indeed, Kaz Minerals has seen its share price fall by another tenth during the course of Tuesday trading thanks to further weakness in the copper price. The ‘bellwether metal’ — so-called because its wide variety of applications makes it a reliable indicator of the health of the world economy — was recently trading around $4,920 per tonne, a whisker above the six-year lows hit in August.
This fresh weakness has been prompted by the US dollar leaping to fresh multi-month highs versus the euro, while further poor consumption data has kept prices under the cosh in recent days, too. China’s General Administration of Customs announced at the start of the week that copper imports slumped 8.7% during October to just 420,000 tonnes.
Economic data continues to worsen
And commodities demand is in danger of deteriorating still further, at least according to a swathe of economic reports in recent days. Firstly the OECD announced yesterday that global trade flows had sunk to levels “associated with global recession,” adding that global growth will drop to 2% in 2015 from 3.4% last year.
And today Moody’s said that it expects growth amongst G20 nations to clock in at just 2.6% in 2015, and rise modestly to 2.8% next year and 3% in 2017. And it warned that economic cooling in China will keep commodity prices under the hammer during the next few years at least — the credit agency warned that Chinese GDP expansion of 7% for this year will fall to 6.3% in 2016, and to 6.1% the following year.
In other news, the International Energy Agency advised today that it expects oil prices to remain below the $80 per barrel marker until 2020 at the earliest, adding that there is a danger of the commodity dealing in the $50-$60 range until well into the next decade. The Brent benchmark was recently changing hands just above multi-year troughs around $48 per barrel.
Given that supply/demand dynamics across key commodity markets are in peril of worsening still further in the months and years ahead, I believe the risks over at Glencore, Kaz Minerals or Tullow Oil will continue to outweigh the potential rewards well into the future.
