Factors have been conspiring to take the commodities market on a stiff ride—downward. Nervous investors have watched everything from oil and natural gas to sugar, industrial metals and even precious metals plunge, with some items hitting price levels not seen in more than a decade.
Oil, of course, has been in the headlines for months as its price has moved downward, but there’s plenty of other turmoil bedeviling investors. Some of the downward pressure has come from the possibility—or threat—of the Fed raising interest rates at long last, which would boost the dollar against gold. But there are other forces at work, too. A slowing economy in China has lessened demand for raw materials, but it’s not just China—and it’s not just the slowing economy.
Here’s a look at 6 conspicuous sufferers investors should be watching, and what’s happened to them.
1. Oil and natural gas:
No surprise here, oil has been headed downward for months—and taking natural gas with it, since cheaper oil puts pressure on gas obtained by more expensive extraction methods like fracking.
While we’ve talked about falling oil prices before, there’s a new factor in play: the Iran nuclear agreement. Iran says that, within days of sanctions being lifted, it can be back in business, increasing oil production to reenter world markets. Since OPEC has already said it doesn’t plan to accommodate Iran in export markets, Bijan Namdar Zanganeh, Iran’s oil minister, has predicted that oil prices will fall.
Although the country’s oil industry isn’t expected to feel the benefits of market reentry till November, and banks including Goldman Sachs Group Inc. and Citigroup Inc. have said that oil markets across the world won’t really feel the effects either till 2016, the re-entry of such a major player in the field is unlikely to go unnoticed—particularly since some market experts are talking about the potential for $40 oil.
2. Gold, Platinum, Palladium:
Gold has been taking a beating. In fact, it has lost so much that it hit price levels it hasn’t seen in five years.
Not only has its price plummeted, Macquarie Group Ltd. said in a report that it might not be done yet; further losses could be on the way. In its report, it said, “Gold has always had a dual nature as a currency and a commodity. At present, it is not desired in either form.”
Of course that’s bad news not only for goldbugs but also for those who invest in the mining companies that are also hurting from the drop in price. Barrick Gold Corp., for instance, which is the world’s largest gold producer, was so hard hit in late July that one week it saw its share price decline at a rate not seen since 1989.
While the potential for an interest rate hike by the Fed has cost gold a lot of its value even as it increased the value of the dollar, China’s offloading of lots of its hoard helped the price fall. In addition, the news in July that China’s gold reserves were considerably lower than the market had previously believed pushed the price even lower.
Platinum and palladium may not have fallen as far as gold, but oversupply and weak demand have taken their toll. Platinum’s presence in catalytic converters for diesel engines leaves it prone to weaker economic conditions in Europe, where diesels predominate, but palladium is used more in gasoline engines in both China and the U.S., and thus suffers under China’s slowing economy.
3. Copper and other industrial metals:
Not only has China’s slowdown hit copper, but it’s a harbinger of things to come—since copper is often viewed as a bellwether for potential growth in the global economy. And that bellwether is tolling down, down, down.
Copper hit its lowest level of demand compared with inventories in two years in July. A report on China’s manufacturing spurred worries over lessening demand for copper and other industrial metals—the latter of which have followed copper’s downward path.
Some of that is due to the potential for an interest rate increase, and some because of China’s twin problems of a slowing economy and a market meltdown. But that rate increase—which, of course, hasn’t even happened yet—has made commodities look less attractive compared with a strengthening dollar even as the cost of borrowing to hold commodities looks likely to increase.
4. Coffee and sugar:
Coffee and sugar have seen some pretty big tumbles lately, each losing 27% and helping to drive down the Bloomberg Commodity Index, which lost 7.2% this month. Plenty of inventory of each, coupled with a weak Brazilian currency (Brazil is a big producer in both categories), have conspired to drive prices lower, and these have dragged down the whole index.
Weather-sensitive as these crops are, though, that could change on a dime, and in this case the bad news could be the good news—at least for sugar, which has seen its price fall to its lowest level in 6½ years. A strong El Niño could damage existing crops and drive demand—and prices—up, although it’s certainly a mixed blessing.
Drought in Thailand and in India is already hitting those countries’ sugar cane crops, and if meteorologists continue to see El Niño patterns in hot, dry weather in Asia and soaking rains and flooding in South America, sugar prices could see a slight recovery. But apparently no such trend is yet in store for coffee, with some coffee companies in the U.S. cutting prices.
Yep, currencies of commodity-exporting nations—such Canada, Australia and New Zealand—are suffering mightily as commodities slide. The Canadian loonie hasn’t been this low since 2004, and Australian and New Zealand currencies nearly made it down to six-year lows as the commodity rout has turned investors—especially hedge funds—sour on them.
In fact, right now they’re popular for shorts, with the Commodity Futures Trading Commission saying that shorting contracts against the U.S. dollar for the three currencies combined hit the highest number since January of 2014.
And of course the euro isn’t exactly popular these days, what with the continuing furor over Greece, although it’s not falling at the same rate as commodities.
6. Distressed bonds:
If you’ve been hoping to make a few bucks out of troubled companies as they struggle their way along, you’re pretty much out of luck. The commodities rout has hit them pretty hard, pushing defaults higher and wiping out more than $7 billion in junk bond values during July.
According to a Bank of America Merrill Lynch index that tracks distressed bonds, they’re down 8.2% for July and 12.2% for the year so far. At this rate, they could see their worst year since 2008, and drop a total of 20+% for the second year in a row.
Which companies are hurting the most? Miners, drillers and energy companies. Don’t look for the tide to turn any time soon.