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Is the commodities rebound over?

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Qatar's Energy Minister Mohammad bin Saleh al-Sada takes a question at a news conference following a meeting of major oil producers in Doha on April 17.   © Reuters

BANGKOK -- The collapse of talks in Doha on April 17 among major oil producers aimed at freezing output levels and curbing the global supply glut has renewed broader concerns about the state of the global commodities market.

     The meeting of the Organization of the Petroleum Exporting Countries as well as non-OPEC oil producing nations in the Qatari capital was called to freeze oil production at the levels of early 2016, an agreement that would have been the first global oil deal in about 15 years. But Iran's withdrawal from the talks at the last minute triggered Saudi Arabia's refusal to sign the draft agreement to halt production at January levels.

     "We concluded we all need time to consult further," Qatari Energy Minister Mohammed al-Sada told reporters.

     Analysts at investment bank Goldman Sachs said Saudi Arabia's insistence that Iran should be part of any agreement is consistent with recent comments by the kingdom's Deputy Crown Prince Mohammed bin Salman and "goes against Iran's long held goal to quickly increase production to recover market share."

     "On its own, we view this outcome as bearish for oil prices given consensus expectations for a 'soft guidance' freeze at January production levels," the bank said.

     The price of Brent Crude, which closed at $42.71 on April 15, ahead of the talks, fell to $41 in early Asian trading on April 18. The commodities-heavy Australian Securities Exchange was dragged down by mining and energy stocks on news of the collapse of the talks, with oil and gas producers Santos down 6.2% at $3.91 Australian dollars, and Woodside Energy down 2.7% at A$25.44, with major mining companies also losing ground.

     Analysts said the failure to reach a deal would hit global markets in the coming week, particularly those connected with the commodities sector, where prices have slumped in tandem with that of oil over the past two years.

     Oil producers led by Russia, Venezuela and Saudi Arabia had been making a renewed effort to put a floor under oil prices that plunged as low as $27.60 per barrel in January for Brent Crude.

     Even before the withdrawal of Iran there were only guarded hopes for a successful outcome of the Doha meeting. It represented the first serious effort by oil producers to try and agree on a broad industry strategy since the oil price rout began and attention will now turn to OPEC's meeting in June where a fresh push for a production freeze is expected.

     Iran, which suffered a 25% fall in oil production to 3 million barrels per day after international economic sanctions were imposed over its nuclear program, remains firmly committed to returning to higher oil production levels now that the sanctions have been removed.

     "Even if all the above complexities can be surpassed, freezing output at January levels would not meaningfully impact OPEC production, which already achieved much of the anticipated growth through January that was expected for 2016," according to Macquarie, an investment bank.

     The International Energy Association said on April 13 that "if there is to be a production freeze, rather than a cut, the impact on physical oil supplies will be limited."

     The IEA said it expected stocks to grow by 1.5 million barrels a day during the first six months of 2016, before slowing to 200,000 b/d in the second half of the year as high-cost production is taken out of the market.

     Meanwhile, buoyed by the highest oil prices in four months and improving economic data from China, particularly over the past month, there has been a rally in prices for mined commodities, although this had stalled in the last few days because of continued gloom about the oil sector.

     The benchmark price for iron ore, the world's second most shipped commodity, has risen from $39.30 per metric ton in early January to as high as $63.30 per metric ton before closing at $57.50 on April 15. Copper closed at $4,786 per metric ton on the London Metals Exchange for three-month delivery the same day, up from $4,471 in January, and zinc hit an eight-month peak of $1,900 metric ton on April 12, up from a January low of $1,444.50.

     These price rises have bolstered the share prices of the world's largest mining companies, with those of BHP Billiton, Rio Tinto, Glencore and Anglo American having jumped in the past month. BHP Billiton shares on the Australian Securities Exchange closed at A$19.38 on April 15, up 18% in the past month, and Rio Tinto shares closed at A$48.20 the same day, a rise of 12%. On the London Stock Exchange, the share price for Glencore rose 9% over the past month, while that for Anglo American has soared 33%.

     While this suggests the markets believe that the worst is now past, there are growing questions about whether the rally can last.

The China factor

As the world's biggest importer of most metals, China continues to hold the key. March trade figures from China showed that its imports of key commodities jumped. Oil imports rose 21.6% from a year earlier and copper imports surged 39.8%, while iron imports rose 6.5%.

     Copper imports have been strong due to opportunistic buying, supported by attractive arbitrage opportunities between the Shanghai and London exchanges, according to ANZ Bank.

     Still, there is widespread skepticism about how strong the economic fundamentals are in China, particularly as the central bank continues to inject liquidity to maintain the growth rate of gross domestic product in its target range of an annual 6.5% to 7%.

     "We believe much of the recent rally in commodity prices reflects positioning ahead of peak seasonal Chinese construction" in the second quarter of 2016, Swiss bank UBS said in a client note. UBS suggested China had boosted commodities buying in anticipation of higher property and infrastructure construction to meet the government's GDP target this year.

     In a recent forecast of average metals prices for 2016, the only commodities that UBS marked up were manganese, for which the group raised its estimate by 9% to $2.75 per metric ton unit for the remainder of 2016, and iron ore, which it forecast would increase by 7% to $41 per metric ton on back of lower freight rates.

     Tim Murray, managing director of J Capital Research, a China-based consultancy, said an upsurge in the futures buying of iron ore indicated there has been a surge of commodity buying from outside the construction sector.

     "There are few other places for Chinese investors to put their money after the stock market problems earlier this year and a property market that remains volatile at best," Murray told the Nikkei Asian Review.

     Murray added that his company has just completed its monthly survey of end-user demand for copper products. "Demand is down between [an annual] 5% and 20%, depending on the product, the strongest demand for copper is cable for the electricity grid." He added that property surveys showed that more projects were being completed than started, a pointer to softer commodities demand ahead.

     Goldman Sachs meanwhile noted that copper, zinc, and nickel have experienced a substantial buildup of speculative buying in the U.S. futures market for base metals, "close to the highest levels seen over the past five years," the investment bank's analysts wrote.

     Goldman Sachs also noted that currency movements have exaggerated the commodities price rally, particularly recent weakness in the U.S. dollar and a rise in the value of commodity producer currencies such as the Australian dollar and Brazilian real. The investment bank added that the rising value of these currencies has negated much of the commodity price strength in local currency terms.

     As highlighted by the collapse of the world's biggest coal company, Peabody Energy, which filed for Chapter 11 bankruptcy protection in the U.S. on April 13, the corporate fallout from the commodities price slide over the past two years continues.

     Like diversified mining giants Glencore and Anglo American, which suffered falls in market value in the second half of 2015, Peabody's woes were the result of both lower commodity prices and high levels of debt.

     Banks have signaled that they are expecting more corporate carnage in the energy sector. On April 14, U.S. banks Wells Fargo, JPMorgan and Bank of America said they would each set aside hundreds of millions of dollars as provision for looming bad debts in the sector.

     In the meantime, most analysts believe that the commodities complex remains under pressure, mainly from oversupply rather than a lack of demand. Goldman Sachs, citing its forecast of a strengthening U.S. dollar during 2016, coupled with continued cost deflation in the mining sector, predicted that falls in commodities prices would resume in the second half of the year.

     Oil is expected to lead a renewed decline in commodity prices without a firm agreement to freeze production, with industry analysts expecting prices soon to fall back to below $40 per barrel.

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