Commodity Rally Stumbles Back Into Reality
By Nathaniel Taplin Updated March 9, 2017 4:29 a.m. ET
Copper gained 30% in November alone.
Copper gained 30% in November alone. Photo: Andrey Rudakov/Bloomberg News
When mining executives start sounding triumphalist and hedge funds pile back into commodities, it is often time for a reality check. This week, that check arrived as “Dr. Copper” moved below its 50-day moving average for the first time since the election, inventories surged, and oil fell 5% in a single session.
The commodities rally had some strong fundamental underpinnings: among them rebounding Chinese industry and years of falling mining investment. But the warning signs that the market was getting ahead of itself have also been evident for some time.
Power Down
Chinese figures, change from a year earlier
THE WALL STREET JOURNAL
Source: CEIC
All figures 6-month moving average
%
Power andITinvestment(Rmb)
Copperimports(tons)
2008
’10
’12
’14
’16
-20
0
20
40
60
For copper, which gained 30% in November alone, legitimate supply-side issues and Trump-related exuberance have overshadowed steadily weakening demand growth from China, the biggest consumer.
Chinese investment in power-sector infrastructure, a key source of demand, has collapsed since mid-2016. And copper imports have steadily weakened from 34% year-over-year growth in second-quarter 2016 to just 2% in January and February. The iron-ore rally has had better underpinnings—Chinese steel production shot up in fourth-quarter 2016—but a tighter monetary stance from the People’s Bank of China and weakening house-price momentum will eventually begin to weigh.
Meanwhile, for oil, much sound and fury expended on OPEC has obscured the fact that U.S. drilling activity, after cratering in 2014 and 2015, is now back with a vengeance.
Old Faithful
US active oil rig count, weekly
THE WALL STREET JOURNAL
Source: Baker Hughes
2005
’10
’15
0
500
1000
1500
2000
The number of active American oil rigs has nearly doubled since June. Activity remains far below the heady levels of 2014—but that merely shows how much further the industry could ramp up if prices do move higher again.
With global activity still accelerating and big cuts to mining capital expenditures over the past five years dampening supply growth, there is little reason to expect a commodity collapse.
But a big leg higher needs strong proof that the current spate of bullish global growth is sustainable even with a tightening Federal Reserve and a weaker China looming on the horizon. President Donald Trump’s infrastructure aspirations, on which many commodity bulls pinned hopes, have taken a back seat to health care and tax issues.
It’s time for commodities to take a breather.
Write to Nathaniel Taplin at
nathaniel.taplin@wsj.com