Fund Sees Growth Jolt as Only Cure for Range-Bound Commodities

Persisting gluts in most commodities and the lack of a strong economic rebound that would drive demand will probably...

Persisting gluts in most commodities and the lack of a strong economic rebound that would drive demand will probably keep a cap on raw-material prices this year, according to Michael Coleman, chief operating officer of RCMA Asset Management Pte.

“In a whole bunch of commodities, you’re still in a bear market, you’re still in an over-supplied, excess capacity, slow demand-growth environment and therefore, it’s a bit difficult to say why should it rally today,” Coleman said in an interview on March 4 in Singapore. “The commodities downcycle can only really end when global GDP growth accelerates.”

Commodities returns have fallen to the lowest since the 1990s amid surpluses in everything from oil to iron ore and grains as economic expansion in China, the biggest commodities consumer, slows to the weakest pace in a quarter century. Slumping prices of raw materials have slashed profits at companies from Exxon Mobil Corp. to BHP Billiton Ltd. and Glencore Plc.

“All the adjustment is having to come from the supply side and historically the supply side is not able to cut enough, quickly enough for long enough to actually turn things around,” Coleman said. “To take glut into deficit you need GDP growth to be stronger than it is today.” RCMA Asset Management runs the Merchant Commodity Fund which looked after $224 million of assets at the end of February.

Crude Lows

The Bloomberg Commodity Index, a measure of investor returns from 22 raw materials, slumped the most in seven years in 2015, and is little changed this year. Banks including JPMorgan Chase & Co., Deutsche Bank AG and Barclays Plc have been scaling back commodities activity in the past three years amid rising regulatory scrutiny.

Excess supplies are the main driver for bear markets across commodities, Goldman Sachs Group Inc. analysts said in January. While prices will likely have to fall further to spur the production cuts needed to end gluts, markets will start to rebound later in the year, they said. Volatile prices are a sign oil doesn’t have much further to fall, the bank said last month.

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U.S. benchmark crude prices may revisit recent lows in the next four to six weeks if record stockpiles continue to increase in the U.S. storage hub of Cushing in Oklahoma, Coleman said. West Texas Intermediate will probably trade between $25 to $50 a barrel this year, with the outlook better in the summer and “pretty grim” in the fourth quarter as inventory builds, he said. Futures traded at $36.39 on Monday.

Cost Curves

While iron ore roared back into a bull market this year, climbing above $50 a metric ton, Coleman doesn’t see scope for much more upside. Prices may trade between $30 and $50 for the rest of 2016 amid structural oversupply. “There’s way too much iron ore capacity and the higher the price goes, the more that will be switched back on,” he said.

“This year commodity prices have started off quite volatile, and so we think there’s going to be a good opportunity set from relative value trading,” said Coleman, who’s looking for more investors in the hedge fund. “Some commodities are very deep into their cost curves and so the potential’s there for at least some short-term rallies, but I think it’s going to be more a sideways trading environment.”

–With assistance from Klaus Wille Supunnabul Suwannakij and Jasmine Ng To contact the reporters on this story: Ranjeetha Pakiam in Singapore at, Sharon Cho in Singapore at To contact the editors responsible for this story: Jason Rogers at, James Poole

By: Ranjeetha Pakiam and Sharon Cho

©2016 Bloomberg News

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