Industrial Metals’ Plunge Accelerates Amid Global Growth Scare

Industrial metals are plunging this week as global growth risks accelerate and the prospects of reduced US stimulus create global turmoil in markets. 

Since mid-July, iron ore futures are down more than 33% in Singapore to the lowest level since December. The catalyst for the downdraft in prices is due to Chinese steel output, and consumption is expected to slide in the coming months due to government authority’s pollution curb on smelters. 

Back to December levels. 

 On Wednesday, iron ore futures plunged 9.5% after Anglo-Australian miner BHP warned of peak prices. 

“Medium-term, China’s demand for iron ore is expected to be lower than it is today, as crude steel production plateaus and the scrap-to-steel ratio rises,” BHP said in its outlook on commodities. 

There’s also risk of China’s managed economy stagnating in the near-term. 

It’s not just iron ore. Copper and steel futures are down 2% and 4%, respectively. Aluminum, nickel, and steel rebar also took a tumble. 

The leg down in industrial metals today could also be due to the prospects of the Federal Reserve announcing a taper program at Jackson Hole next week or in the coming quarters. There also has been the spread of COVID-19 and weaker economic growth worldwide, adding to downward pressure on the metals. 

The “primary drivers are still very much fears about global growth due to the delta variant, above all in Asia/China, along with the Fed signal that it is getting closer to tapering, strengthening the dollar and weighing on commodities in general,” Marc Ostwald, chief economist and global strategist at ADM Investor Services International in London, told Bloomberg. 

Citi’s Global Economic Surprise Index is nearing the zero mark which would soon mean that economic data worldwide is beating to the downside. More stimulus please… 

The parabolic rise in industrial metal prices began in early 2020 and came to a screeching halt in mid-May when Chinese regulators started to wage war against soaring commodity prices. The high cost of iron ore and other raw materials raised concerns over producer price inflation, prompting Beijing to act.

Over the last several years, the Bloomberg Industrial Metals Index has usually rolled over ahead of global stocks.

Iron ore has surged since global central banks vastly expanded their balance sheets during the pandemic. 

The question we have is if tapering will kill the commodity rally? Or better yet, kill the super commodity cycle everyone has been talking about.