Fears Of China Spending Cuts Crush Commodities
Commodities -- which have underperformed stocks the past two years owing to over-production and low demand -- fronted a global stock sell-off Monday following news that China called for an urgent nationwide audit of government debt.
That ignited fears that it may cut spending on infrastructure projects -- the country's primary economic growth driver.
IPath DJ-UBS Nickel ETN ( JJN ) crashed the hardest among non-leveraged ETFs , melting 5.42% to 18.41. It's tumbled 23% year to date and nearly 18% in the past 12 months. Some 40% of nickel supply, a key ingredient in stainless steel, is being produced at a loss at current prices, according to Deutsche Bank.
"Prices under $14,000 a metric ton are unsustainable for high-cost producers, meaning more production cuts are looming," IHS Global Insight's analysts wrote in a commodities report released Monday.
"Barring a significant shock, we see nickel prices bottoming out in the third quarter and moving incrementally higher into early 2014. Surplus conditions will keep prices below $18,000 a metric ton over the next six quarters."
IPath DJ-UBS Copper ETN ( JJC ) was nearly flat at 38.10 -- a three-week low. The ETF tracking the red metal has lost 17% year to date and 12% in the past year because of steady increases in mine production in the face of softening demand.
Copper prices will likely rebound in the second half of 2013, pushing prices from $7,000 a metric ton to $7,500, according to IHS. "Recent mine accidents and tightness in scrap markets leads us to believe the market is a bit too pessimistic," IHS analysts wrote.
IPath Pure Beta Grains ETN ( WEET ), tracking soybeans, corn, wheat, soybean meal and soybean oil, plunged 5.08% to 45.35 -- a three-month low. It's tumbled 10% year to date and 18% in the past 12 months.
"They are moving south as it's recognized that growing conditions are good and better-than-expected crop yields are likely," David Hunter, chief market strategist at KCCI, a brokerage firm in Jersey City, N.J., said in an email.
United States Natural Gas Fund ( UNG ) burned off 2.59% to 18.45 -- a five-month low. It's lost 2.4% year to date and 11% in the past year. Natural gas has sold off the past two weeks after a sudden spike earlier this month as a heat wave struck the Northeast, boosting energy demand from increased use of air conditioners and fans.
Natgas prices will likely rise as European liquefied natural gas supplies tighten in 2014, according to IHS. "Residential demand in Northwest Europe was 7 billion cubic meters higher than 2012 levels in the first five months of the year," IHS analysts wrote. "Power sector gas demand will contract slightly to 143 BCM in 2013, before rising slowly as power demand grows and coal capacity retires."
Increased output in response to rising prices between 2008 and 2011 has been met with slow demand suggesting the global economy teeters on the edge of recession, some investing strategists say.
"China's credit crisis is worse than what we faced in 2008. Japan is in uncharted waters with what it is trying to do and policymakers could lose control of the situation," Hunter wrote.
"Europe continues very weak and the European Central Bank policy is not nearly easy enough," Hunter added. "Brazil and Australia are suffering due to the manufacturing slowdown in China and that's likely to get much worse."