The Global Commodity Supply Glut

Winston Churchill famously said “if you're going through hell then keep going”. This could very well be the mantra for global steelmakers, as they face the most challenging environment over the last 20 years. Lackluster demand and overcapacity are just some of the issues that causes steel mills to shut down and sent the hot rolled coil price crashing below 350 Euros per ton. Especially the Chinese industry seems to be preparing for production cuts, as excess production is spreading across the world. At least producers can enjoy some relief from a fall in the price of iron ore, a key ingredient in steel production. Now is definitely a good time to follow the Kairos recommendation closely.

Most of our clients will know that steel is not the only market facing a supply glut. The world’s largest commodity market is also flooded with excess supply as the battle between OPEC and US “frackers” is coming to a showdown. Specifically, the Saudis have increased production to squeeze out the frackers and other high-cost producers, and it does seem like the tactic is starting to bear fruit. Even the International Energy Agency acknowledges the trend, but does also note that the oil market glut is likely to persist throughout 2016. With Iran vowing to reclaim its market share after the sanctions towards the country have been lifted, the stage is set for plenty of price action.

One particular event that certainly could increase volatility across all financial markets is the long awaited interest hike in the United States. With the risk of crying wolf yet another time, most economist do now expect the Federal Reserve to raise interest rates in December 2015. While even we have reported plenty of “wolf cries” in our newsletter over the past months, one cannot underestimate the significance when the world’s largest economy (home of the world’s reserve currency) is planning to increase interest rates. Click here for a walk-through from the Financial Times on how a rate increase could affect the world economy.

Across the Pacific, China’s economic growth slowed in the latest quarter to a six-year low of 6.9 percent, compared with a year-on-year expansion of 7 percent in the previous quarter. Although slightly above economists’ expectations, the rate was the slowest since the 6.2 percent recorded in the first quarter of 2009. Although the Chinese Economy clearly is slowing down, the country’s economic growth is still the envy of the rest of the world. However, as noted when China published its 2Q 2015 GDP figures, there is plenty of scepticism on the reliability of the government’s economic reports.

In general, one should take most economic data with a grain of salt. As reported by the Economist, very few people realize that published economic statistics are subject to constant revisions. Take for example 1Q 2015 growth in America. The initial 0.1 percent GDP growth estimate from the Bureau of Economic Analysis was disappointing but not disastrous. The second estimate (a decline of 1 percent) made things looks bleaker. When the third and final estimate came in at -2.9 percent, it was clear the quarter had been the worst since the depths of the financial crisis. Lesson learned, do not put all your faith into one number – you never know what it might look like in a year from now.