Iron ore is set to outpace other commodities in the first three months of 2016, finishing a volatile quarter up almost 25 per cent.
The rally in iron ore prices, reflecting strengthening Chinese steel prices and increased production ahead of the country’s key construction season, has come amid a rollercoaster ride for commodities in the first quarter.
The Bloomberg Commodity index, dragged down by crude oil’s continued spiral downward, in late January fell to its lowest level since at least 1991, but has since bounced back and is poised to finish the quarter flat, up about 0.2 per cent.
With one trading day left in the quarter, iron ore, which in December fell as low as $37, was at $53.20 a tonne. Gold was also a leading performer, set to close the quarter up almost 16 per cent at $1.227 a troy ounce on rising concerns over China and global economic growth prospects at the start of the year.
The yellow metal has continued to see support from worries about negative interest rate policies by central banks in Europe and Japan, and the prospect of fewer interest rate hikes in the US.
Commodity investors and traders continued to focus on crude oil during the first quarter, as prices rebounded after Saudi Arabia and Russia called for producers to freeze output at January levels.“The pull back in expectations in the likely number of rate hikes this year has led to a recalibration of gold prices higher, as bullion had been sold off in 2015 on expectations of more like four Fed rate hikes in 2016,” said James Steel, precious metal analyst at HSBC.
After falling to a 12-year low of $27.10 a barrel in January, Brent, the international benchmark, recovered the $40 level in March, and was set to close the quarter just under $39, up 4 per cent on the quarter. West Texas Intermediate, the US marker, also looked to finish the quarter up 4 per cent, around $38 a barrel.
The rally in oil and gold lifted investor confidence. Net flows into commodity indices, exchange traded funds and structured products totalled over $20bn in January and February, the strongest start to a year since 2011, according to figures compiled by Barclays.
“It is a long time since commodities have been as popular with investors as they have so far this year,” said Kevin Norrish, an analyst at Barclays.
However, he added that the current buying was more short-term and opportunistic compared with the past. “The kind of commodity investment that is taking place currently is not the long-term buy-and-hold strategy for portfolio diversification and inflation protection that underpinned the huge inflows over the previous decade,” he said.
Despite oil’s rebound from the year’s lows, the average price for the quarter for WTI was $33.61, the lowest since the fourth quarter of 2003 and Brent, at $35.17 a barrel, was the lowest since the first quarter of 2004.
For oil companies, “the further fall in average prices means that first-quarter results are likely to show even more financial stress and greater minimisation of capex in a drive to conserve cash”, said analysts at Standard Chartered.
Both WTI and Brent have averaged below $40 for four straight months and below $50 for eight straight months.
Elsewhere in the commodities sector, copper was on course to finish the quarter up almost 3 per cent around $4,850 a tonne, while sugar was up 4 per cent at 16 cents a pound.
Warm weather and rising inventories depressed natural gas, which was one of the top losers, falling almost 20 per cent to $2 per million British thermal units. Cotton retreated more than 9 per cent to just over 57 cents a pound on continued worries about China’s record state stockpile.