Two reasons why commodities prices could collapse

After big falls in the iron ore price overnight, and likely again tonight, a number of other commodities could also come off the boil.

Silver prices appear to be falling, as does gold, and copper definitely is as the chart below shows. Copper sank to a four-week low overnight.

copper price chart


Platinum prices have come off, and Brent crude oil has dropped to US$43.58 a barrel, down from above US$48 a barrel at the end of April.

That has major implications for the diversified miners – including BHP Billiton Limited (ASX: BHP), South32 Ltd (ASX: S32) – and even Rio Tinto Limited (ASX: RIO) which only generates a small percentage of total revenues from commodities other than iron ore. The three miners are down 4.8% to $17.53, 5.5% to $1.55 and 3.9% to $44.90 respectively in trading today.

Several resources companies have seen their share prices double or triple since the start of this year, but that trend could be about to reverse (perhaps apart from those in the lithium sector). South32’s share price is still up 45% since the start of this year, while BHP and Rio are flat.

And there are two main reasons for the falling commodities prices.

  1. Chinese regulators are cracking down on speculation in the futures markets, with evidence pointing to retail investors jumping into the futures market as we wrote earlier today. Those moves are likely to see investors exit the market, volumes fall and prices come back down to earth.
  2. Chinese economic data released overnight was weak, suggesting that the global powerhouse’s appetite for commodities is weaker than analysts and the markets had feared. April imports slumped 10.9% compared to April 2015, but analysts had expected a smaller 5% slide. Steel prices also continue to fall, indicating an oversupply domestically in China.

    Chinese exports also fell, down 1.8%, reversing the growth that had come in March. Economists had been expecting April exports to fall just 0.1%. Economic growth had slowed to 6.7% in the first three months of 2016, but it appears China is slowing even further.

Foolish takeaway

While some have been calling for the bottom of the commodities cycle, it appears they may have been too early – and prices could sink much further from here.

Look out below.

Forget resources for now...

This "dirt cheap" company. is growing like gangbusters, and trading on a 5.6% dividend yield, FULLY FRANKED (8% gross). With interest rates set to stay at these low levels for years to come, for income-hungry investors, including SMSFs, this ASX company could be the "Holy Grail" of dividend plays for 2016. Click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.