Commodity Producers Still Producing Despite Lower Prices

Two interesting articles caught our eye last week related to commodity production and the potential for a continuation of the current supply glut. It is no secret that the prices of many commodities have fallen significantly in the past 18 months. What is surprising is that many producers are responding by actually increasing production in a bid to capture market share and push high cost producers out of business. Helping support this course of action is the strong dollar and weaker currencies in commodity producing nations, which lowers the cost of operating a mine or pumping a well. Take the mining giant Vale, who is pushing ahead on a $16 billion iron-ore operation that will be “the biggest project in the history of international mining.”  This comes as iron ore prices have fallen 43% in the last 18 months. The investment bank UBS is predicting that the iron ore markets will be oversupplied by 150 million metric tons by 2018, which could hold down prices for years. The same trend is occurring in the oil markets, where OPEC and large non-OPEC producers are ramping up production. A recent WSJ survey of 13 large investment banks predicts that oil will not top $60/barrel next year, largely due to this activity. A sustained level of low commodity prices should keep inflation subdued for the foreseeable future, keeping bond yields in the same range we’ve been in for most of 2014 and 2015. 

Source: Bloomberg, UBS, Wall Street Journal