Rallies point to commodities turnround

Sharp rallies in the price of two key commodities have raised hopes that the sector - the worst performing major asset class of 2014 - might have bottomed.

Iron ore, a key ingredient in steelmaking, enjoyed its biggest gain since 2012 this week, rising more than 12 per cent to $57 a tonne, while the price of Brent, the international oil marker, hit a 2015 high.

"This year is likely to be one of generally recovering prices," said Julian Jessop, head of commodities research at Capital Economics. "Brent almost certainly bottomed out in January and what happens to oil prices will probably set the tone for the rest of the market."

The sector, as measured by the Bloomberg Commodity Index, dropped 17 per cent last year as the price of oil and several other raw materials slumped because of rising supplies and weak demand.

But Brent has now risen for three consecutive weeks, gaining 18 per cent, while iron ore, a key source of profits for several major mining houses, is up 22 per cent from the six-year low it reached earlier this month.

Analysts said the recovery in iron ore prices reflected restocking by Chinese steel mills as well as expectations that its government will provide more initiatives to spur economic growth.

China is the world's biggest consumer of seaborne iron ore and this week Beijing cut sharply the level of cash commercial banks must park with the central bank in a strong signal of intent to boost flagging growth.

"On the demand side there is an awful lot of bad news priced in, particularly on the slowdown in China," said Mr Jessop. "It's taken a while but most people are used to the idea that China's growth is going to be a lot slower in the next couple of years than it has been."

Signs of supply side discipline also helped stoke the rally in iron ore. On Wednesday, BHP Billiton, one of the world's biggest iron ore producers, deferred a project that would have increased the capacity of its Australian mines to 290m tonnes a year.

Meanwhile, North Sea Brent crude oil prices have now rebounded by 45 per cent since hitting a five-year low in January, rallying to $65.80 a barrel on Friday, the highest level this year. But they remain well below the 2011-2013 average of around $110 a barrel.

Traders said Brent's recovery has been helped by signs of slowing US production, growing demand, and Saudi Arabian-led air strikes on rebels in Yemen.

Buying by state-backed Chinese traders for the country's strategic reserves has also contributed to the recovery, though concerns remain that prices have rebounded too quickly.

US crude oil inventories are at the highest level in 80 years and have risen for 15 consecutive weeks, leading some to say traders have already priced in a slowdown in production before it has got under way.

"Supply cuts can put a bottom to a market but they don't turn a bear market into a bull market," Michael Coleman, co-founder of RCMA Asset Management, told the FT Commodities Global Summit last week.

Analysts and investors also have concerns about the rally in iron ore in part because of tepid economic growth in China.

"The good news from BHP that will slightly slow future production does little to alleviate the pressure of oversupply in the face of weakening demand from China," analysts at Investec Securities said in a note.

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