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Despite Commodity And Resources Rally, Metals Pricing Recovery Is Not Immanent

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Despite Commodity And Resources Rally, Metals Pricing Recovery Is Not Immanent

In a sector battling overcapacity, a Wall Street Journal report says miners are not seeing the imminent recovery in commodity prices or resources that rallied through much of this year, and unfortunately, this month's figures headed still lower.

A Rally, But No Recovery?

"From lows hit as early as January to May, copper gained 17 percent, nickel rose 25 percent, and iron ore, a key ingredient in steelmaking, shot up 75 percent to $68.70 a metric ton," the report noted. "Copper, iron ore and other metals and resources rallied through much of this year, but this month headed lower once more. Those declines will continue."

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From a positive standpoint, the commodity prices have rallied on the expectations that the Chinese government would provide more stimulus to resurrect the economy that in turn creates more demand for metals and iron ore. Further, a weak dollar and low interest rates ensured that the rally continued.

However, the recent strengthening of the dollar due to anticipations over a June rate hike from the Fed, along with China playing down expectations of further stimulus, has cut the commodity rally abruptly.

Is A Bottom Even Close?

"Although we have recently seen some positive signals [...] we are expecting another year or two of low copper prices," the report said, quoting Jean-Paul Luksic, chairman of Chilean copper producer Antofagasta plc (ADR) (OTC: ANFGY).

"I would say the recent softness has more to do with increased expectations that the Fed will raise interest rates in June and its effect on the U.S. dollar," said India-focused mining giant Vedanta Resources plc (OTC: VDNRF) chief executive Tom Albanese. The Journal elaborated on Albanese's stance, stating "Albanese also believes that the rally just went beyond what the fundamentals would suggest."

Meanwhile, analysts have repeatedly called for the closure of more mines and smelters "for prices to really bottom out."

The report recalled the words of Lakshmi Mittal, chief executive of the world's largest steelmaker, ArcelorMittal SA (ADR) (NYSE: MT), who said that China has yet to fulfill a promise to shut down more than a hundred million tons of excess steel-production capacity.

 

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