The speed of production cuts in this downturn has been much more rapid than in previous bear markets. Announcements by major players of large cuts by could trigger a recovery in prices even though they are unlikely to be sufficient to restore supply balance.
In the bear market in 2001, curtailments by BHP Billiton (even if they never actually eventuated) and the message to the market that they were prepared to lead the industry into preemptive action went some way to restoring confidence, and a price rally in early 2002.
Ultimately, a recovery in demand is the only factor which will drive a sustained forward march in commodity prices, and these prospects are appearing to slip even further into the future. However, in the interim, recoveries could be for shorter term, which could provide trading opportunities.
The suddenness and severity of the collapse in commodities demand have been amplified by destocking more of finished goods and not so much of commodities. When the destocking process is complete, apparent consumption will be restored to a level closer to the real underlying consumption, providing some relief from the current extreme depression in offtake.
Speculative and investment positions in commodity markets have been liquidated as part of the massive de-risking process. Long positions have been sold, but short positions have also been covered as investors withdrew from this risky asset class.
(The authors are Citigroup analysts)
