How far away are commodities from their bottom?

By nature, speculators in commodities live on the edge. At any point, they will put their bets based as much on trend analysis as on gut feeling - a combination of logic and emotion. Many of them have begun arguing commodities from oil to coal and steel to copper that are trading at multi-year lows may annually now be closing to the bottom and, therefore, the time is ripe to take long positions.

Their logic is not to be faulted in normal circumstances. However, the reality since the 2008-09 financial crisis has undergone fundamental changes, with growing moderation of China's till-recently voracious appetite for industrial and energy commodities. China growing at a double-digit rate annually is well in the past.

The world's second largest economy's growth in the third quarter of 2015 at 6.9 per cent was the slowest since 2009. This is happening as the country is transiting from investment and export-led growth to one powered by consumption. The shift in focus has led to the industrial sector growing at a piffling 0.2 per cent in the past quarter, an extraordinary fall from a 22 per cent annual rate in the second quarter of 2007.

Further, in a reflection of continuing weak global demand, Chinese exports, according to that country's General Administration of Customs, were down 3.7 per cent in September from a year ago, owing to a 5.5 per cent decline in August.

The fall in imports was a sharp 20.4 per cent in September. August imports' contraction was 13.8 per cent. Across the board, a drop in commodity prices is inevitable in the context of China opting for a less energy-intensive phase of consumption led-growth and the rich country grouping - Organisation for Economic Cooperation and Development - forecasting a global growth of only 2.9 per cent in 2015.

Of all commodities, coal is the biggest loser, owing to Chinese import contraction. The country burns this polluting fossil fuel in very large quantities to meet its energy requirements. But, its coal import demand is now set to fall continuously till it becomes zero in the long run, as global research group Macquarie foresees.

Beside the reason, cited, the focus on building clean energy based on renewable resources explains why coal imports by China fell nearly 30 per cent to 156.36 million tonnes (mt) in the nine months to September.

More than one agency is expecting coal shipments to China contract a further 25 mt next year over a near-certain 60 mt in 2015. To add to the woes of miners, developed countries are resolute in building a new energy infrastructure, where polluting and carbon-intensive coal-fired power plants do not find a place.

The world coal market is so oversupplied and current production so plentiful that Goldman Sachs has red-flagged any further investment in capacity expansion. The story is no different for oil, in surplus in an environment of flat demand - what with Japan lapsing into its fourth recession in five years and China's demand moderating.

So, we find the world's benchmark crude Brent doing $46 a barrel, a marked fall from $115 a barrel in June 2014. This, then, is the case of Saudi Arabia's bet of maintaining crude output by the Organization of Petroleum Exporting Countries, in the face of falling prices, to squeeze out the US shale oil producers going wrong.

However, the US Energy Information Administration reports the country's crude oil production fell by 40,000 barrels a day in October, compared with September. The fall in US production hardly has any impact on oil prices. Denominated in dollars like so many other commodities, the currency value appreciation makes oil automatically more expensive for importing countries facing economic pain. They need to be compensated by the fall in crude prices.

Other major bearish influences for the oil market are record inventories, with stocks rising every week over the past two months and the possibility of Iran, which has the world's fourth largest proven reserves of crude and the second largest gas reserves, ramping up production to its 2011 level of 3.6 million barrels a day.

Iran has an estimated 40 million barrels in storage in tankers. Metals, too, have lost considerable ground in the past year. Speculators instinctively start taking long positions in the belief that the bottom might be around. Even if the floor is found soon, how long prices will crawl remains in a speculative domain.

LIVING ON THE EDGE

• Speculators say commodities are headed to touch bottom and, hence, it's time to take long positions
   
• However, this assumption might be out of place given the recent moderation in Chinese demand for commodities
   
• Of all commodities, coal is the biggest loser, owing to Chinese imports contraction
   
• Even if prices touch bottom, it is unclear how long will they remain low