With Glencore wobbling, commodities crash now turning into a crisis

By Bradley Olson

(Bloomberg) — The 15-month commodities free-fall is starting to resemble a full-blown crisis.

Investors are reacting to diminished demand from China and an end to the cheap-money era provided by the Federal Reserve. A Bloomberg index of commodity futures has fallen 50 percent since a 2011 high, and eight of the 10 worst performers in the Standard & Poor’s 500 Index this year are commodities-related businesses.

The logo of commodities trader Glencore is pictured in front of the company's headquarters in the Swiss town of Baar in this November 20, 2012 file photo. Shares in mining and trading company Glencore fell almost 30 percent and closed at a record low on Monday over concerns it is not doing enough to cut its debt to withstand a prolonged fall in global metals prices. About 3.5 billion pounds ($5.33 billion) in market value was wiped off the Swiss-based firm, whose $10 billion share offering in 2011 turned its managers into billionaire shareholders but left it saddled with debt - a growing problem as commodity prices fell. REUTERS/Arnd Wiegmann/Files
The logo of commodities trader Glencore is pictured in front of the company’s headquarters in the Swiss town of Baar in this November 20, 2012 file photo. Shares in mining and trading company Glencore fell almost 30 percent and closed at a record low on Monday over concerns it is not doing enough to cut its debt to withstand a prolonged fall in global metals prices. About 3.5 billion pounds ($5.33 billion) in market value was wiped off the Swiss-based firm, whose $10 billion share offering in 2011 turned its managers into billionaire shareholders but left it saddled with debt – a growing problem as commodity prices fell. REUTERS/Arnd Wiegmann/Files

Now it all seems to be coming apart at once. Alcoa Inc., the biggest U.S. aluminum producer, said it would break itself into two companies amid a glut stemming from booming production. Royal Dutch Shell Plc announced it would abandon its drilling campaign in U.S. Arctic waters after spending $7 billion. And the carnage culminated Monday with Glencore Plc, the commodities powerhouse that came to symbolize the era with its initial public offering in 2011 and bold acquisition of a rival in 2013, falling by as much as 31 percent in London trading.

Read also: Glencore on ropes, shares fall 30%, market pricing debt default at odds on

Peak prices in gold and silver are four years old, oil’s plummet since June 2014 has been pushed along by OPEC’s November decision to keep pumping despite excess supply and U.S. natural gas prices have fallen to less than a fourth of their 2008 value.

Read also: As Glencore leads, Anglo will follow – cut dividend, rights issue

It’s about to get worse, according to analysts John LaForge and Warren Pies of Venice, Florida-based Ned Davis Research Group. Commodities may be in the fourth year of a 20-year “bear super-cycle,” according to an Aug. 14 research note. The analysts looked at commodity busts dating to the 18th century and found them driven by factors such as market momentum rather than fundamentals, LaForge said Monday in an interview.

Read also: Glencore raises $2.5bn in new rights issue despite record low share price

The good news: most of the damage is done in the first six years, LaForge said.

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