Negative cycle in commodities from 2015-2016
The negative cycle of a downturn in commodities
Commodities tend to move in waves of profitability, profitability leads to excess supply. Excess supply leads to lower prices and losses to the industry. Losses lead to contraction and closure of many factories and supply shrinks, this sows the seeds of the next upward wave in commodities.
During a downturn, when the firms are in distress, factories maintain production. There is a cost in idling and restarting furnaces, a firm would choose to continue production despite heavy losses over the short term in the view to prevent losses occurring due to shutdown of furnaces. As supply does not go down even though the firms are in distress, additional supply enters the market at cheaper prices as producers chase cash over profits. Firms continue producing through losses because of restarting costs.
Debt is another push factor for factories to continue to produce into losses. Producers have to chase cash, and oftentimes this means producing at a substantial loss and ramping up production to obtain as much cash as possible to pay back the debt, driving down raw material inventories and internal inventories in order to prevent default, additional supply is pushed into the market, extending the oversupply.
As prices fall many producer will not want to hold inv
When the market rebounds, supply would have shrunk, the supply chain would need to restock, and many of the players would have restructured or consolientory that is deemed to be depreciating, the supply chain will slowly unload inventories. These will all prolong the negative cycle.
dated, or simply shutdown, contributing to a healthier supply balance. Even if there is a poor rebound, prices will rebound sharply, just from the restocking.
This is what has happened in many commodities from 2015 till 2017 as China went into a slowdown and pushed down prices and demand for many different commodities.
Commodities tend to move in waves of profitability, profitability leads to excess supply. Excess supply leads to lower prices and losses to the industry. Losses lead to contraction and closure of many factories and supply shrinks, this sows the seeds of the next upward wave in commodities.
During a downturn, when the firms are in distress, factories maintain production. There is a cost in idling and restarting furnaces, a firm would choose to continue production despite heavy losses over the short term in the view to prevent losses occurring due to shutdown of furnaces. As supply does not go down even though the firms are in distress, additional supply enters the market at cheaper prices as producers chase cash over profits. Firms continue producing through losses because of restarting costs.
Debt is another push factor for factories to continue to produce into losses. Producers have to chase cash, and oftentimes this means producing at a substantial loss and ramping up production to obtain as much cash as possible to pay back the debt, driving down raw material inventories and internal inventories in order to prevent default, additional supply is pushed into the market, extending the oversupply.
As prices fall many producer will not want to hold inv
When the market rebounds, supply would have shrunk, the supply chain would need to restock, and many of the players would have restructured or consolientory that is deemed to be depreciating, the supply chain will slowly unload inventories. These will all prolong the negative cycle.
dated, or simply shutdown, contributing to a healthier supply balance. Even if there is a poor rebound, prices will rebound sharply, just from the restocking.
This is what has happened in many commodities from 2015 till 2017 as China went into a slowdown and pushed down prices and demand for many different commodities.
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