No let-up for slumping commodities under Federal Reserve hike

The US Federal Reserve is not doing any favours for commodity markets already enduring the longest slump in decades.

By raising US interest rates for the first time since 2006, the central bank has bolstered the value of the dollar, the currency used around the world to buy and sell most raw materials.

Even with global surpluses and slowing economies keeping prices low for everything from crude oil to wheat, demand may weaken, especially from major importers in Asia, such as China and India, that have been key drivers of commodity buying.

“The currency movement due to the US rate increase will have a direct impact on our business,” said Kazuo Kagami, the president of Toho Titanium, which makes a lightweight, super-strong alloy used in everything from airplane parts to golf clubs.

"The Japan-based company sells half its products overseas in dollars.

All sorts of raw materials have global surpluses after heavy investment in new production over the past decade boosted supplies, which began arriving just as demand slowed.

The Bloomberg commodity index of 22 items plunged 27% this year, the biggest drop since the financial crisis in 2008.

The gauge is down for a fifth straight year, compounded by a surge in the dollar against almost every major currency during the period.

In comparison, the Bloomberg dollar spot index rose the most in a month yesterday and has rallied 9.7% this year. An index which tracks 18 mining companies has slid 51% this year.

The Fed’s decision to raise borrowing costs by 0.25%, up from zero percent, marks the beginning of the end for an unprecedented era of easy monetary policy.

That may mean sustained strength for the dollar and limited demand for raw-material imports from countries with weaker currencies.

Higher interest rates will boost costs for metals traders who have been benefiting from low borrowing costs.

More than 90% of the aluminum stored in warehouses around the world is tied up in financial transactions that seek to exploit the gap between current prices and higher ones in the future.