Commodities: Overcapacity in aluminum and steel markets at all-time highs, analysts say

A sharp move lower in the US dollar after China´s central bank raised its daily fix for the country´s currency by the most since July 2005 light a fire under commodity prices.

Bloomberg´s commodity index was jumping 0.71% to 172.34 as of 18:13 BST, alongside a drop in the US dollar spot index of 0.66% to 93.143.

Industrial metals did best in Friday´s session, with three-month copper futures on the LME finishing higher by 2.6% on the day at 5,042.00, with the similarly-dated zinc and lead contracts sporting advances of 2.9% and 3.6% by the close of trading, respectively.

Precious metals were also wanted, with the gold contract for delivery in June 2016 rising by 2.12% to $1,293.30 per ounce on COMEX and silver higher by 1.66% to $17.88 per troy ounce.

The most heavility-traded iron ore futures contract on the Dalian Commodities Exchange rose by as much as 6% to 462 yuan a tonne.

Overcapacity in aluminum and steel markets

Despite recent sharp gains in steel prices, on Friday analysts at Macquarie warned that overcapacity in steel and aluminum markets was still at all-time highs.

That meant that over the longer-term they always expect (real) price reversion to a level below that seen over history.

In the case of steel, the removal of Chinese capacity would lead to an improved situation over time, but not a solution.

"Using an 88% utilisation rate as a level which would be deemed healthy for these industries – one which we view as fair for a long-term norm – we would need to remove over 250mt of steel capacity permanently from the global market, and over 7mt of aluminium," the broker said in a research note sent to clients.

Be that as it may, also on Friday Citi´s global asset allocation team adopted a more upbeat stance on commodities, extending its 'overweight' recommendation to include all subsectors in that space.

"Oversupplied markets should begin to diminish in 2016. And a boost in energy prices should also help to secure a floor under all commodities," Citi told clients.

Dollar denominated corn futures on the Chicago Mercantile Exchange were up by 0.76% to $1.16 per pound and the cotton#2 contract on the ICE by another 0.38% to $6.39 per pound.

Cocoa futures on LIFFE were up by 1.9% to £2,313.00 per metric tonne on the LME, whereas corn futures retreated 1.5% to €162.50 per tonne.

White sugar futures on LIFFE closed 2.4% higher at $468.70 per tonne.

Front month West Texas Intermediate crude oil futures dropped 0.43% to $45.83 per barrel on NYMEX, in tandem with falls in gasoline and heating oil.

Bloomberg´s April survey of oil companies, producers and analysts found that OPEC´s output of crude oil jumped by 484.000 barrels a day to 33.217m, led by a 300,000 barrel increase in Iranian production.

June 2016 natural gas futures on NYMEX on the other hand jumped 4.09% to end the day at $2.16/MMBtu.