The issue of credit risk in commodities?

Dorval AM
"Analysing the world, deciding on portfolios, explaining what we do"
Gustavo Horenstein
Fund Manager. Economic Research and Asset Allocation
With the end of the commodities supercycle, the entire sector is under pressure. The recession in heavy industry and construction in China associated with the arrival of the latest production capacities on the market is weighing on prices. In oil, the shift in balance is considerable with a prominent role of supply (excess) versus demand (stable growth). 

In principle, a decrease in commodities prices related to a supply shock should be good news for global growth and financial markets. Unfortunately, the indebtedness of the commodities sector has particularly increased in recent years. Debt for the worldwide oil and gas sector alone totals 2.5 trillion dollars according to calculations by the Bank for International Settlements. This figure must be qualified. First of all, it compares with a global GDP of nearly 78 trillion dollars. Then, the difficulties are concentrated on the US high-yield debt market, where the oil and gas sector represents 210 billion dollars, plus approximately 170 billion dollars for all other primary industries. Price deflation is harming the sector’s ability to meet its commitments. This harm, coupled with the technical liquidity problems of the US high-yield credit market, is deteriorating the risk appetite. The adjustment of production overcapacities is in progress, and the process will last for several more months.

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