London

“Demand hasn’t been bad,” Ivan Glasenberg, chief executive of Glencore, one of the world’s resource companies, told investors this month. “Demand is still growing even in oil, iron ore and thermal coal. So why have prices come down? Well, we have all invested too much and increased supply in a big manner.”

Supply has been the key narrative in commodity markets this year, determining the winners and the losers in everything from nickel to soyabeans. It is the reason commodities are on course to be the worst-performing major asset class for a third consecutive year.

It is a trend that could continue in 2015 with the big iron ore producers and Opec showing no signs of curtailing production. “It has been too convenient to believe that the main problem has been global GDP growth,” said Ed Morse of Citi. “But increasingly, the supply side counts more as investment cycles are creating persistent gluts in some areas.”

The importance of supply can be seen in iron ore, the worst-performing major commodity of 2014. Iron ore has dropped almost 50 per cent this year to a five-year low as a flood of new supply, primarily from mines in Australia, hit the market. That has overwhelmed tepid demand growth in China, the world’s biggest consumer.

Years of high prices saw the mining industry plough hundreds of billions into new projects to cash in on China’s seemingly insatiable appetite for steel.

Morgan Stanley reckons seaborne supply increased by 12 per cent last year, or just over 100 million tonnes, as the big producers, BHP Billiton, Fortescue Metals Group, Rio Tinto and Vale, increased capacity. However, demand for seaborne material rose by 9 per cent, resulting in a surplus of 157 million tonnes.

Few analysts expect prices to recover in 2015 as more supply is introduced to the market. Fraser Jamieson, analyst at JPMorgan, said: “A further 341 million tonnes is expected to come on over the next five years... global demand moderating, we believe the market oversupply will deepen in the near term.”

Rising supplies have also blighted the agricultural market this year. A bumper crop in the northern hemisphere has led to rising inventories and lower prices. But supply has also been a key factor behind those commodities that have outperformed in 2014.

Nickel has been the best performer of the metals traded on the London Metal Exchange this year. Prices rose to a high of $21,625 (Dh79,428) in May after Indonesia banned exports of the metal in a bid to boost its domestic processing industry.

In zinc, expectations of large mine closures have driven the metal to a 6 per cent return on the LME. This year, there was confirmation that Century, Australia’s largest open-pit zinc mine that started shipping the metal in 1999, would cease production in 2015.

But the difficulty involved in calculating supply has caught some out in the copper market. While the market expected a substantial surplus of the red metal at the beginning of the year, estimates of the extent of that surplus have been consistently reduced on news of mine disruptions and reduced output.

Financial Times