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Energy, iron ore, precious metals suffered losses in 2015
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
But while prices are unlikely to recover to the peaks seen earlier this century, some major classes may have hit the bottom, with experts predicting moderate upticks in 2016.
As a barometer of the global economy, the commodities market is painting a pretty dismal picture.
Slowing growth in China and supply surpluses driven by investment during the commodities boom of the Noughties have sent prices to multi-year lows.
But while prices are unlikely to recover to the peaks seen earlier this century, some major classes may have hit the bottom, with experts predicting moderate upticks in 2016.
ENERGY
Energy prices are likely to stay weak, although there may be some upside potential to crude oil prices in the second half of the year if OPEC holds its nerve on its production ceiling and smaller companies, such as US shale producers, are forced to shut.
Oil forecasts vary wildly, with Goldman Sachs calling USD 20 a barrel Brent, while most others are more sanguine as they predict a rebalancing of supply and demand in late 2016.
Moody’s puts Brent crude at USD 43 per barrel and US West Texas Intermediate (WTI) at USD 40. Analysts at Societe Generale expect a rebound to USD 60 in Q4 2016.
US WTI and Brent crude have fallen over 40 percent in 2015 alone and are both around USD 37 a barrel.
Natural gas prices posted a spike recently, recovering from 17-year lows due to unexpected forecasts of colder weather ahead in the US, which will spur demand for heating fuel.
But with the market moving ahead to price in the lower temperatures, inventories will need to drop to 2012 levels for a sustainable bull run, warned Phillip Future’s Daniel Ang in Singapore.
IRON ORE
A slowdown in the growth of world’s largest consumer, China, is hitting the country’s property market hard and with a large steel inventory still waiting to be cleared, this is likely to continue to drag on iron ore prices, which have tanked to around USD 40 a ton now from almost USD 70 in January.
National Australia Bank, UBS and Westpac are all negative on the steel-making raw material, which is likely to remain depressed, in turn hitting the Australian economy and currency.
PRECIOUS METALS
Prices of gold and silver have tanked about 10 percent in 2015 on expectations of an interest rate hike from the US Federal Reserve, which earlier this month raised rates for the first time since 2006.
An interest rate hike makes precious metals a less attractive investment because they are non-yielding assets that incur holding costs. So with more hikes expected next year, more downward pressure is expected on gold prices and exchange traded funds, BMI Research said in a note.
The research house expects the Fed to hike rates by a further 100 basis points or 1 percent in 2016, sending gold prices to test the USD 1,000 an ounce level by the first quarter of 2016.
COPPER
The red metal has had a tumultuous year, falling over 20 percent year-to-date. But prices may rise, despite ongoing challenges, according to London-based Capital Economics.
Underpinning the research house’s optimism is confidence that the Chinese economy will avoid a hard landing, alongside a pickup in the US economy and expectations of a supply contraction in 2016 after a raft of production cuts and mine closures in 2015.
“We are cautiously positive that with tightening supply and somewhat stronger demand growth, the scene is being set for a recovery in the copper price,” economist Caroline Bain said.
“Investor sentiment will be key. For now, persistent concerns about growth in China and the first rate hike in the US are weighing on sentiment. However, we think these fears are overdone and that, over the course of next year, improving fundamentals will support higher prices.”
Bain predicts copper will reach USD 6,000 a ton by end-2016, up from around USD 4,750 per ton now.
GRAINS
Despite fears of weather shocks from El Nino and La Nina, low grain prices are unlikely to get much boost due to ample inventories, Dominic Schnider, UBS Wealth Management’s head of commodity and Asia-Pacific forex, told CNBC’s Squawk Box on Monday.
“In general, there is a bias toward a little bit higher prices, but we have decent buffer and a decent inventory, so we can absorb whatever short-term weather volatility there is,” he said.
Although there is a possibility that El Nino – the warming phase of the weather phenomenon – may hit grain yields, global inventories are plentiful, in part due to agricultural technological advances such as genetically modified crops.
If El Nino was followed by counterpart La Nina – the cooling phase – grain prices may spike in the long run due to the negative impact on the US, which is a big producer, but that prospect is too far into the future to predict, said Schnider.
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