Commodities back from the dead
Finally, analysts are prepared to vouch that the worst is over but some warnings persist
or the past two-and-a-half years, calling the bottom of the commodities price cycle was taboo. Depressed prices and unusual market conditions saw even the most seasoned of market watchers shy away from any pronouncements that the worst could be over.
But, as prices continue to lift steadily, confidence is growing that indeed this is the case.
The World Bank, adding its voice to this view in its Commodities Market Outlook released this week, forecasts that industrial commodity prices will surge in 2017 on the back of tighter supply and stronger demand.
It’s good news for the global economy in general and for commoditydependent nations such as South Africa in particular.
“Prices for most commodities appear to have bottomed out last year and are on track to climb in 2017,” said John Baffes, a senior economist and lead author of the report.
Copper, zinc, tin and nickel prices have made considerable gains in recent months. The chrome price has also rocketed. The JSE Resources 10 index is up 50% on this time last year, with resource companies such as Anglo, Kumba, ARM, Assore and Glencore trading at 12-month highs.
The about-turn in commodity prices has also helped to strengthen the currency. The rand is also performing well at present, dropping from 14 to the dollar over the festive period to near 13.20 this week.
In October, the World Bank forecast that metals prices would only rise 4% in 2017 but its latest report anticipates an increase of 11% on the back tightening supply and higher demand from China and other advanced economies.
Less is expected of the oil price. The World Bank forecasts it will stay at current levels of $55 a barrel for the year, although it notes this is still 29% higher than the average price reached in 2016.
This, it says, is based on an assumption that oil-producing nations will make good on their commitment to limit production.
“I don’t like bottom fishing,” said Rene Hochreiter, a mining analyst at Noah Capital. “But the iron ore price, that bottom was in the middle of 2015; platinum prices bottomed in October, and gold prices have even bottomed.”
The platinum price has gone from $911 at the beginning of the year to near $1 000 at present. The gold price, which does not tend to follow the commodity price cycle, is also thriving and has gone higher than $1 200 for the first time in two months.
But the World Bank does not expect gold and platinum to be part of the commodities good news story in 2017. Instead, it says, precious metals prices are projected to decline in 2017 as benchmark interest rates rise and safe-haven buying ebbs.
But rising prices of some commodities usually bodes well for all, Hochreiter said. “They all sort of follow each other. Some lead and some lag but they generally follow the same trajectory over 12 or 18 months.
Mamokgethi Molopyane, a mining analyst at Creative Voodoo Consulting, says the optimism over commodities is being buoyed by a slight economic recovery overall. “Compared to last year, 2017 is already looking better. That alone has encouraged the markets towards commodities,” she said. “There’s sentiment of ‘Phew! We are finally out of crisis collapse period’, as it tapered off towards the end of last year.”
Azar Jammine, the chief economist of Econometrix, said classical economic drivers of supply and demand are lifting commodity prices. “They are why you have cycles in the first place. When prices fall to below the price of production, you get closures of mines and oil fields, and a change of crops. That in turn produces change in the cycle.”
Optimists are also betting on a rise in demand for commodities driven by stimulus measures in China and the United States. On Monday, the global ratings agency Fitch said, although stimulus measures helped China to register 6.7% gross domestic product growth in 2016, they were funded by credit and pose a