More doom looms for metals
IF 2014 goes down as an “annus horribilis” for the commodities industry, few pundits are betting that prices will improve significantly over the next 12 months.
Across the board, from industrial metals to soft commodities and oil, prices have dipped sharply over the past year on a combination of weakening demand growth and excess supply.
Although lower prices for the basic building blocks of industrial growth should help to boost the broader global economy and ultimately support long-term demand, it could be several years before a new upward cycle in the sector begins to take shape. Until then, prices are likely to remain under pressure as the balance of power remains with major consumers and not the producers.
Topping the list of concerns worrying analysts has been China. This anxiety over the world’s biggest consumer of industrial raw materials is expected to persist.
Most economists expect China’s economy to have grown by 7.4% in 2014 — the slowest rate recorded since 1990.
China props up demand for most of the raw materials — especially iron ore, coal and copper — which defined the boom years known as the “commodity supercycle”.
Iron ore and coal producers arguably have suffered the most from China’s cooling economy. After entering a bear market in March, iron ore delivered to Qingdao in China fell 47% last year to settle at about $71 (R830) per ton.
The surplus in iron ore supply that began to emerge at the beginning of the year is expected to widen to about 300 million tons by the end of 2017 as major producers such as Rio Tinto and BHP Billiton continue to consolidate their output into bigger, more productive mines.
Over the past year, the IHS Material Price Index has fallen 20%. The advisory firm’s chief economist, Nariman Behravesh, expects that commodity prices will slide by a further 10% on average this year, despite the increasing chance that China’s government will underwrite a massive stimulus programme to revive growth.
A combination of feeble global demand growth and strong supply growth is to blame
“A combination of feeble global demand growth and strong supply growth is to blame. China remains key to the demandside story,” said Behravesh. “Any further softening of growth will likely translate into another round of price declines.
“Unfortunately, if the Chinese government chooses to boost growth by encouraging investment to expand industrial capacity, this could exacerbate the excess-supply conditions in sectors such as steel and chemicals.”
Despite the multitude of reasons to remain short commodities, there are pockets of potential growth still to be found.
Colin Hamilton, head of global commodities research at Macquarie, said: “Nickel is still one commodity where we are extracting less from the ground than we are consuming every day.
“Yes, inventories are high, but as we know with the LME [London Metal Exchange] warehousing system, this doesn’t mean they are available when the market needs them. Risk versus reward in nickel still looks very positive, particularly from today’s levels.”
However, after the battering that investors received in 2014, it may be prudent to wait and see how China revives growth before doubling down on commodities again. — © The Daily Telegraph, London