Friday, January 1, 2016

Commodity sector in pain as China’s super-boom ends

A decade-old commodity boom came crashing to an end in 2015, hurting energy and mining firms as China’s industrial rise and appetite for raw materials slowed. The outlook for 2016 is not much better.

The Thomson Reuters Core Commodity Index fell by a quarter over the year to hit its lowest level since 2002 in December as commodities from iron ore to oil and gold took a battering, and there are few bright spots in sight.

“The chances of an optimistic 2016 are bleak,” said Mark To, head of research at Hong Kong’s Wing Fung Financial Group. “Slowing economic growth and structural reforms in China might contribute to decreased demand for commodities.”

Further interest rate hikes by the US Federal Reserve will add to the pain by strengthening the dollar, and making many commodities more expensive for international buyers, To said.

Among industrial commodities, iron ore prices have tumbled 40 per cent this year due to global oversupply and shrinking Chinese steel demand for a third year of losses, and the rout is seen stretching to next year.

In coal, thermal prices fell almost a third in 2015, hurt by waning Chinese demand and the rise of renewable energy, with Goldman Sachs and the International Energy Agency saying China’s coal demand has peaked.

Both iron ore and coal have shed around 80 per cent in value since their respective historical peaks in 2011 and 2008.

The downturn has hammered mining majors such as BHP Billiton, Rio Tinto and Anglo American as well as merchants like Asia’s Noble Group and Europe’s Glencore, forcing them to slash jobs and sell off assets.

Benchmark oil and natural gas prices have also slumped, down a third this year and two-thirds since the rout began in 2014 as ballooning supply clashed with slowing demand.

“Headwinds (are) growing for 2016 oil,” Morgan Stanley said this week, citing increases in global supply and a slowdown in demand, reflecting a market consensus that meaningfully higher prices are not expected before late 2016.

The outlook is expected to trigger a fight for survival across the supply chain, including shippers and private oil drillers, while oil-dependent countries from Venezuela and Russia to the Middle East will feel the pain of smaller revenues.

Base metals to shine?

One bright spot may be base metals, where fundamentals seem to be improving, said analysts.

“Everyone is expecting prices of metals to have bottomed out,” said Helen Lau, analyst at Argonaut Securities in Hong Kong.

“On the demand side there are signs of recovery, US economy is improving and China is taking steps to stabilize its economy. On the supply side, we are finally getting response from the producers who are determined to do something to prop up prices.”

Gold, however, is showing no sign of recovery after sliding to a near-six-year low earlier in December.

The metal was poised to close the year down about 10 per cent, its third straight annual loss, on a stronger dollar and on fears that higher US interest rates would hurt demand for non-interest-paying bullion.

Its outlook heading into next year does not look much better, with several traders and brokerages predicting a drop in prices to $1,000 an ounce or below early in 2016 before firming in the second half.

Gold has largely been influenced by US data and the Fed’s monetary policy. Even if the Fed rate hike path next year is slow, gold would take a hit, said traders.

Other precious metals have also felt the brunt of a stronger dollar. Silver looked set to end the year down nearly 12 per cent, while platinum and palladium were set for declines of around 30 per cent.

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