##{"id":66057,"date":"2015-12-08T10:00:19","date_gmt":"2015-12-07T23:00:19","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2015\/12\/08\/material-matters-bleak-outlook-for-commodity-prices-in-2016\/"},"modified":"2015-12-08T10:00:19","modified_gmt":"2015-12-07T23:00:19","slug":"material-matters-bleak-outlook-for-commodity-prices-in-2016","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2015\/12\/08\/material-matters-bleak-outlook-for-commodity-prices-in-2016\/","title":{"rendered":"Material Matters: Bleak Outlook For Commodity Prices In 2016"},"content":{"rendered":"

-Less commodity-intensive growth in China
\n-Cement, glass, aluminium, steel oversupply
\n-Base metals pricing relatively better positioned
\n-Bulks likely to remain weak over 2016
\n-Titanium dioxide feedstock outlook soft
\n-Temporary sharp sell off in PGMs<\/strong>
\n <\/p>\n

By Eva Brocklehurst<\/p>\n

Commodity Outlook<\/u><\/p>\n

It may be tempting to look for a bottom for commodity prices next year but Citi suspects there may be more softness ahead. The issue is whether the supply\/demand fundamentals are shifting closer to balance for many commodities.<\/p>\n

The core of the problem, in the broker's view, is the damping down of expectations in China and a shift to less commodity-intensive growth, plus a slowdown in other emerging markets. The rising US dollar is expected to be an ongoing headwind in general, ranging from most beneficial to gold<\/strong><\/u> prices on a tactical basis to meaningless for soybeans<\/strong><\/u>.<\/p>\n

Citi expects higher prices by the end of 2016 for US natural gas<\/strong><\/u>, crude oil<\/strong><\/u>, base metals – especially copper<\/strong><\/u> and nickel<\/strong><\/u> – as well as platinum<\/strong><\/u> and palladium<\/strong><\/u>. A mild price recovery is expected in cereals<\/strong><\/u> while bulk minerals<\/strong><\/u> are expected to remain weak. The broker does expect price recoveries to be more persistent in 2017 for oil and base metals and possibly agriculture.<\/p>\n

Commonwealth Bank analysts believe China has re-emerged as the key downside risk for prices. A deterioration in tier one and three cities in October has renewed the potential for the property sector to tank again.<\/p>\n

Meanwhile China's secondary sector, dominated by manufacturing of finished goods, continues to slow. Electricity output and loan growth to heavy and light industries confirm this is the case, the analysts maintain.<\/p>\n

Overcapacity continues to hinder the economy with a number of industries in chronic oversupply, particularly cement<\/strong><\/u>, glass<\/strong><\/u>, aluminium<\/strong><\/u> and steel<\/strong><\/u>. Reductions by major Chinese metal producers do bode well for base metal prices but the analysts are cautious, believing aluminium, alumina<\/strong><\/u>, steel and zinc<\/strong><\/u> are the best positioned for a price increase if supply does ease.<\/p>\n

National Australia Bank analysts add their weight to the bearish tone. Declines in prices are expected to be a little more modest in 2016, with iron ore<\/strong><\/u> the main drag on the sector. US dollar strength will help to partly offset price declines in Australian dollar terms. Overall, the Australian terms of trade is expected to trend lower but at a slower pace.<\/p>\n

The analysts expect iron ore spot price will stabilise at an average US$42\/tonne in 2016 while hard coking (metallurgical) coal<\/strong><\/u> will average US$83.50\/tonne. Their forecast for thermal (steaming) coal<\/strong><\/u> <\/strong>for the 2016 Japanese fiscal year is unchanged at US$62\/tonne.<\/p>\n

To account for further upside risks to OPEC (Organisation of Petroleum Exporting Countries) production in coming months, despite a fall in US production, the analysts have revised near-term forecasts marginally lower.<\/p>\n

Oil prices are now expected to stay around the high US$40 to low US$50 per barrel in the first half of 2016 and improve slowly towards US$60\/bbl by early 2017. Higher global LNG<\/strong><\/u> supply is weighing on prices but the analysts note prices have flattened out since March in Australian dollar terms.<\/p>\n

Meanwhile, the NAB analysts expect gold price movements will be largely determined by the US Federal Reserve's policy tightening. A hike is expected this month in the Fed Funds rate but the analysts believe the tightening will be gradual next year before accelerating in 2017. Gold prices are expected to maintain a modest downward trend, reaching below US$1000\/oz by the second half of 2016.<\/p>\n

Goldman Sachs, in marking to market, has highlighted the broad downward move this year across a raft of prices, particularly for iron ore (13%), nickel (9%), zinc (8%), alumina (7%) and steel (3%). Changes to commodity price forecasts have a material impact on the broker's earnings forecasts for those stocks exposed to these metals.<\/p>\n

The broker's major changes include a 10% downgrade for South32<\/strong><\/u> ((S32)), Fortescue Metals<\/strong><\/u> ((FMG)) and OZ Minerals<\/strong><\/u> ((OZL)) earnings. The gold price has been significantly weaker than Goldman expected over October and November and this has had a negative impact on earnings estimates for Newcrest Mining<\/strong><\/u> ((NCM)), Regis Resources<\/strong><\/u> ((RRL)) and Northern Star Resources<\/strong><\/u> ((NST)). The broker upgrades Independence Group<\/strong><\/u> ((IGO)) to Neutral from Sell on valuation grounds.<\/p>\n

Mineral Sands<\/u><\/p>\n

The titanium dioxide<\/strong><\/u> feedstock market continues to weaken. Ord Minnett expects prices, particularly for ilmenite<\/strong><\/u>, will remain weak over the near term. Additional volumes from Africa are entering the market, taking share in the Chinese market from higher cost producers in Vietnam.<\/p>\n

Meanwhile, capacity reductions are occurring across the pigment industry. Ord Minnett believes the curtailments in the pigment industry are not yet complete and, amid lower Chinese growth estimates, are likely to flow through to lower feedstock demand. The broker reduces feedstock price forecasts by 10-20% for the next two years.<\/p>\n

Platinum Group<\/u><\/p>\n

Large outflows in both platinum and palladium exchange traded funds have occurred over recent months. Macquarie observes most of the moves in these funds have emanated from South Africa.<\/p>\n

The broker suspects investors are losing patience with these metals after the prices fell substantially over the year. The timing is of interest. Macquarie surmises the appeal of platinum, particularly, may have been hurt by the VW diesel scandal with investors deciding it was a good time to exit. In any case the broker is not losing sleep over it, noting the selling has eased.
\n <\/p>\n

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