Share

What is the outlook for commodities?

A recent conference convened by Goldman Sachs, the US bank, polled delegates on which metals they expected to recover the best in 2016.

About 27% of delegates expected gold to be the best-performing commodity in 2016 with copper coming a close second at 20% of delegates.

Embarrassingly, this is the contrary view to Goldman Sachs which believes copper has the best prospects.

The truth of the matter is – and whisper this – nobody actually knows.

Fending off questions as to why Anglo American hadn’t acted quicker to cut loss-making operations and restructure central costs, CEO Mark Cutifani responded somewhat wryly: “I don’t recall anyone two years ago predicting the prices we have today. I find that quite interesting.”

He’s right. Nobody was. The metals price declines, especially in the second half of 2015, have been a curve ball of note.

On the supply side, the commodities market is heavily influenced by China’s economy, which is undergoing fundamental change as it transitions from an investment-led economy to a consumer-led one.

“Our economists believe that growth will continue to slow down next year,” said Goldman Sachs in a 3 December 2015 report.

“Structural issues such as overcapacity and the debt overhang will weigh on [China’s] domestic demand,” it said.

In the absence of demand-side improvements, therefore, the sobering news is that for commodity prices to show signs of improvement there may have to be a change on the supply side: namely, bankruptcies.

For an example of how this might work, one has to look at how the opposite has already been true.

Keeping Lonmin afloat through a highly dilutive shares-for-cash issue – when there was hope it might be restructured leading to massive cuts in platinum output – was a contributing factor that saw the price of platinum fall from $1 000/oz (R14 625) to about $850/oz.

There are some bright spots. The malaise in rough diamond prices is expected to ease in the course of 2016 as a temporary oversupply of stock among polishers and cutters is eased, and because retail demand in China and the US is thought to be stable.

Aluminium, manganese and coal, especially coal, are under tremendous pressure.

There’s also a secular change in sentiment against coal as a source of energy, with many banks and funds cutting back new investment in the fuel.

Said Barclays Capital in a recent report: “Our commodity supply/demand models show no clear signs of deficits emerging until 2018 (iron ore) or later (copper, coal and aluminium).”

This is an excerpt from an article that originally appeared in the 31 December 2015 edition of finweek. Buy and download the magazine here

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.98
-0.4%
Rand - Pound
23.94
-0.2%
Rand - Euro
20.50
-0.2%
Rand - Aus dollar
12.35
+0.0%
Rand - Yen
0.13
-0.4%
Platinum
898.45
-0.8%
Palladium
1,000.75
-0.1%
Gold
2,193.42
-0.1%
Silver
24.50
-0.6%
Brent Crude
86.09
-0.2%
Top 40
67,995
+0.5%
All Share
74,200
+0.4%
Resource 10
56,292
+1.1%
Industrial 25
103,603
+0.3%
Financial 15
16,537
+0.1%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders