It’s been a painful bear year for commodities, and analysts aren’t holding back on why they think this trend will continue in 2016.
According to the Australia-based Macquarie Group, it all comes down to three Ds: destocking, divestment and desperation. Analysts with the financial services firm don’t see demand turning around anytime soon and have thus made aggressive price downgrades.
Just how bad is the outlook?
“We are currently projecting 2016 demand for all major metals and bulk commodities remaining well below the 10-year norms. With financial markets taking an increasingly negative view on the long-term health of the industry, pressures on metals and bulk commodity producers seem set to get worse,” a recent report stated.
Most commodities are in oversupply, and with weak economic growth expected – most notably in China – that’s unlikely to change.
The Macquarie team sees global industrial production expanding just 2.3% in 2016, a level that has meant minimal metals demand growth in the past. “Essentially, nowhere in the world is seeing enough commodity-intensive growth to drive us into bottlenecks for material availability,” they explained.
Many commodity players, such as miners and metal producers, mistakenly assumed China’s growth would continue at an incredible “super boom” pace, the group says. But that’s clearly turned out not to be the case, which is hurting steel producers, miners and others.
“This makes the current low price environment a duration event,” the Macquarie analysts wrote. “In other words, while we may be close to bottom, the bottom can persist for a long time, and certainly through 2016.”
“Despite bouncing back mid-year, the commodities market has fallen by more than 20% in the year to date, as measured by the S&P GSCI,” said Jade Fu, an investment manager with the London-based Heartwood Investment Management in the group’s 2016 outlook report. “We retain a cautious outlook on the commodities sector as oversupply is expected to persist.”
In its latest outlook, the World Bank says metals prices sank 12% in the third quarter of 2015, the fourth consecutive quarterly decline. The group predicts that, with slowing demand in China and elsewhere, metals prices are likely to drop 16% for the year ending Dec. 31.
A white metal used to make steel, molybdenum, experienced a nearly 50% drop in its price this year – the biggest decline in 79 raw materials tracked by Bloomberg. Global demand for the metal weakened 5%.
“It’s like a poster child for the commodity bear market,” said Paul Christopher, a St. Louis-based head global market strategist for Wells Fargo Investment Institute, which oversees $1.7 trillion, in a recent Bloomberg News report.
“We don’t have a positive outlook on metals, including molybdenum, because they’ve been overproduced,” Christopher said.
They will continue to do the worst, not just because China’s demand is slipping still, but also because there’s not been enough supply adjustment.” As for precious metals, gold futures – reacting in part to the hike in interest rates – are set to drop 11% in 2015. Silver’s dip this year should be roughly 8%, according to some industry estimates.