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.
Higher rates typically work against gold and weaken its appeal as a haven.
Societe Generale SA is even suggesting that investors short gold in 2016 outlook, saying the metal is a “clear casualty” of Fed tightening, according to a Bloomberg story in early December.
Prices should keep dropping in 2016, averaging $955 by the fourth quarter, the bank says. Other investment banks, such as Citigroup and Goldman Sachs, are also bearish.
In an economic envionment with low inflation, analysts say, gold tends to suffer.
The World Bank points out that agricultural-related commodity prices fell by more than 2% in the third quarter of 2015 and are likely to drop off by 13% for the full year, “reflecting abundant supplies and high levels of existing grain stocks.”
Fertilizer prices declined 1% percent in Q3’15 and may drop 1% in 2015 due to weak demand and rising supply.
Analysts with the World Bank are bearish on this sector, despite some expectations regarding how weather patterns would affect supply. El Niño, they state in a recent report, “is unlikely to cause a spike in global agricultural prices because of ample supplies of most agricultural commodities and weak links between global and domestic prices.”
In general, asset and investment managers are not looking to boost their stakes in commodities.
“From an asset class perspective, we continue to believe that equities offer more attractive risk-adjusted returns versus commodities,” said Heartwood’s Fu in his 2016 outlook report for the group.
Bank of America Merrill Lynch concurs: “We continue to favor equities over bonds and commodities for 2016,” the bank stated in its review of the year ahead. “A firm U.S. dollar and subdued global growth will continue to put downward pressure on commodity prices.”
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