The commodities revival
he price of commodities — from oil to natural gas, from iron ore to copper is one that is relatively easy to understand. High prices are a good thing for exporters and low prices are bad thing for importers. Since February 2016 the metal commodities price index (which includes combined copper, aluminum, iron ore, tin, nickel, zinc, lead, and uranium price indices) has increased in general with a 2016 average of around 2.56%. However will this revival be short lived or is this revival sustainable?
Since February 2011 metal commodity prices have fallen (indicated by an index drop of approximately 152 points until December 2015). Although the consensus at the beginning of 2016 was that the status quo would prevail there are three factors that have had a greater effect on the price upturn that anything else: costs, supply and China.
A significant cost reduction for many diversified miners in 2016 was the dollar denominated expenditure of diesel fuel. With energy cost forecasts under the radar of it has reduced significant pressure leading to lower losses on a cash basis. Also attributable to gains on a cash basis has been higher futures prices as indicated by a market that is in contango.
However in 2017 with maturing assets leading to extraction of low grade ores across many base metals as well as the large more complicated projects (including declining ore grades, deeper shafts, higher stripping ratios and longer hauling distances) preferred by the largest miners, this could lead to higher costs. This may therefore lead to diversified miners waiting for further price rises until the next projects are sanctioned.
Significant falls in greenfield and brownfield investments has meant further reasons to questions longer term sources of supply.
When it came to the commodities prices being at their lowest come the beginning of 2016, the most common reason being thrown around was oversupply. And one of the commodities hardest hit was iron ore. With the biggest diversified miners reducing supply and Chinese domestic supply following suite, prices returned to sanctity. Other miners and states that control markets followed the practice of lowering supply which seems to have worked in driving up prices.
China’s insatiable appetite for metals has not significantly subsided. Marginal increments in economic growth demonstrate an economy that is returning to health — although a far cry from the peaks post financial crisis. An event to look forward to this year will be the Chinese National Congress that lays out the economic plan for the next five years. From this we shall be able to deduce the state’s bullish or prudence in its demand. I suspect a bullish approach with several commodities with significant ramp up in several commodities.
Although 2016 got off to a unenviable start, 2017 seems to have fared a bit better.