Commodities poised to continue industrial-led rebound in 2017

commodities

Commodities are poised to score their strongest yearly gain since 2010, with industrials leading the way higher, in a complete turnaround from last year’s performance.

Iron ore, zinc and natural gas are the year’s best performers, but last year were among the big losers.

“In 2016, commodities began the recovery from a five-year bear market,” said Christopher Wyke, product director of the Schroder Commodity Strategy.

The Bloomberg Commodity Index is poised to tally its first yearly percentage gain in six years—a significant turnaround from the end of 2015, when it posted its worst annual percentage loss since 2008. As of mid-December, it traded up 11.5% for the year, after 2015’s drop of nearly 25%.

“We believe that this rally will be extended over the next few years,” supported by supply and demand “dynamics, government action and investment demand as investors seek inflation protection,” said Wyke.

Performance overview

Many of the year’s strongest performers made up for 2015’s losses and then some.

“As producers across the complex have scaled back supply, markets appear to be rebalancing,” said Ben Ross, portfolio manager at Cohen & Steers. “We believe that this is part of a fundamental recovery and estimate most commodities are likely to achieve supply-and-demand equilibrium by the end of 2017.”

“Most commodities have been trading below their marginal cost of production for an extended period, causing producers world-wide to reduce output and cut investment in future projects,” he said. “We believe this supply response is slowly rebalancing the market amid stable global demand growth.”

Iron-ore prices have about doubled this year as of Dec. 14, after losing roughly 46% last year at this time. Copper is about 22% higher year to date, after dropping about 24% last year, while palladium has advanced more than 29% this year, compared with a loss of roughly the same amount in 2015.

Brent crude up around 46% year to date as of Wednesday, has done a bit better than West Texas Intermediate crude‘s nearly 38% climb so far this year.

Gold looks set for yearly gain of nearly 8%, recouping most of last year’s 10.5% drop, while silver’s SIH7, +1.14% up over 22%, following a loss of almost 12% in 2015.

Industrials lead the charge

Industrial metals have led the rally in commodities this year.

A chart complied by Adam Koos, president of Libertas Wealth Management, which compares year-to-date gains for iron ore, silver and copper, and others, with their performance a year ago, puts the turnaround into perspective.

The slides that follow detail these as well as a few other big commodity movers.

Iron ore
While many commodities rebounded from last year’s steep declines, iron ore made the largest move by far—making a full U-turn in 2016 from the previous year’s devastating losses.

“When you look at what iron ore did in 2015—a considerable downtrend—it had nowhere to go but up this year, and it did,” said Joseph Innace, metals content director at S&P Global Platts.

“The trend has been up all year, reaching a recent peak of $82.30 [per dry metric ton] on December 7, 2016,” he told MarketWatch on Dec. 8—a surge of 92.7% year to date, based on S&P Global Platts IODEX daily price data.

“As Chinese steelmaking goes, so goes iron ore,” said Innace. The annualized 2016 rate of steel production from China is at nearly 810 million metric tons, while most predictions saw it coming in under 800 million metric tons, he said.

Copper
Copper was also among the worst performers last year, but this year comes in among the largest gainers.

Expectations that U.S. President-elect Donald Trump’s plans to improve the nation’s infrastructure will boost industrial commodity demand helped provide an extra late-year lift.

Copper futures settled at $2.605 a pound on Comex Wednesday. It trades over 20% higher year to date.

Traders realized that copper had been left behind by the rise in other base metals, said Christopher Ecclestone, a mining strategist at investment bank and research firm Hallgarten & Co.

Prices for the metal had a tough time holding on to a gain for the year on the back of ample supplies, but has spiked higher from the lows seen in October.

It found some support from a “small element of underinvestment, no new flow of projects, [and Chinese] buying, said Ecclestone. And earlier this month, Rio Tinto suspended shipments from the Oyu Tolgoi mine in Mongolia after Chinese authorities closed a border crossing, according to news reports.

Ecclestone expects copper to climb to around $3.10 a pound next year.

Zinc
Zinc prices have seen a spectacular 72% rise so far this year.

The metal, which is used as a coating for steel and iron to prevent rusting, got a boost from “prolonged underinvestment, a dramatic life of death decision by Glencore to restore its fortunes by closing capacity,” along with permanent mine closures by others in 2015, according to Ecclestone.

The metal’s future, as is the case with most industrial metals, is “closely linked to the economic health of China, which is the largest producer, consumer and refiner of zinc, said Chris Gaffney, president of world markets at EverBank.

The market saw worries about China’s growth in the first half of this year, but the second half of 2016 saw investors betting on “further infrastructure spending, which combined with predictions of a deficit in supply to dive prices higher,” said Gaffney.

Looking ahead, he expects infrastructure projects in the U.S., China and India to continue to increase demand for zinc, while production will be “slow to ramp back up.”

“This means we could see continued price increases, albeit slower than what we have seen in 2016,” he said.

Oil and natural gas
Oil and natural-gas futures bounced back after two years in a row of steep losses.

Yearly gains of nearly 45% for Brent and almost 38% for West Texas Intermediate crude were impressive, but not as impressive as the more than 52% jump seen for natural-gas futures.

“Supply and demand is slowly rebalancing and we should start seeing inventories start declining in 2017 with demand exceeding supply,” Brian Youngberg, senior energy analyst at Edward Jones, told MarketWatch.

During the year, the energy market saw a continued decline in investment, which translated into falling production in the U.S. and elsewhere, he said. “Demand growth is solid and better than expected, led by India and the developing world.”

And the Organization of the Petroleum Exporting Countries’ recent agreement to cut back output “has helped push prices up with expectations that the rebalancing will occur a bit earlier in 2017 than otherwise thought,” said Youngberg.

Many oil producers outside of OPEC also agreed this month to reduce output by 558,000 barrels a day and OPEC’s top producer Saudi Arabia, said that it may even cut more than promised.

Looking ahead, WTI oil prices are likely to move through the $50s in 2017 and end the year near $60, Youngberg said.

The market is concerned about oil shale production ramping up, but most producers will remain disciplined and investment likely will not increase until prices get above $55 and look stable, he said.

Natural gas, meanwhile, may see a material price rise if the market sees extreme weather, Youngberg said. If not, “we could see prices decline” with a worst-case scenario being a revisit to the $2 level next year.

Gold and silver
Gold is looking at its first yearly gain since 2012, albeit a modest one, while silver is ready for its highest annual percentage rise in six years.

The yellow metal is up roughly 7.9% year to date, set to come up short of recouping last year’s nearly 11% loss. Silver is up over 22%, following hefty drops in each of the last three years.

“Gold saw a tremendous start to 2016 as a combination of global growth worries, uncertainty regarding Brexit and the U.S. elections, and a pullback in U.S. rate-hike expectations drove precious metals prices to the best performance of all asset classes,” said Gaffney.

But gold peaked just after Brexit, then “range-traded” during most of the third quarter as U.S. election uncertainties were offset by new rate-hike expectations here in the U.S., he said. After the U.S. election, gold prices then saw a big drop “as investor confidence in global growth, along with expectations of higher U.S. interest rates” pushed gold prices back down.

On Wednesday, the Federal Reserve announced its decision to increase interest rates for the first time in a year.

Silver’s “resilience” after the U.S. election is the “biggest surprise,” said Gaffney. The white metal has more industrial uses than gold, so the “renewed confidence in global growth has placed a floor under the price of silver as we approach the new year.”

Julian Phillips, co-founder of GoldForecaster.com, said he expects President-elect Donald Trump’s economic stimulus actions to boost growth in the U.S., but “it may well be at the expense of the dollar, certainty and global stability,” as his policies may significantly raise the U.S. debt burden.

“This will be positive for the gold price,” said Phillips.

Gold prices are likely to “drift higher” next year, according to Gaffney, possibly “booking returns in the high single digits to low double digits.”

Source: MarketWatch

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