Comeback for commodities

In its latest issue of the Commodities Market Outlook, World Bank Group has projected a modest recovery for most commodities in 2017 as demand strengthens and supply tightens.  

This prediction is in line with others given by a number of other companies including Citigroup, which has also forecast a better year in 2017.

The Washington-based lender also pared its forecast for declines in 2016 in its latest quarterly outlook, reflecting a moderate rebound for many commodities, but particularly precious metals, energy and agriculture.

Ample supplies

A reduction in Indonesian supply due to heavy rains and low stocks at China’s port and utilities contributed to a pick-up in imports in the second quarter of 2016, reveals the report. Coal supplies also tightened due to production outages in Australia and lower availability in Colombia.

Currently, China consumes half of the world’s coal output and coal accounts for nearly two-thirds of the country’s energy consumption. The government has plans, however, to reduce coal’s share from 64% to 60% in 2020 by reducing the energy intensity of the economy by 15% and increasing the share of nuclear energy, natural gas and renewables.

Furthermore, the government is hoping to reduce coal production by 500 mt over the next three to five years. Consequently, in April 2016, the government ordered that the statutory working days for coal miners be reduced from 330 days per annum to 276.

Import demand in China is expected to weaken in the year-ahead, and will partly be offset by rising short term demand in India and other emerging markets, the report adds. That said, “Production in India is growing under new government policies aiming to reduce imports significantly over the next few years,” it says.

“Global supplies are likely to remain ample, and there is large spare capacity that could be brought back online in countries such as Australia and Indonesia should prices firm.”

Favourable crop

Early indications for the 2016-2017 season point to a favourable crop. According to the July assessment of the US Department of Agriculture (USDA), global production of wheat is expected to reach a new record, at 0.5% higher than 2015-2016.

Yields in the EU, meanwhile, remain above its five-year average and the US harvest is very good. Conditions are also promising in other important wheat producers, including China, Russia, Canada, Kazakhstan and Australia.

As a result of favourable supplies, World Bank Group anticipates that the stock-to-use ratio – a measure of the abundance of supplies relative to demand – will reach 34.8%. This is not only marginally higher than last season’s ratio but also a 17-year high.

In addition, production of maize is expected to increase by 5.3% in 2016-2017, reflecting good crop conditions in the US as well as in the EU and Ukraine. Increased production, however, will bring with it an increase of consumption, adds the report. Together, these projections imply that the stock-to-use ratio for maize at the end of the season will fall by 1%.

Following last year’s poor crop of rice, due mostly to an El Nino-related shortfall in some producing countries, rice production is projected to increase 2.3% in 2016-2017. Despite increased production, however, the stock-to-use ratio will not change, as consumption is predicted to increase by 2.3%.

Again, according to the July USDA, global suppliers of wheat, maize and rice will each reach 2,789m metric tonnes in 2016-2017. This is 3% higher than last season’s record supplies. If projections materialise, 2016-2017 will be the fourth consecutive surplus crop year, says the report.

China stimulus

Metals consumption has been relatively strong in the second quarter of 2016 due to firming industrial activity globally. Consumption here has been buoyed by stimulus measures and increases in fixed asset investment, particularly in infrastructure. Construction has also been positive for metals demand and, although housing inventory remains high, the excess supply is easing.

With regard to supply, declining investment and shut-in of high cost operations has been more than offset by new low cost capacity from legacy projects. “The recent price rally may tempt producers to restart idled capacity or delay further closures,” says the report.

“Supply at existing operations has been supported by significant cost reductions, producer currency devaluations and better management practices. However, a reversal in exchange rates and oil prices is now reflating production costs.”

Certainly, China remains an important driver for metals demand. Statistics in the report show that the country’s share of world metal consumption rose above 50% in 2015, and the country has accounted for the majority of global growth over the past 15 years. The transition from an investment/export driven economy to one that is consumption-led, however, could reduce demand growth for raw materials.

The slower demand in China as well as higher-than-expected production and further cost reductions could present downside risks to World Bank Group’s metals forecast, as could a number of upside risks focused on global demand and supply shortfalls from project delays, operational disruptions, falling ore grades, increased environmental constraints and more closures of high-cost capacity.