Four factors surrounding the commodity forecasts


Recently, a lot of hits and misses have been witnessed in the Australian mining and resource sector with regard to earnings given the volatile market scenario. Some analysts including Macquarie seem to have lowered the sector performance by virtue of lowering ratings on key stocks. The factors that somehow or the other influence the entire gamut of the performance have been discussed below:

Volatile Commodity Prices: The volatile commodity prices have recently taken a toll on the miners, and as a result, we saw many of them putting efforts to cut costs in order to safeguard pressure build-up on their earnings. The Australian dollar also took a hit in order to sustain against the drops in many commodity prices for the past few years. As per the recent forecast by Macquarie analysts, material surge is expected for oil, nickel and US gas prices while other commodities may go either ways, up or down, within 10% over the next two years. The forecast is 15% down for manganese and iron-ore. The Australian Financial Review, also indicated that commodities might be moving into another bear market. Commodity prices on July 20, 2016 have revealed that Gold held steady while London copper and nickel sank post the release of US housing report. In the last few months, we otherwise saw rise in iron ore and metallurgical coal prices owing to rebound in China’s construction activity supported by stronger steel demand. Demand from China has supported copper prices. While nickel has suffered a blow, aluminium has support from favourable long-term demand from car making and power generation. Zinc has performed well and lead market remains well supplied.


Commodity Prices (Source: Thomson Reuters)

Mining Sector’s Lull Phase: We saw that mining and energy were the only two sectors in the overall negative zone on July 20, 2016 with BHP Billiton falling off 3%, Rio Tinto dipping 2% and South32 dropping 2.7%. BHP recent results demonstrate the efforts of the miner like others to deal with the challenging conditions. The miner missed iron ore guidance only by 3 mln/t with less petroleum output in 2016 while it sees incremental lift in FY17 iron ore output. Iron ore generally has witnessed a lot of volatility and this constitutes a market that leans towards oversupply while the surplus output appears to be gradually easing. It has been reported that there has been a mismatch between the 41-million tonne increase in China’s iron ore imports in the first six months of 2016 and rise in output by the two major exporters, Australia and Brazil. Given the challenging scenario, even Rio Tinto now expects to ship less iron ore in 2017 than 2016 with a target of about 340 million tonnes compared with 350 million for this year.


Metal Price Performance (Source: Thomson Reuters)

Supply-demand Scenario: As per the latest commodity update report from National Australia Bank (NAB), it is the balance of supply-demand factors that are significant to the outlook for commodity markets given the challenging global economic outlook and production growth for key commodities. NAB USD non-rural commodity price index is expected to drop by 13% in 2016 and a further 8% in 2017 at the back of iron ore prices.


NAB non-rural commodity price index (Source: National Australia Bank)

One Positive for Resource Sector: Recently, the South Australian state budget’s major priority on the resources sector has been appreciated by the South Australian Chamber of Mines and Energy (SACOME). At the same time, treasurer and mines minister, Tom Koutsantonis reiterated the importance of the resources sector in SA at the back of the fact that minerals and petroleum sector contributed $6.38 billion to the state (considering the 2014/15 data).

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