After what can only be described as a horrific year for metals and bulk commodity prices, market attention is now quickly turning to what the new year will bring. Some believe that the worst is now over while others think the bear market that has gripped the commodities complex this year is only getting started.
In a note released earlier this week, analysts at Macquarie research have pondered that very question, and it doesn’t make for pleasant reading for commodity bulls.
They suggest 2016 will be about the three D's: destocking, divestment, and desperation. Unfortunately, for commodity bulls, another D — demand — is unlikely to feature in their opinion. As a result, they've made aggressive price downgrades across the vast majority of commodities they cover on the back of "the weaker demand outlook and general cost curve deflation".
Here's a snippet from the report explaining their view — our emphasis is in bold:
For us, 2016 will be the year of the three D's for commodities: destock, divestment and desperation. Unfortunately not demand, as it is very hard to see where strong, co-coordinated demand acceleration could come from. 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.
Pointing to the chart below, they plot where each commodity currently sits based on supply-and-demand dynamics in their view. The arrows represent where they expect the balance of each commodity will likely sit in approximately two years' time.
With the exception of zinc, silver, and palladium, the medium-term outlook for the complex appears bleak, to say the least:
"The vast majority still sit in the oversupplied region. Moreover, as we have lowered our forward demand forecasts, so the arrows have become shorter," notes Macquarie. "We now expect global industrial production to grow only 2.3% over 2016, which is historically a level which results in minimal metals demand growth. Essentially, nowhere in the world is seeing enough commodity-intensive growth to drive us into bottlenecks for material availability."...MORE