Commodity prices under serious pressure

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By Staff Reporter

WINDHOEK – Investors in industrial commodities should be wary of the pressure that is to besiege the commodities market, as prices take a dip and producers limit production. The outlook is buoyant for precious metals though, especially for the next three years.
“It is going to be challenging for industrial commodities, as it is not an easy environment. Patience will be needed,” says the Head of International Mining & Metals at Standard Bank, Rajat Kohli.

While copper recently recovered from five-and-a-half year lows after a vicious sell-off, prices remain well below US$6,000 a tonne and still remain under pressure.

Although there is sustained evidence supply is coming under control as companies cut production levels to manage supply better, Kohli does not foresee a short-term recovery. “It depends on how deep we are into the price curve relative to what producers are producing. There will be more pain,” says Kohli, who is based in London.

While precious metals are in for a “pretty challenging year”, Standard Bank prefers them over base and bulk metals. “I sense there will be greater relative price strength over the next three years,” says Kohli.

According to the World Bank’s latest commodity research, the precious metals price index declined 8.4 percent in the fourth quarter of 2014 and fell to a four-year low in November, with platinum, gold and silver down 7, 10, and 20 percent for the year, respectively.
After finding some price support in the first half of 2014 due to receding geopolitical risks, fundamental weakness of the markets contributed to the declines in the second half of the year as physical demand for precious metals by traditional buyers, notably China and India, is off compared to the previous year, when a large drop in prices induced buying, says the World Bank.

Factors that could prove critical to prices and prospects for mining companies will be Chinese demand, oil prices, the impact of currency price movements, US interest rates, and quantitative easing in Europe.

While costs for some miners and producers will decline due to lower oil and gas prices, this does not necessarily translate into improved bottom lines. “It also puts downward pressure on commodity prices,” says Kohli.

Oil prices went into freefall from June last year to lose 55% in value amid a plunge to their lowest levels in five years. According to the World Bank, this was the third-largest seven-month decline of the past three decades for oil, only the 67 percent drop from November 1985 to March 1986 and the 75 percent drop from July to December 2008 were larger.

But just as important as the future of oil prices, is the outlook for China’s economy. According to the World Bank, strong and sustained economic growth in emerging economies, notably China, has been the most frequently discussed driver of commodity prices.

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