Supply risk might buoy prices

Among base metals, zinc was the flavour of 2016, with prices up 60% due to a demand-supply mismatch

After an eventful 2016, the new  year is likely to remain positive for base metals and energy, following a reduction in supplies, as major producers resort to output cuts. Also, after a weak beginning, the rally in base metals and energy in the second half of 2016 suggests the global industrial economy is limping back to growth, which should further aid prices.

Among base metals, zinc was the flavour of 2016, with prices up 60 per cent due to a demand-supply mismatch built over the past two years. The US President-elect’s announcement to spend $1 trillion on infrastructure boosted metal prices. Lead, copper, nickel and aluminium prices increased in double-digits due to  production cuts and stable demand. While 2017 is expected to see the price trends continue, it might not be smooth.

“Year 2017 is likely to bring political uncertainty with a variety of European referanda and elections. Optimistic investor sentiment toward the base metals group might temporarily lift aluminium prices but bearish fundamental balances are expected to keep prices anchored in a close range,” said Rory Johnston, an economist with Scotiabank. Copper prices could see marginally tighter demand-supply balances, given numerous supply risks (labour contracts, Indonesian export regulations), but these are likely to be minor issues. Hence, copper prices are likely to be marginally higher in 2017, he adds.

Another factor that could impact the metals rally, including that of steel, is China limiting credit flow for speculative buying in the property market. 

“Forecasting commodity markets for 2017 will depend largely on four key drivers — actions of Donald Trump, US Fed, the Chinese government and  the Organization of the Petroleum Exporting Countries  (Opec),” said Gnanasekar Thiagarajan, director, Commtrendz Research.

He says that speculators continued to book profits in base metals, given the meteoric run-up and concerns about demand growth in the world’s top commodities market. 

The key point with China is that for the first time in five years demand was the main driver of prices, rather than supply-related reasons. And, with the crackdown on pollution due to these industries, supply-side woes are expected to support prices. 

Crude oil, too, saw good agains after falling below $30 a barrel in the first quarter of 2016. It has come out of price hibernation with a bang, almost doubling from its February lows, and headed towards $60 levels.  Cut in US shale oil capacity and a reunited Opec along with Russia deciding to cut output, also helped. 

“Year 2017 promises to be equally surprising with upward bias for prices and increased demand for crude oil and base metals across the world, led by the US. Uncertainty will also have to be factored in with elections coming up in major EU countries, Britain set to trigger Article 50 and a new president in the US. But growth, inflation and rising interest rates could determine prices through 2017,” said Jayant Manglik, President, Religare Securities.  Opec’s  deal to cut production has been the first coordinated cut by producers to curtail output since the financial crisis of 2008. Again, the bias for crude prices is upwards.

“In 2017, oil consumers will have to cope with higher prices as producers implement a supply cut,” said Navneet Damani, analyst, Motilal Oswal Commodities.

the rally in metals and oil has more legs

brent crude