According to investment bank ANZ commodity prices should rise overall in 2014. The bank think that palladium and energy are the most likely to increase in value over the next year with oil-seeds and other precious metals likely to see the largest price falls. Interestingly ANZ suspect that although US QE tapering is a headwind to commodity prices in 2014 (higher US bond yields, a stronger US dollar etc), Chinese demand will be the key risk to commodity markets in 2014. Indeed the muted reaction from commodity markets from the heavily trailed QE tapering announcement may suggest the impact has largely already been priced in.
Note: The ANZ China Commodity Index (CCI), launched in July 2012 tracks Chinese domestic prices of 22 commodities, including iron ore, coal and rice, which are not included in other international commodities indices, and is weighted on consumption rather than production.
ANZ anticipate that the recent sharp slowing in Chinese commodity demand since 2010 is likely to pass as authorities are likely to have finished clamping down on excessive investment and liquidity conditions. ANZ “think the new authorities are now in a better position to re-stimulate targeted sectors, which should restore confidence back into commodity markets.” As ANZ point out – the second year of a new China government administration (2014 in this case) also tends to be a strong one, suggesting a series of positive stimulus moves can be expected to set the growth agenda for the coming years which are likely to support commodity demand. However, the re-emergence of tight liquidity in China’s financial markets in recent days has sparked fears that a credit crisis could over flow into the real economy.
The Shanghai Composite index may be the best barometer of Chinese commodity demand according to the report. While the relationship between US equity markets and commodity prices has broken down over the past few years, it has re-engaged between Chinese equity markets and commodities.
Materials Risk has highlighted Chinese meager attempts to tackle industrial over-capacity before. ANZ think that it’s too early to suggest a material change in industry structure in 2014 noting that “successful closure of excess capacity will only prop up industry utilisation rates to more normal levels, while the closure of environmentally sensitive supplies (particularly thermal power) will be more than offset by the commissioning of newer, cleaner capacity.
Could the recent decline in commodity prices be setting the foundations for the next strong price recovery? That’s the view of ANZ who note the change in senior management in commodity producing companies has heralded a shift from maximising growth to maximising returns. The least profitable markets in particular – thermal coal, aluminium and nickel – are likely to see the curtailment of exploration and capital expenditure plans first. This may set the stage for a broader rebound in 2015.