The rally in commodities prices in Q2 lost momentum in Q3 as market sentiment waned, which lead to mixed results in prices for raw materials. Prices for energy commodities recovered the ground they had lost in the aftermath of the Brexit vote and the failed coup in Turkey, and expectations that major oil producers will agree an oil cap deal in late September stoked crude oil prices. However, prices for base metals performed poorly. Drops in prices for aluminium, copper, iron ore and steel offset gains in nickel, tin and zinc. Precious metals continued to gain ground in Q3, building on the steady rises seen throughout the past weeks in the wake of sound investment demand for safe haven assets. The only exception is platinum, for which prices fell further in September due to stronger mine output in South Africa. Meanwhile, agricultural raw material prices continued to fall as markets remained oversupplied, particularly in corn, soybeans and wheat.
The gradual rebalancing in most markets remains in place and once the volatility dissipates, market and macroeconomic fundamentals are expected to be positive drivers for commodities prices toward the end of this year and into next year. Against this backdrop, forecasters polled this month by FocusEconomics expect that commodities prices will 8.6% year-on-year in Q4 2016, up from the 8.0% rise that analysts forecast last month. Throughout 2017, demand for commodities is seen rising and prices are expected to continue increasing, although at a slower pace. In Q4 2017, commodities prices are projected to rise 6.4%.
ENERGY | Another OPEC meeting fuels speculation in oil markets
Average prices in the energy market swung from a drop in July to an increase in August and rose further at the beginning of September. The current rally, led mainly by crude oil, responded to reports that major oil producers—led by Saudi Arabia and Russia and with Iran’s participation—would attend an OPEC ministers’ meeting on the sidelines of an industry conference in Algeria in late September in order to discuss a potential coordinated action to freeze production and help rebalance the oversupplied market. But September’s meeting in Algeria follows a similar initiative in April where OPEC and non-OPEC countries were unable to reach an agreement as Saudi Arabia refused to join any deal without Iran. Iran is seeking to recover its pre-sanctions production level of around 4.0 million barrels per day (mbpd) and, according to Zanganeh, the country reached a production level of 3.85 mbpd in August. A successful deal in September now looks more feasible since Iranian production is approaching its pre-sanctions levels.
Near-term downside risks prevail in the form of still elevated inventories and an expected slowdown in refinery activity in the coming months due to seasonal maintenance. Nonetheless, a sustained decline in non-OPEC production continues to suggest that a rebalancing in crude oil markets is under way. In addition, demand in India is expected to pick up toward the end of the year, while it will stabilize in China. FocusEconomics analysts expect that prices for energy commodities will rebound strongly and increase 19.6% year-on-year in Q4 2016, an upward revision from the 18.2% increase expected last month.
BASE METALS | Nickel and zinc remain best performers
After a sharp increase in prices for lead, nickel, tin and zinc had spurred a strong rebound in base metal prices in July, average prices in the base metal markets declined again in August and remained weak at the outset of September. The sluggish performance of late has been the result of a persistent fall in prices for aluminium, copper, iron ore and steel. Although nickel prices have lost some ground in recent days, they remain at high levels due to nickel ore supply concerns in the Philippines, the world’s largest producer. The administration of President Rodrigo Duterte has taken a hardline stance on the environmental record of the country’s mining industry and ordered it to suspend operations in ten mines—eight of which are nickel mines—since early July; it remains unknown when the suspension will be lifted. Although global nickel inventories remain high, market participants are still bullish on the metal. Meanwhile, zinc is the second-best base metal performer and prices continue to gain ground. The increase in zinc prices is mainly the result of an improvement in demand from China as well as in supply concentration given the aggressive production cuts in the past months. Copper, on the other hand, has recorded an increase in supply, helped by a major new mine in Peru.
Although base metal prices remain sluggish, analysts expect them to rise timidly toward the end of this year on the back of further output cuts and a gradual increase in demand. Analysts expect base metals prices to increase by 4.9% year-on-year in Q4 2016. This month’s forecast was revised up from the 4.1% rise projected last month.
PRECIOUS METALS | Investor demand supports high prices
Gold, silver and palladium fueled the recent gains in prices for precious metals, but prospects of a U.S. interest rate hike this year have slowed the rally. Investor demand for precious metals has continued to be strong and is expected to remain healthy in the coming months. The macro environment also remains supportive of demand for precious metals. Monetary easing programs in Europe and Japan continue unabated and these countries’ major central banks are expected to continue adopting expansionary monetary policies to achieve inflation targets. Meanwhile, political uncertainty related to the upcoming U.S. presidential election will keeping demand for safe havens high.
However, the rally in precious metals, particularly in gold, is likely to be limited. Investment demand for safe havens has replaced previously strong physical demand from emerging markets—particularly Asia. High prices for precious metals have caused a slowdown in physical demand, prompting a drop in purchases of jewelry, which is the single largest demand source of physical gold. Demand for gold (and silver) jewelry, especially in China and India—the biggest markets for bullion—is highly price sensitive, therefore the presence of such buyers has waned since earlier in the year. Against this backdrop, the outlook for precious metals remains positive and experts project prices to jump 21.5% in Q4 2016 over the same period last year. This month’s projection was revised up from the 20.9% increase that analysts had expected last month.
AGRICULTURAL | Monitoring La Niña
After a strong increase in Q2, agricultural commodities prices fell sharply in Q3, reflecting a broad-based decline, particularly in soybeans and wheat and, to a lesser extent, in corn. The sharp drop in most prices was the result of abnormally high crop yields in the U.S. That said, prices for sugar remain on the almost uninterrupted upward trend that started in April. The latest surge in sugar prices was largely due to the strengthening of the Brazilian real against the U.S. dollar. Expectations of a substantial supply shortage in global markets and prospects of reduced inventories in Asia also buttressed sugar prices.
The El Niño weather phenomenon of 2015/2016—the strongest in many decades—is long gone. Now, there is a high potential that La Niña 2016/2017 is forming. The La Niña phenomenon is associated with cooler-than-normal weather conditions along the North American west coast, and warmer, drier conditions in much of the southern United States. Weather experts monitoring the phenomenon calculate that the probabilities of a La Niña forming range between 60% and 70%. The strength of the phenomenon remains to be seen, but it certainly has the potential to impact worldwide weather conditions. Risks associated to the weather phenomenon are high and could affect agricultural prices. However, stocks remain high, which means that significant swings in prices are likely to be contained. Analysts expect that agricultural prices will increase 9.7% year-on-year in Q4 2016, which was revised down from the 11.2% increase expected last month.
Written by Ricardo Aceves