Commodities prices decline hits the breaks in Q4 2015
The downward trend in commodities prices that began in the second half of 2014 hit rock-bottom toward the end of 2015. The combination of a challenging global economic backdrop, which caused demand to slow—particularly in China—along with an abundant supply of raw materials put downward pressure on prices for most commodities in the second half of 2014 and throughout most of 2015. According to recent data, prices for the raw materials included in this report dropped 21.6% in Q1 over the same period of last year, which came in above the 26.7% fall registered in Q4 2015. The slower drop in Q1 reflected less pronounced declines in the prices forenergy commodities as well as for both base and precious metals. Conversely, the decline in prices for agricultural commodities accelerated in Q1 2016.
ENERGY | Fall in prices continues in Q1 on strong supply; negotiations to freeze oil output fail
Prices for energy commodities prices—led by oil—continued to fall in the first quarter of the year on the back of persistently-strong supply from OPEC members and due to investors’ increasing aversion to risky assets, including energy commodities and stocks. Global oil prices were extremely volatile during Q1. Prices collapsed at the beginning of the year, despite rising geopolitical tensions in the Middle East, on investors’ expectations of “low for long” oil prices. Crude oil prices fell to under USD 28.0 per barrel in mid-January—the lowest level since 2003—before rebounding and hovering between USD 35.0 and USD 40.0 per barrel in February and March. Moreover, oil prices increased gradually in the first weeks of April and climbed to just above USD 40.0 per barrel amid expectations that major oil producers would potentially halt oil production. Representatives from 16 oil-producing countries, which account about half of the world’s output, met in Doha on 17 April in an attempt to freeze oil production. Discussions faltered after Saudi Arabia insisted that the Kingdom would not restrain production if Iran was not part of the deal. The lack of an agreement prompted prices to drop on the following trading day and highlighted the existing tensions between the two regional rivals. Analysts had broadly expected the Doha negotiations to fail as Saudi deputy Crown Prince Mohammed bin Salman fueled skepticism by reiterating the Kingdom’s stance on Tehran’s position.
Substantial uncertainty persists and it is probable that the breakdown of talks in Doha will cause another price rout. However, prices for the hydrocarbon are likely to find some support in the coming weeks as there are signs that output is falling among producers with higher costs. In addition, rising geopolitical tensions in the Middle East, field maintenance in the UAE and a recent strike that reduced Kuwait’s production by 60% could potentially prop up prices. Energy prices, in general, are expected to rise 11.1%% year-on-year in Q4 2016, with the outlook skewed to the downside as analysts cut the energy price forecast for Q4 2016 by 1.8% over the previous month’s projection.
BASE METALS | Prices remain subdued in Q1, further increase will be slow
After base metal prices collapsed at the end of 2015, they continued to fall in the first quarter of 2016, although at a less sharp rate. The fall was more moderate due to a combination of factors, namely recent economic data that suggest that the economy of China—the world’s largest consumer of base metals—is more stable than previously expected. Also, production cuts in the wake of diminished global mining capital expenditure and the weakening of the USD in Q1 provided some support to prices. Nonetheless, in recent weeks, base metal prices have been oscillating at low levels. Most analysts believe that prices will remain subdued throughout most of the year and that they will see a more meaningful increase toward the end of the year.
Following the lows registered at the end of 2015 and beginning of 2016, prices are expected to rise, albeit timidly, toward the end of this year. Further output cuts and a slow increase in demand are seen supporting prices to gradually increase by 3.6% year-on-year in Q4 2016. This month’s forecast was revised up from last month’s 2.4% rise.
AGRICULTURE | El Niño effect to weaken in Q2, while pressure may come from La Niña
Prices for most agricultural commodities—except for soybeans, wheat and wool—extended their losses and continued to decline in the first quarter of the year despite adverse weather conditions associated with the El Niño phenomenon. Prices fell 6.4% annually in Q1, which came in below the 5.6% decrease tallied in Q4 2015. The faster drop in Q1 is partially explained by the fact that high inventory levels offset the impact of adverse weather conditions. Meanwhile, weather forecasts have recently indicated that El Niño will weaken over the course of Q2 2016, which, according to analysts, will be favorable for winter corn crops in Brazil, but may hamper sugar cane crushing. For the remainder of the year, the most likely scenario according to the weather forecasts is a transition to a La Niña weather pattern, which also has the potential to affect crops.
PRECIOUS METALS | Prices rally in Q1, upward pressures are expected to remain contained
Precious metals, led mainly by gold and platinum, rallied strongly in the first quarter of the year. The sharp increase in prices mainly reflected investors’ surging appetite for safe-haven assets in the midst of rising geopolitical tensions, global macroeconomic instability and turmoil in global financial markets. Moreover, precious metals continued to defy gravity in the past weeks as a result of the Fed’s most recent announcement regarding its monetary policy stance. In its policy statement, the Fed struck a dovish tone in reducing the number of increases that it expects to carry out this year from four to two. In addition, the terror attacks in Brussels prompted investors to continue demanding safe haven assets. That said, a further increase in precious metals prices—gold in particular—was limited due to the fact that the recent strengthening in prices negatively impacted physical demand for the metals, particularly in India, where imports slowed in March.
Following the strong rally seen in Q1, precious metals prices are expected to continue increasing, although at more moderate pace. A faster increase in prices for precious metals will be capped by pressure from a monetary policy tightening in the U.S. Conversely, investors’ higher appetite for safe-haven assets and a looser monetary policy in the Eurozone and Japan should support prices. The outlook for precious metals remains relatively stable. Analysts project that prices will rise on average 6.7% in Q4 2016. This month’s projection was revised up from the 5.2% increase that analysts had expected last month.
Risks associated to the arrival of La Niña in the second half of the year may explain a more substantial increase in prices for agricultural raw materials. Forecasters surveyed this month expect that agricultural prices will increase an average of 4.8% year-on-year in Q4 2016, which, if confirmed, will represent the first rise since Q2 2013. Nonetheless, commodities experts remain cautions regarding the evolution of agricultural prices this year and thus cut the forecast from last month’s 5.7% rise.
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