ADVERTISEMENT

Commodities Set For A Comeback In 2017, With One Exception

Base metals, such as copper, aluminium, likely to gain, analysts say

Vapour rises into the sky from smoke stacks at the aluminium plant illuminated by lights at the Ras Al Khair Industrial City, operated by the Saudi Arabian Mining Co. (Ma’aden) in Ras Al Khair, Saudi Arabia. (Photographer: Simon Dawson/Bloomberg)
Vapour rises into the sky from smoke stacks at the aluminium plant illuminated by lights at the Ras Al Khair Industrial City, operated by the Saudi Arabian Mining Co. (Ma’aden) in Ras Al Khair, Saudi Arabia. (Photographer: Simon Dawson/Bloomberg)

Global commodity prices are expected to see a pick-up next year, spurred by optimism that the world’s two biggest economies, the United States and China, will ramp up fiscal spending to boost slowing growth.

Base metals such as copper, aluminium, are likely to be the winners as President-Elect Donald Trump's plan to boost U.S. infrastructure may lift demand in China, analysts said.

Metals have rallied nearly 20 percent in 2016, with the London Metal Exchange Index heading for its first annual gain in four years, as consumption in China proved resilient and Trump's win boosted demand for base metals.

The Bloomberg Commodity Index has advanced 12 percent in 2016 after a five-year losing run that was spurred by the slowdown in Chinese growth and the glut in commodities like copper and crude oil.

Citigroup is positive on commodities such as oil, zinc and copper going into the next year, but its bullish outlook is laced with caveats. Volatility is likely to pick up as markets re-balance and as developments in China shift prices, according to the bank.

Trump’s election highlights a key risk, Citigroup says, flagging the potential for rising tensions, including trade wars.

Base metal prices have been on the rise since October following positive factory data from the U.S. and Europe. Trump’s victory further bolstered rally in November.
Base metal prices have been on the rise since October following positive factory data from the U.S. and Europe. Trump’s victory further bolstered rally in November.

Crude Oil: Steady Run In 2017

While base metals may tread higher next year, crude oil prices are expected to stay steady as lingering concerns over rising U.S. shale gas production are likely to weigh in.

Edelweiss Financial expects Brent crude prices to stabilise around $55 per barrel next year. Any further price increase would be offset by the rise in U.S. shale gas output, thereby setting a price equilibrium, Jal Irani, senior vice-president of wholesale capital markets at Edelweiss Financial told BloombergQuint.

U.S. shale production is on track to grow in the first quarter, with producers achieving 800,000 barrels per day of annual production growth at $55 a barrel, Goldman Sachs said in a report earlier this month.

Despite the recent cut announced by the Organisation of Petroleum Exporting Countries (OPEC), oil prices are still at less than half the level from their all-time highs. OPEC’s recent decision to cut production for the first time in eight years, with an eye on ending the global glut, would normalise inventory that has been fed in part by the U.S. shale boom.

“With U.S. shale capacity already in the background, there would be a cap to crude prices in any case. I feel $45 could be a bottom for crude prices while top may be capped around $65,” Mihir Vora, chief investment officer at Max Life Insurance said over the phone.

Oil prices are also likely to languish as fears over restored Libyan supply would weigh on prices. The influence of the OPEC production cut appears to have all but left the markets now, with trading slowing down into the new year, analysts said.

"Even if OPEC maintains the quota of cuts, Libya is bouncing back with its production and Nigeria is expected to follow similar footsteps. So that will likely keep a lid on prices," said Prayesh Jain, assistant vice president - research at IIFL Wealth Management.

Libya pumped just under 600,000 barrels a day last month, Bloomberg estimates show. It’s targeting output of 900,000 barrels a day by the start of 2017 and about 1.2 million barrels by the end of next year, according to Mustafa Sanalla, chairman of Libyan oil company, National Oil Corp.

Nigeria is also expected to ramp-up production after decreased oil revenue from lower exports, coupled with the persistently low crude oil prices, battered the country’s economy. The African nation is pumping 1.8 million barrels a day and could achieve a daily output of 2.1 million barrels of crude, according to Emmanuel Ibe Kachikwu, Nigeria’s Minister of State for Petroleum Resources.

Gold To Lose Sheen On Strong Dollar?

Gold is slated for a rocky ride next year as U.S. dollar continues its northward journey. With traders pricing in a 74 percent chance of a Fed rate hike by June, the strong dollar is likely to take some sheen off gold, as it makes the yellow metal expensive for non-U.S. investors.

Spot gold prices, which have gained about 7 percent so far this year, are set to snap four straight annual declines on the back of safe haven demand.

Goldman Sachs has cut its outlook for gold prices to $1,200 an ounce both on a 3-month and 6-month horizon.

The dollar index, which measures the greenback against a basket of currencies, closed 0.46 percent lower at 102.21 on Friday. The dollar hit a 14-year high of 103.56 on December 15 following the Federal Reserve's hawkish interest rate hike forecasts.

An year-to-date chart showing fall in gold prices vs dollar index, while brent crude prices moved nearly in tandem with the dollar index since Nov.
An year-to-date chart showing fall in gold prices vs dollar index, while brent crude prices moved nearly in tandem with the dollar index since Nov.

“Fund managers are not interested in buying gold at this time,” Jigar Trivedi, analyst at Anand Rathi Securities told BloombergQuint.

“There may be some bounce-back due to safe-haven buying, but that would be temporary. Gold may lose its safe haven appeal as we progress into the next year,” he added.