An Uncertain Outlook: Commodity Prices
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An Uncertain Outlook: Commodity Prices

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“Stronger for longer” was the mantra during the golden years of the resources industry’s recent boom, when China’s seemingly insatiable demand drove prices ever-higher. Now with coal and other commodity prices slumping, is the”super-cycle” finished?

“After an upturn lasting a decade, the commodity super-cycle's end is at hand,” UBS analyst Mark Rider told the Sydney Morning Herald, citing China’s slowdown and debt issues in developed economies.

According to Rider, the peak in commodities prices has passed, with the downswing set to last as long as two decades.

For large importers such as Japan, lower prices could prove a welcome relief as it reenters recession and continues to grapple with the post-Fukushima nuclear freeze. But for exporters such as Australia, the effect on growth is already being felt as its third quarter growth was the lowest in nominal GDP terms since the global financial crisis.

Coal prices have slumped this year with thermal coal hitting three-year lows on weaker global economic activity and metallurgical or coking coal dropping on reduced Chinese steel production. The benchmark coking coal contract was recently set at U.S. $170 a metric ton for the fourth quarter 2012, nearly half the record U.S. $330 a ton of 2011.

While the spot iron ore price has regained some lost ground this month, rebounding to U.S. $123 a ton on Tuesday after dropping to U.S. $86 a ton July, it remains well below the 2011 peak around U.S. $200.

China accounted for around 40 percent of world demand in 2011 for iron ore, zinc, lead and copper and any further pick-up is dependent on increased growth in the world’s second-largest economy. However, recent commodity price weakness has forced major miners to review expenditure plans.

Already, major miners BHP Billion and Rio Tinto have announced billion-dollar cost cuts, with the world’s largest miner, BHP, shelving in August the U.S. $30 billion expansion of its Olympic Dam mine in South Australia. The move sparked comments by Australia’s federal Resources Minister Martin Ferguson that “the resources boom is over” – a remark which drew a swift rebuttal from his leader, fearful of the consequences for government finances.

In a November 27 presentation to the Queensland Exploration Council, Dominic Kazlauskas, director – corporate finance at resources broker Patersons, echoed the hopes of his audience that the ”super-cycle” would endure.

“Resources have underperformed this year, but over time they will outperform the rest of the market given the way that society consumes our commodities,” he said.

“Things need to work themselves out in the eurozone before things really start moving. China dominates global resources demand, but India is basically the same size and they all want their mobile phones, air conditioners and cars and that’s not going to stop.”

Kazlauskas said financial issues in Europe and the United States had weighed on the sector, noting that the International Monetary Fund had trimmed its global growth forecasts to 3.3 percent in 2012 and 3.6 percent in 2013.

However, emerging and developing economies are expected to average 5.3 percent growth over the same period, with China “continuing to grow above the world average and to dominate global resources demand.”

“Is the resources boom over? No…but I’m a believer in longer cycles and the super-cycle, particularly with India and China continuing [to grow] and representing half the world’s population, and that’s not going to end anytime soon,” he said.

Sector picks

With the outlook uncertain, Kazlauskas suggested there would be a further slowdown in some commodities but gains in others.

Patersons favored precious metals gold, silver and platinum, while forecast supply shortages should aid copper and zinc, he said.

The broker is less bullish on iron ore, coal and nickel however, although Kazlauskas expressed confidence in the outlook for uranium despite the effects of the Fukushima nuclear crisis.

Resources analyst Allan Trench of CRU group has coined the outlook as “UPTZ” through to 2016, due to expected rises in prices of uranium, palladium, tin and zinc.

“Gold and copper — having had a strong run in recent years — will be out-performed by other metals in price terms by 2016,” he wrote in a December 5 report for International Longwall News.

In contrast to Patersons, Trench rated silver as the second-worst expected performer among 24 commodities, with gold in the middle of the pack and nickel ranking sixth-best.

Like equities, the resources sector has seemingly become best suited for selective investors. Yet with the International Energy Agency predicting Asia will cement its dominance as the main source of energy demand growth through to 2035, the bulls still have reason for optimism.

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