The rout in commodities prices that has wiped billions from the value of energy and mining companies across the world in the past 12 months will continue in 2016, according to economists, analysts and executives on the front line.
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Prices in a range of key industrial commodities plunged in 2015 as China’s factories and appetite for raw materials slowed while supply, especially of oil and iron ore, increased.
Bob Dudley, the boss of BP, said the price of oil, which lost 34% in 2015, could continue to fall in the first few months of 2016. “A low point could be in the first quarter,” Dudley has told BBC radio.
Dudley predicted that prices could stabilise towards the end of the year, but would remain low for the forseeable future.
“Prices are going to stay lower for longer, we have said it and I think we are in this for a couple of years. For sure, there is a boom-and-bust cycle here,” Dudley said.
His words will sound a warning for investors across the globe when markets reopen on Monday, especially those in the resource-heavy UK and Australian markets.
The commodity index used by Thomson Reuters fell by a quarter over the year to hit its lowest level since 2002.
“The chances of an optimistic 2016 are bleak,” Mark To, head of research at Hong Kong’s Wing Fung Financial Group, said. “Slowing economic growth and structural reforms in China might contribute to decreased demand for commodities.“
Further interest rate hikes by the US Federal Reserve will add to the pain by strengthening the US dollar and making many commodities more expensive for international buyers, he said.
The smallest, niche agricultural commodities were the only bright spots in sight as weather and disease roiled crops, raising concerns about tightening supplies and boosting cocoa, cotton and orange juice.
Among industrial commodities, iron ore prices tumbled 40% this year due to global oversupply and shrinking Chinese steel demand, marking a third year of losses.
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The rout is seen stretching into next year and will mean prolonged pain for resource giants such as BHP Billiton, Rio Tinto and Brazil’s Vale, as well as for Australia’s third largest producer Andrew Forrest’s Fortescue Metal group.
“We have a modestly higher price for iron ore of just over $50 by end-2016 but that does not rule out prices falling below $30,” Caroline Bain of Capital Economics told Bloomberg.
With all four committed to increased supply in a fight to the death against higher-cost producers, Bain predicted there would be casualties.
“It is hard to see the big four cutting production by much. But we think production elsewhere – notably in China – will be cut at current prices or lower,” Bain said.
In coal, thermal prices fell almost a third in 2015, also hurt by waning Chinese demand and the rise of renewable energy, with Goldman Sachs and the International Energy Agency saying China’s coal demand has peaked.
Both iron ore and coal have shed around 80% in value since their respective historical peaks in 2011 and 2008.
The downturn has hammered BHP, which has seen its share price fall by a third in Australia and by 40% in the UK, Rio and Anglo American, as well as merchants like Asia’s Noble Group and Glencore, forcing them to shed jobs and sell assets.
“We had the big party from 2005-2011, and now we are suffering the big hangover,” Breakaway Research senior resources analyst Mark Gordon told AFP.
“The so-called supercycle was a real anomaly in history, so the upward trend was an anomaly, and the downward trend is also an anomaly.”
Benchmark oil and natural gas prices have also slumped, down a third this year and two thirds since the rout began in 2014, as ballooning supply met slowing demand.
“Headwinds [are] growing for 2016 oil,” Morgan Stanley said this week, citing increases in global supply and a slowdown in demand, reflecting a market consensus that meaningfully higher prices are not expected before late 2016.
The outlook is expected to trigger a fight for survival across the supply chain, including shippers and private oil drillers, while oil-dependent countries from Venezuela and Russia to the Middle East face smaller revenues.
Prices of industrial metals also plummeted this year. Copper and zinc shed a quarter of their value, and nickel collapsed more than 40%, hammered by slowing growth in top consumer China.
Some investors are hoping base metals are over the worst, but some fund managers and analysts expect further losses next year before miners make significant output cuts to offset slowing demand growth.
“We’ve come a long way, but 2016 will probably be another lost year for commodities, though we should see a bottom,” said Tiberius Asset Management Chief Executive Christoph Eibl.
“The supply overhang needs to be corrected, which will be painful because that means giving up market share and restructuring,” Eibl added. “I think this will happen next year.”
Gold, however, is showing no sign of recovery after sliding to a near six-year low earlier in December.
The metal closed the year down about 10% for its third straight annual loss, on a stronger dollar and prospects that higher US interest rates will hurt demand for non-interest-paying bullion.
Its outlook heading into next year does not look much better, with several traders and brokerages predicting a drop in prices to $1,000 an ounce or below early in 2016, before firming in the second half.
Gold has largely been influenced by US data and the Fed’s monetary policy. Even if the Fed rate hike path next year was slow, gold would take a hit, said traders.
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