Commodity Markets 2015

Bank Credit Analyst

2015 Commodity Market Themes

december 23, 2014 by bca research

http://blog.bcaresearch.com/2015-commodity-market-themes

Three overarching themes will dominate industrial commodity markets in 2015, most particularly in the first half of next year: Weaker demand, resulting from tepid EM and DM growth ex-U.S.; surging supplies; and a strong dollar. Weak or lower industrial commodity prices naturally follow for next year.

• Oil preoccupies consumers, producers, investors and the media, as markets seek to rebalance abundant supply with slowing demand, but similar adjustments are being forced in iron ore, steel, and base metals markets, as well.
• For oil markets, the pass-through of lower prices to consumers will be felt most in the U.S. There will be less impact on demand in high-tax provinces (e.g., eurozone), and in markets where subsidies and subsidy expenses are being reduced as prices go lower (e.g., China). Slower growth will force high-cost suppliers to dial back production, and for capex to be allocated to the most promising geology that can be developed at low cost.
• A stronger dollar will limit demand growth ex-U.S. for commodities generally, oil and base metals in particular, as local-currency costs increase.
• On the supply side, production costs incurred in local currencies are falling – the most visible example being Russia, where the ruble has fallen about 50% against the dollar, similar to the decline in oil prices – and may incentivize increased production in the short run as exporting states attempt to recover USD revenue via higher volumes.
• Somewhat outside these global macro forces lie agricultural markets, which are in the process of adjusting to recent over-supply conditions – particularly in grains and sugar, which are coming off rare back-to-back ideal growing seasons. These markets offer the highest likelihood of delivering superior returns in 2015, in our view. However, this view is not without risk: Lower oil prices and weaker currencies in key exporting countries could incentivize higher production in ag markets, as well.

Source: http://blog.bcaresearch.com/2015-commodity-market-themes