Commodity Market 2016 by Gnanasekar Thiagarajan, Commtrendz Research

by Mr. Gnanasekar Thiagarajan, Commtrendz Research

Commodity markets began the year on positive note on hopes that Federal Reserve will hold on to the easy money policy that they have been maintaining from 2008. 

But, as the year progressed, economic data and statements from the Federal Reserve started to become more hawkish and market participants seemed to ignore any economic data that suggested that rates could be on hold. 

To add to the uncertainty crude prices almost halved as the rout began in mid 2014. 

OPEC, was expected to cut output on the back of rising supplies and producing countries running huge deficits , but Saudi Arabia’s, the largest member of OPEC’s resolve to hold on despite pressure from other producing nations, kept pushing prices lower. 

To keep the shale oil producers in the U.S away from business, OPEC has been continuing to maintain status quo. Since, inflation was not near the central bank’s uncomfortable zone, the dove camp continued to hope for a postponement of rate hike in the current year. But, finally the much awaited rate hike took place in December, taking away some of the uncertainty that surrounded financial markets in 2015.

Base metals, copper, nickel, zinc, lead and Aluminium also took a sharp beating as the largest consumer, China’s growth and demand for commodities started lagging. Though China has taken enough measures so far by cutting interest rates and artificially depreciating the currency, and so on, but it has so far not had any desired effect. Commodity producers are reeling under pressure, as new projects have been put on hold. Cost cutting and production cuts have been put in place, but prices are still below cost of production and demand still looks benign.

Gnanasekar Thiagarajan,
Commtrendz Research

Bullion was affected largely due to the expectation of a rate hike, as the ETF’s saw large amount of outflows. The interest rate hike could dent gold’s appeal,  because unlike stocks and fixed income markets, where dividends and fixed interest is possible on investments, while gold does not provide any interest, but only a potential to appreciate. 

 With the dollar looking stronger by the day as a rate hike was getting more likely, gold lost almost 10 % in the year and is more vulnerable to falls going ahead too. Since, Silver had fallen sharply lower already in 2014, the fall was relatively less and cushioned in 2015, though it did fall overall with gold.

Looking ahead

If 2015 was the year in which the growing oversupply of key commodities led to a rout in prices, will 2016 lead to a consolidation and the start of recovery? Another group of increasingly nervous producers are those in the Organization of the Petroleum Exporting Countries (OPEC), as they also await the exit of higher-cost crude from the market. While top OPEC producer Saudi Arabia still has sufficient financial reserves to weather another year of low prices, the budgets of other countries, such as Venezuela and Angola, are starting to look increasingly vulnerable. 

It may take another year of producers grimly hanging on before they start to topple over, and if history is any guide, it always takes longer for the point of maximum pain to be reached than the market anticipates.

Many resource companies will be hoping for a slightly better demand profile in 2016, especially if China’s spending on infrastructure and housing construction does pick up in tandem with a slightly brighter economy in the rest of the world. But demand isn’t the main issue for commodities, and even the most optimistic scenarios for the global economy are unlikely to spur enough consumption to overcome excess supply.

If commodities are to stage any sort of recovery in 2016, it’s likely to take the form of a fairly brutal first half followed by a brighter second, but this scenario only holds if sufficient supply is forced from the market because of ongoing low prices.

Heading into 2016, commodity markets are expected to maintain their bearish trend, as the Federal Reserve has indicated that , it is anticipating four rate rises next year. The markets are however expecting  something different and  the Fed funds futures currently suggests there’ll be just two rises, in June and December.   

The first quarter of 2016 may be slightly beneficial for commodities, as the Federal Reserve observes the effects of the rate hike on the U.S economy  and is not expected hike rates during that period.

Bullion, gold and Silver could see some respite from a weakening dollar and we can anticipate a revival in early 2016, but the fate of both gold and Silver and particularly gold in 2016, hinges on the pace of rate hikes.  

But,  history suggests otherwise. Gold’s mighty secular bull of the 1970s, which greatly dwarfed the 2000s one, happened during a time of high and rising interest rates!  And then gold’s subsequent multi-decade secular bear in the 1980s and 1990s unfolded during a long span of interest rates relentlessly falling on balance. 

Gold rallied with rising rates and slumped with falling rates in the past, so the theory that rising rate are not good for gold could come in for scrutiny.

And the big wildcard for gold comes from investment demand, which can fluctuate massively. If equity markets were to fall owing to higher interest rates, that could lead into safe-haven buying.  Rising and higher interest rates are actually bullish for gold for one simple reason.  

And that is they are actually very bearish for stocks and bonds.  Gold is an alternative asset that shines the brightest when the conventional asset classes are suffering.  And nothing pummels stock and bond markets like rising interest rates.  That is the sole reason the Fed took seven years of waiting to increase interest rates.  

So, we expect gold to either bottom out at present levels or slightly lower from here close to $975-1000( MCX 24,000) and then start moving higher to $1200( MCX : 28,000) or even higher later towards $1375. Silver has limited downside from present levels and think any fall from here could be a potential opportunity for investment with targets near $15( MCX: 36,000) or even higher to $19-20( MCX : 40,000- 42,000) later on. 

The funds have been net long for a goodish period of time and their patience could get worn out if price break crucial supports near $12. While this support holds, we are hopeful of a good recovery in going into 2016.

We expect crude oil prices also to bottom out soon as negative fundamentals have more or less been priced in. 

Revival in global demand and new capacities additions being put on hold, could be future positive for crude. 

Anything below $30/bbl looks unsustainable, as crude produced below cost of production, could lead to production cuts even if OPEC does not endorse it. We see prices moving in a range of $28-30 (MCX: 2,150) to $48 (MCX: 2700-800) initially and then towards $60(MCX: 3,200) later.

Base metals are our favoured commodities for the coming year. Production cuts have already cut huge surplus the metals have been adding. 

Further, actions by Chinese authorities to stabilize and put the economy on tract could further boost metal prices in 2016. 

We expect an upside of 20-25 % at least and the possibility of downside being limited to 5%  from present levels.

Agriculture

The year ahead will present both opportunities and challenges for primary producers, processors, traders and retailers in the food and agri sectors.

With one of the most intense El Nino events on record, dry conditions are expected to linger into 2016. The food and agribusiness sector must prepare to weather the ‘new normal’ as volatility from the El Nino weather pattern and China’s economic slowdown may constrain production of several agri commodities and drive up prices.

Chinese import demand also continues to be a crucial factor with uncertainty arising from the weak Chinese economy. The moderation in China’s economic growth rate to an estimated 6% and potential further devaluations of the currency may weigh on the minds of Chinese buyers. 

Despite this, recovery in several Chinese food and agri sectors and local consumption growth means long-term demand for agri commodities remains healthy.

DISCLAIMER : Views expressed above are the author's own. 

Src: ET 

About Mr. Gnanasekar Thiagarajan

Director at Commtrendz Research and a consultant to MCX & MCX-SX and many more corporations both in Indian and overseas.

More than 20 years of experience in commodity and forex trading. Formerly a forex dealer with Bank of Nova Scotia.

Web Site: Commtrendz.com

https://plus.google.com/u/0/115987349087525551655/about

gnanasekar.t@gmail.com

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