Commodity prices risk slide after 2016 rebound

Commodity prices risk slide after 2016 rebound

ANALYSIS
By business reporter Sue Lannin
Posted about an hour ago
PHOTO: Chinese steel demand will be crucial to iron ore and coking coal prices in 2017. (ABC: Stephen Stockwell)
MAP: Australia
This year was a year of surprises for commodity prices, which started the year in the doldrums but ended the year on a bullish note as the world's major producers cut supply, driving prices higher.
The election of Donald Trump as the next US president also raised hopes that his potential plans for new infrastructure spending would boost demand for construction materials, such as steel.
But with so many ifs, such as will the US really spend $US1 trillion on building new infrastructure and will oil producers stick to the supply cuts they have agreed, the question is can the commodity rally last?
OPEC rules, OK?

From what was touted as the most important OPEC meeting since the oil price shock of 1973, members of the Organisation for the Petroleum Exporting Countries united and agreed to cut production by 1.2 million barrels of oil a day over the first half of 2017, despite scepticism that anything at all would be achieved.
OPEC also convinced non-OPEC producers such as Russia to reduce the global supply glut, bringing the agreed cut in output to more than 1.7 million barrels of oil a day.
Oil prices jumped from a 13-year low below $US27 a barrel in January because of oversupply to above $US55 a barrel after the OPEC agreement.
EMBED: 2016 oil price chart
There could be more upside, with ANZ predicting that oil prices could rise to $US67 a barrel next year when the OPEC supply cuts kick in.
Goldman Sachs, which is predicting a bullish year for commodities, sees West Texas Intermediate Crude at $US57.50 a barrel in the second quarter of 2017 dipping to $US55 in the second half of the year.
Standard & Poor's is less optimistic about oil prices, seeing them hover around the $US50 a barrel mark in 2017.
Oil producers' Catch-22

The catch is higher oil prices encourage oil and gas producers with more expensive production costs to get back into the game, such as US shale firms.
Drilling rig counts in the US have been increasing as the oil price rises.
There is also the question of whether major oil producers will stick to the deal. Some OPEC members such as Libya and Nigeria are exempt from the agreement.
The Commonwealth Bank's mining and energy strategist Vivek Dhar said the higher prices could undercut the planned supply cuts by major producers if the US shale industry increases production.
"That has the potential to add supply next year reducing the impact of what we've seen by supply discipline by OPEC," he said.
ANZ's senior commodity strategist, Daniel Hynes, doesn't think a rise in US oil production will weigh too heavily on prices.
"The scale of the cuts that OPEC have agreed to will far outweigh any potential increase in US output," he said.
Chinese dragon breathes life into iron ore, coal

Coking coal and iron ore were the year's biggest turnarounds, mainly thanks to policy changes in China which included cutting working hours for coal mines and more stimulus spending from Beijing.
The shortages drove up Chinese demand for the steel making ingredients, with Australian high quality coking coal quadrupling from $US75 a tonne early in the year to above $US300 a tonne in November, back to levels last seen in 2011 after the coal mine shutdowns caused by the Queensland floods.
EMBED: Coking coal prices 2016
Benchmark iron ore prices more than doubled from under $US40 a tonne early in the year to above $US80, amid higher Chinese demand for the raw material as coking coal prices surged.
Prices for thermal coal, used for power generation, jumped from around $US40 a tonne range to above $US100 a tonne at the port of Newcastle.
EMBED: Thermal coal prices 2016
Mr Dhar said commodity price speculation in China also drove coal and iron ore prices.
What goes up must come down

Standard & Poor's metals analyst Kenneth Foo warns that the price rally in coking coal is not sustainable, with US and Australian miners indicating that production could rise in 2017.
S&P expects prices to fall below $US200 a tonne.
S&P analysts also expect demand for steel to remain flat or fall in 2017 if property sales and construction drops in China because of government measures to cool the market.
New iron ore mines

New iron ore supply will come onto the market in 2017 from Brazilian miner Vale and Gina Rinehart's Roy Hill mine in the Pilbara, which is expected to bring prices down.
The Commonwealth Bank expects iron ore to fall $US45 a tonne by the end of 2017 because of the rise in supply.
EMBED: 2016 iron ore prices
Goldman Sachs is predicting above $US60 a tonne in early 2017 and $US55 a tonne by the end of the year.
Even the Australian Government has predicted the price of key commodities will fall, with its latest budget update tipping lower prices for key commodities.
It sees iron ore prices as declining to around $US55 a tonne by the September quarter of 2017 and expects coking coal prices to slide to $US120 a tonne in early 2018.
Fool's gold

The price of the precious metal surged from its low in January around $US1,060 an ounce to the year's high above $US1,366 in July, fuelled by investors looking for a safe place to park their money.
But gold is now on the defensive thanks to the higher US dollar trading near 14-year highs, rising global interest rates and the rally in global markets thanks to the Trump factor.
EMBED: Spot gold price 2016
Analysts generally see gold prices trading around $US1,200 in 2017 as the US Federal Reserve pencils in three more rate rises.
However, the Commonwealth Bank predicts that prices could dip below the current price of around $US1,130 to around $US1,100 an ounce.
All eyes on China

China is the greatest risk to the outlook for commodity prices, especially if the economy slows down or the credit bubble bursts.
Top Beijing think tank, the Chinese Academy of Social Sciences, tips the economy's growth could ease to 6.5 per cent, which would make it the slowest rate in more than 25 years.
ANZ's Daniel Hynes said prices would also be hit if China changes tack and increases production of key commodities, such as coal.
"If that policy did change, and we saw a significant rebound in domestic output for alot of commodities, that certainly could impact markets," he said.
http://www.abc.net.au/news/2016-12-21/commodity-prices-set-to-slide-after-2016-rebound/8138408