Commodities: How low can you go? - ANZ

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 12, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) - Research Team at ANZ, suggests that the aggressive broad-based declines since mid-2014 means commodity prices are now at levels that are loss-making, or at best only marginally profitable, for many globally traded hard and soft commodities.

    Key Quotes

    “This means many producers are scratching their heads and saying surely things can’t get too much worse. However, you don’t have to look too far back in the history archives to see international prices could well move lower yet in 2016. Indeed even at the low point mid last year for our ANZ commodity price index it was still a third higher than the depths of the GFC.

    That said, we still get the distinct feeling that things are nearing a bottom and for New Zealand’s main sectors/exports the fundamentals don’t suggest there should be another sustained leg lower in 2016 at this stage. But sentiment can be a funny thing. The focal points continue to be: lower emerging market demand growth, especially China; high inventories in many cases; further declines in energy prices and other commodities that are affecting sentiment, weighing on the cost curve and reducing some key buyers’ purchasing power; low feed costs and generally favourable weather conditions boosting the competitiveness of key competing exporters; and a high USD.

    The mix isn’t great and makes it difficult to see what the catalyst will be for a turn-around in 2016. But with cost curve analysis showing many sector participants struggling at current price levels, a reduction in investment, recalibration of business models and supply response is likely to shape the 2016 outlook.

    Due to different contractual arrangements, supply chain configurations and production lifecycle the timing of supply responses can vary significantly between different sectors. But increasingly there is more evidence of this taking place in various ways, especially for the more pressured commodities. Indeed just this week there is murmurings out of China of raw milk pricing reductions and renegotiating (reduction) of farmer supply contracts by domestic processors.

    In Europe the Dutch cooperative FrieslandCampina has been so overwhelmed by the increase in milk from farmers it has run into capacity constraints. So to deal with this it has offered a bonus to suppliers to stay below a certain volume of milk, capping supply growth for now.

    All up, supply reductions over time will help trigger improvement in prices, but high stocks and weak demand are likely to cap gains during 2016. For sustained price improvement a pick-up in demand growth will be required, which feels more a late 2016, or 2017 story at the moment.”
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