The World Bank has lowered its 2016 price forecast for 37 of the 46 commodities it monitors and has warned that low prices for oil and other commodities are “likely to be with us for some time”.
The bank’s latest ‘Commodity Markets Outlook’ cut its price outlook for oil this year to $37/bl, from a forecast of $51/bl in October. For non-energy commodities, the largest decline is expected in iron-ore prices, with the report forecasting a 25% decline in 2016, owing to reduced imports from China’s steel producers and new capacity in Australia and Brazil.
Iron-ore prices fell from an average of $96.9/t in 2014 to $55.8/t last year, with prices plunging 15% in the fourth quarter to average $47/t. The price of the ferrous mineral fell to $41/t in December and bank is forecasting an average price of $42/t for 2016. It is also only projecting a modest recovery to $51/t by 2020.
Iron-ore prices had fallen for eight consecutive quarters and were currently barely one-fourth of the high reached in 2011, owing to continued oversupply, weak demand and destocking at Chinese mills.
“Global seaborne iron-ore demand may be nearing a peak due to China’s transition to a less-metal intensive economy and as a result of rising scrap metal availability. More low-cost iron-ore capacity awaits development in Australia, and will continue to displace high-cost output in other areas,” the report states.
Besides iron-ore, other non-energy commodity prices fell 4% in the fourth quarter of 2015, to a level almost 40% below their early 2011 highs, on continued large inventories and ample supplies.
Metal prices fell 8% on softening growth prospects in China and continued increases in supply due to earlier investments, while agriculture prices fell 2.3%, marking the seventh consecutive quarterly decline.
“El Niño-related concerns in some regions did little to support prices on global commodity markets,” the report notes.
In fact, it forecasts that most agricultural commodity prices will fall in 2016, with grains expected to decline 3.4%, oils and meals by 2.2%, and raw material and beverage prices by 1%. “Prices are expected to recover marginally in 2017, but even that mild recovery is subject to numerous downside risks.”
Most metals prices are expected to fall in 2016, with iron-ore’s weak performance likely to be followed by nickel, which is expected to decline 16% and copper, which is expected to be down 9%.
Precious metals are also expected to remain under pressure, with gold prices having declined during 10 of the past 12 quarters, reaching $1 105/oz in the fourth quarter of 2015 – a drop of one-third since its quarterly peak of $1 718/oz in the fourth quarter of 2012.
Platinum prices are expected to continue to fall in 2016, despite having declined more steeply last year than other precious metals, as South African mine production ramped back to full capacity following labour unrest in 2014.
“Demand from the auto sector remains buoyant, but the outlook for diesel vehicles, which mainly use platinum output in catalytic converters, has been dented by the Volkswagen diesel emissions scandal,” the report states.
The bank expects average gold and platinum prices of $1 075/oz and $950/oz respectively in 2016.
The forecast for oil prices is similarly depressed, with the lower forecast reflecting the sooner-than-anticipated resumption of exports by Iran, greater resilience in US production due to cost cuts and efficiency gains, a mild northern hemisphere winter and weak growth prospects in major emerging market economies.
Oil prices fell by 47% in 2015 and are expected to decline, on an annual average, by another 27% in 2016. However, the authors expect a gradual recovery during the the course of the year, partly because the “sharp oil price drop in early 2016 does not appear fully warranted by fundamental drivers of oil demand and supply, and is likely to partly reverse”.
In addition, high-cost oil producers are expected to sustain persistent losses and increasingly make production cuts, while demand is expected to strengthen somewhat with a modest pickup in global growth.
Nevertheless, the anticipated oil price recovery is forecast to be smaller than the rebounds that followed sharp drops in 2008, 1998, and 1986, with the bank forecasting a rise to $48/bl in 2017 and a recovery to only $58.8/bl in 2020.
“Low prices for oil and commodities are likely to be with us for some time,” said senior economist and lead author John Baffes. “While we see some prospect for commodity prices to rise slightly over the next two years, significant downside risks remain.”
Thermal coal prices, meanwhile, have fallen by more than 60% since the beginning of 2011 because of chronic oversupply and falling imports into China and India, while Europe and the US continue to shun coal amidst a global drive towards cleaner energy collapsing gas prices and increasing power efficiency.
The authors expect average coal prices to decline 13% in 2016 to $50/t, on continued weak demand and oversupply.
The bank will next update its commodity outlook in April.