December 25, 2014
The region’s miners have had a year to forget. Will 2015 be any better?
On Monday, Australia’s Department of Industry cut its iron ore price forecast for next year by a third, from the $94 a metric ton forecast in September to just $63, with rising output continuing to exceed demand.
Prices have nearly halved this year as major miners ramped up production, forcing a number of smaller companies to the wall and hitting employment and government tax revenues. On Tuesday, the price of the key steelmaking ingredient fell to $66.84 in China, its lowest level since June 2009.
According to Bloomberg Intelligence, 22 iron ore projects have been canceled or suspended since July in response to the low prices,eliminating an estimated 140 million tons of extra capacity. However, more than 100 million tons of new capacity has entered the market during the same period, with an estimated 340 million tons extra forecast over the next five years, mainly from Australia and Brazil.
China buys two-thirds of global seaborne iron ore but is set to produce its weakest annual growth since 1990, with a slowing real estate sector also reducing demand. China’s steel consumption is estimated to have risen by 1.5 percent in 2014 compared to its post-global financial crisis average of around 10 percent a year, hit by the downturn in residential construction that accounts for nearly half of its steel use.
While ANZ forecasts the iron ore price will average $80 a ton in 2015, JPMorgan predicts $67 and Citigroup as low as $60, according toBloomberg News.
However, Australia’s government forecaster sees better times ahead, although not until later next year: “The current market oversupply is expected to prevail through the start of 2015 in response to a likely ongoing cyclical downturn in China’s housing sector. Prices are forecast to rebound in the second half of 2015 as some producers cease production and housing construction activity in China starts to recover; however this rebound in the housing sector remains a key area of uncertainty.
“Further growth in low cost supplies from Australia and Brazil are also expected to offset production closures and maintain downward pressure on the iron ore price in 2015,” the industry department said in its December resources and energy quarterly.
According to the department, Australia’s earnings from mineral and energy commodities will fall by 10 percent to A$176 billion ($142.7 billion) in fiscal 2015, with earnings from iron ore slumping by 24 percent, although a lower Australian dollar will partly offset some of the losses from falling commodity prices. It also noted a 29 percent dive in exploration expenditure year-on-year in the September quarter 2014, with capital expenditure down 14 percent and mining employment similarly lower.
Coal Oversupplied
Meanwhile, coal prices are also expected to drift lower in 2015, hitting an industry that has seen a wave of mine closures and job cuts. Despite being “relatively stable” recently, prices for high-quality metallurgical coal used in steel production averaged $126 a ton in 2014, down 21 percent on the previous year, with a further dip to $120 forecast in 2015.
“The closure of more than 20 million tons of capacity has been announced, and it is likely that further production cuts will be announced during 2015. Metallurgical coal prices are expected to remain subdued until these announced closures materialize and further capacity is closed,” Australia’s industry department said.
Thermal coal used in power generation is also likely to face further price pressures, with the department expecting a 14 percent drop in the benchmark Japanese annual price to $70 a ton. Having started 2014 at around $83 a ton (Newcastle free on board spot price), prices slipped to $62 by mid-December due to oversupply and weaker Chinese import demand, with the supply overhang predicted to continue next year.
According to International Coal News, around a third of Australian coalmines were operating in the red earlier in 2014, although lower oil prices, a falling exchange rate and lower labor costs have helped miners, along with an expected rise in demand from emerging markets such as Brazil, India and Vietnam.
A recent wave of coal acquisitions by Japanese trading houses may also suggest the coal market has bottomed, according to Reuters, while the International Energy Agency sees global coal demand continuing to rise over the next five years, breaking the 9 billion ton level by 2019.
Oil, Gas Pressured
Falling oil prices may be a net benefit for Asia, but producers such as Australia and Indonesia have seen export income eroded from a halving of the oil price in 2014. Despite the International Energy Agency’s forecast that oil consumption will increase by 900,000 barrels a day in 2015, Australia’s government forecaster expects Brent crude to average just $66 a barrel next year, compared to forecasts by securities firms Morgans and UBS of $100.
According to ANZ Research, “High cost non-OPEC producers are likely to make the first cuts to output, but not until [third quarter] 2015, so unconventional oil supply will continue to rise.” The bank expects a 30 percent fall in both U.S.-based West Texas Intermediate and Brent prices next year, with oil “one of our least-preferred commodities in 2015.”
Nevertheless, the Asian Development Bank (ADB) sees the situation as a perfect opportunity for Asia to reform industry structures.
“Falling global oil prices present a golden opportunity for importers like Indonesia and India to reform their costly fuel subsidy programs,” ADB chief economist Shang-Jin Wei said in a statement. “On the other hand, oil exporters can seize the opportunity to develop their manufacturing sectors as low commodity prices tend to make their real exchange rates more competitive.”
Cheap oil has also weighed on gas prices, a trend that is expected to continue in 2015. According to Australia’s government forecaster, increased supply from Australia’s new liquefied natural gas (LNG) projects in Queensland state will create added downward price pressure, which together with low oil prices will see landed prices in Japan for LNG drop to $11 to $12 a gigajoule.
Spot prices for Japanese LNG have already halved since February, with the expected restart of more nuclear reactors expected to exert further downward pressure, along with the threat of U.S. gas exports. The slump has led to the deferral of billions of dollars worth of new LNG projects, including reportedly Woodside Petroleum’s decision to delay its $40 billion Browse project in Western Australia.
Gold’s Glimmer Fades; Base Metals Mixed
Gold prices hit a four-year low in November, with the precious metal’s appeal as an alternative currency diminished by the rising U.S. dollar and prospect of higher U.S. interest rates.
According to Bloomberg, investor holdings in gold-linked exchange-traded funds have slumped to their lowest level since 2009, with more than $7.5 billion wiped from their value this year. From gold’s recent level at $1,178 an ounce in New York, Goldman Sachs has forecast a fall to $1,050 by December 2015.
Noting lackluster jewelry demand and declining investor purchases of physical gold, Australia’s government forecaster expects prices to decline from $1,267 in 2014 to $1,178 next year, “with further falls in investment demand more than offsetting forecast moderate growth in physical consumption.”
For base metals, however, the picture is mixed. Copper is forecast to drop by 5 percent to $6,580 a ton on greater supply and the impact of the rising U.S. dollar. However, nickel is set to continue its recent surge on the back of Indonesia’s export ban, rising by 8 percent next year to average $18,250 a ton, while zinc should post another 3 percent increase to $2,231 a ton, helped by slow supply growth.
Summing up the outlook for 2015, ANZ Research described it as a game of two halves: “Commodity markets are likely to be volatile in 2015, with rising concerns over emerging market growth and inflated inventory levels offset by the pre-emptive positioning of returning commodity investors. Most commodities look oversold as we enter the New Year, but weak near-term fundamentals are unlikely to prop-up much confidence.
“Overbought equity markets and a buoyant U.S. dollar will also create headwinds for most participants. Supply-side issues will dominate while the demand backdrop remains muted. We think it will be a year of two halves. The first half will be weaker and more volatile, but the second half should improve as increased supply-discipline and stabilizing growth begins to emerge.”
For Asia’s commodity exporters, the upturn cannot come some enough, even while the region’s major importers enjoy the benefit of cheaper prices.
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