On March 24, US oil futures settled at around $39 a barrel, up nearly 50 percent on Januaryâ€™s 12-year low of below $27. Meanwhile, the benchmark copper price on the London Metal Exchange closed at $4,945 a ton, up 15 percent from its six-year low in January, while iron ore prices have risen by nearly 30 percent this year to more than $50 a ton.
The iron ore price posted its biggest one-day gain on record on March 7, surging 19 percent to $62.60 a ton after Chinese Premier Li Keqiang pledged to spend 1.65 trillion yuan ($250 billion) on building roads and 800 billion yuan on railway construction, as part of efforts to ensure a minimum gross domestic product (GDP) growth rate of 6.5 percent for the next five years. The bounce back in commodity prices has helped minersâ€™ share prices in the regionâ€™s major exporters such as Australia and Indonesia, with their mining indices rising by 5 percent and 10 percent, respectively, since the start of year.
The revival in confidence follows two years of savage losses in market value, along with a wave of job losses and mine closures across the global industry. The Bloomberg Commodity Index, a measure of 22 raw materials, has dropped by about 40 percent in the last two years, having reached in January its lowest point since 1991. In February, the worldâ€™s biggest miner, BHP Billiton, posted a $5.7 billion half-year net loss compared to its previous half yearâ€™s $4.3 billion profit, while rival mining giant Rio Tinto posted a $866 million loss for fiscal 2015 compared to the previous yearâ€™s $6.5 billion profit.
Meanwhile, Japanese trading houses are expected to post write-downs of nearly $9 billion in their upcoming results due to their boom-time commodities investments, with traditional heavyweights Mitsui and Mitsubishi sinking into their first net annual losses in more than 60 years.
However, analysts now see signs that the cyclical sector may have passed the low point of its downturn, which followed a massive boom on the back of Chinese demand that eventually led to oversupply across a range of commodities. In a March 11 report, ANZ Research said commodity markets had started to â€œfind a floorâ€ amid signs that the worst â€œmay be overâ€ for the battered sector.
â€œSentiment has also picked up, with a glass half full approach being taken to weaker than expected economic data. Technically, many markets are also bouncing off strong support levels. The headwinds that a stronger [U.S. dollar] and volatile equity markets created are also easing,â€ the Australian bank said.
ANZ said supply growth in industrial metals had â€œslowed considerablyâ€ in recent months, while financial pressures on U.S. oil producers had seen â€œsmall incremental losses slowly build toward a sizable reduction in output.â€
â€œThis begs the question: are we on the path to recovery? At this stage, we feel this move is more about markets becoming less bearish rather than any fundamentally driven move higher. For that to occur, we would want to see economic data in emerging markets stabilize. That aside, the point where markets start tightening is now close enough to see for investors,â€ it said.
In the short term, ANZ said the best performers in the next three months would be sugar (up 6 percent), nickel (up 3 percent), and corn, palladium and thermal coal (all up 2 percent). It also said January 2016 may have been the â€œcyclical lowâ€ for oil prices, with prospects of a significant cut in U.S. production along with the tentative agreement between Russia and Saudi Arabia to freeze output.
According to ANZ, ratings agency Standard & Poorâ€™s has downgraded 119 energy companies in the first 50 days of 2016 compared to 30 downgrades in the first quarter of 2015, with the ratings cuts adding to the pressure on U.S. producers which control an estimated 1.2 million barrels per day of supply.
Gold has also benefited from growing investor demand, amid expectations of higher inflation and the U.S. Federal Reserveâ€™s decision to ease its pace of interest rate hikes. Gold holdings in exchange-traded funds have increased around 18 percent this year, with strong investor flows outweighing â€œsubduedâ€ physical flows of the precious metal.
According to Morningstar analyst Mathew Hodge, goldâ€™s ongoing shift from a â€œfinancialâ€ to a â€œconsumerâ€ commodity on the back of demand from Chinese and Indian consumers should see it make further gains, with jewelry expected to account for two-thirds of gold demand by 2020. For base metals, better than expected Chinese demand and the prospect of further stimulus had improved sentiment, with copper and zinc expected to outperform, ANZ said. The bank expects the nickel price to rise by 17 percent over the next 12 months, with copper up 13 percent and zinc increasing by 7 percent. However, it predicted a â€œdrawn outâ€ rebalancing process for bulk commodities such as iron ore and coking coal, despite Beijingâ€™s new spending measures. Chinese coal demand has declined for two straight years and China reportedly aims to cut as much as 9 percent of its production capacity by 2020, eliminating potentially 1.3 million jobs as it curbs oversupply, although coal still accounts for around two-thirds of its total energy use.
BlackRock fund manager Evy Hambro has predicted further pain ahead in 2016, even while pointing to an eventual recovery. â€œCommodity markets remain oversupplied and prices for certain commodities will need to remain at current levels, or move lower, to see loss making production leave the market. In light of this, dividends will remain under pressure,â€ Hambro said.
â€œAs we enter 2016, the industry will be forced to respond and we would expect to see an acceleration in production cuts which should be supportive for commodity prices.â€
Nevertheless, the recent uptick in commodity prices and resulting improvement in investor sentiment has been noted by mining explorers, including Australian miners Carpentaria Exploration and Diatreme Resources.
Carpentariaâ€™s managing director Quentin Hill said confidence was returning to the sector as the supply overhang gradually diminished and analystsâ€™ worst fears of a Chinese steel demand collapse appeared increasingly unlikely.
â€œWeâ€™re now seeing market watchers look past the current supply situation toward the next iron ore demand growth phase in 2017 and beyond. In the next phase, steelmakers will seek to improve productivity and curb pollution and therefore higher-quality iron products will be favored. This has been realized by Australiaâ€™s Fortescue Metals (FMG), which struck a product blending deal with Vale improving its quality, but also by Japanâ€™s Mitsubishi in its recent [letter of intent] to acquire Carpentariaâ€™s Supergrade iron product,â€ he told The Diplomat.
â€œFMG has often spoken about sentiment driving prices, with sentiment turning before fundamentals. The Chinese government has stated there will be no hard landing, and even after they complete the restructuring of Chinaâ€™s steel sector there is still the prospect of another 200 million people becoming urbanized in the next 15 years, requiring extra steel and therefore iron ore.
â€œEstimates of Chinese steel demand having reached its long-term peak could therefore be seen as self serving and designed to assist the industryâ€™s restructure. As a clearer picture on Chinese demand emerges during 2016 and 2017, sentiment will change, and iron ore prices will strengthen, especially premiums for high grade iron and pellets such as from our Hawsons iron project near Broken Hill.â€
Another Australian explorer, Diatreme Resources, has pointed to the benefit of a rising Australian dollar gold price for new gold projects.â€œApplying the current Australian dollar gold price of around A$1,700 ($1280.50) an ounce makes projects such as our Tick Hill project in North Queensland potentially highly profitable, along with the benefit of lower input costs following the cooling of the mining boom. Weâ€™ve identified significant savings from using secondhand plant and equipment along with cheaper professional services and labor costs,â€ Diatremeâ€™s chief executive Neil McIntyre said.
McIntyre is also seeing better times ahead for mineral sands miners, with the companyâ€™s Cyclone zircon project in Western Australia expected to benefit from a forecast supply shortfall within the next three years.
McIntyre said the Queensland state government had also been supportive of local miners, following a spate of job losses in the industry.
After riding the China-driven upturn and then suffering the post-boom fallout, Asiaâ€™s miners could be forgiven for being hopeful for an end to the pain in the Year of the
Monkey. For Asiaâ€™s major commodity
importers though, expectations of continued low prices might prove shortsighted, unless the world economy takes another sudden downward turn.
Anthony Fensom is an experienced business writer and communication consultant with more than a decadeâ€™s experience in the financial and media industries of Australia and Asia