When Will the Commodities Bloodbath End?

It was a bloodbath for commodities in 2015.

Brent crude oil fell 45.7% for the year, the most out of any commodity. From its high of US$127.07 per barrel, Brent’s been smashed by more than 70% in the past 18 months. It’s now trading at US$33.55 per barrel.

Other big losers were nickel (down 42.6%), heating oil (down 41.4%), and gas oil (down 40.2%).

Copper lost a quarter of its value, declining for a third straight year. It’s the longest slump for the base metal since 1998. Among other base metals, zinc was down 25% and aluminium fell 18% for the year.

Even gold languished at multi-year lows, down about 10%. It was unable to attract buyers. This is despite bouts of intense stock market volatility, geopolitical shocks, sovereign and company default rumours, and changing views about central bank policies.

Jodie Gunzberg, S&P Dow Jones Indices global head of commodities, summed it up nicely. In a resource note, she said ‘2015 will go down in history as one of the worst years ever for commodities’.

Will resource prices ever recover?

According to Gunzberg’s note, the S&P GSCI — a major commodities index — lost 32.9% last year. Check out the destruction for yourself on the graph below.


Source: S&P Dow Jones IndicesClick to enlarge

Looking at that, you can see why punters hate resources. I mean, cocoa and cotton were the only winners last year. I guess, contrary to what global warming alarmists argue, it must have been a cooler year!

Jokes aside, talking about the struggle for resources, this is the third year in a row the S&P GSCI has declined. It’s down a total of 55.6% during this time.

What sentiment is on the horizon for resources

Remember, the bad news for commodities won’t last forever. Even Credit Suisse sees slightly better times ahead. According to the Sydney Morning Herald, chief investment strategist for Australia David McDonald said:

Although we are not positive on commodities we do believe they could be closer to stabilising and this would provide a boost for Australia.

Certainly if you’re willing to take a longer view there is compelling value in some of the resources stocks.

We’ve seen earnings of the resources sector revised down from a positive…to minus 25 per cent now, that’s a pretty negative outlook and further revisions down are unlikely.’

Christoph Eibl, chief executive of Tiberius Asset Management, agrees. He told the Australian Financial Review that a bottom is ahead this year.

We’ve come a long way, but 2016 will probably be another lost year for commodities, though we should see a bottom.’

The supply overhang needs to be corrected, which will be painful because that means giving up market share and restructuring. I think this will happen [this] year.

Much of the attention this year will be on China. It is after all the world’s largest consumer of raw commodities. Looking at recent history, there’s a strong correlation with demand for metals. The Australian Financial Review went on to provide its bearish outlook.

It’s tough to imagine sentiment sinking much further, but the market still looks very well supplied.

Rebalancing is needed and that is likely to come via mine output cuts. There’s no shortage of smelting capacity, which is still growing, particularly for aluminium in China.

Looking at other base metals, Goldman Sachs forecasts copper to hit US$4,500 per tonne by year’s end. It’s now trading at US$4,513.96 per tonne. Goldman told the Australian Financial Review,

We continue to see the risks surrounding our end-2016 forecast as skewed to the downside, with the main risks being Chinese demand and cost deflation.

Nickel is expected to have another tough year. Helen Lau, analyst at Argonaut Securities in Hong Kong, told the Australian Financial Review,

There is too much (nickel) supply, inventory level is very high on the [London’s Metal Exchange]. Lower stainless steel prices [should] put further pressure on nickel.’

Here’s the real story for commodities

I strongly disagree with Argonaut and Goldman’s assessments. As legendary commodities investor Rick Rule said to me, ‘while higher prices lead to lower prices, lower prices are the cure for higher prices’.

Rick knows what he’s talking about. He’s made hundreds of millions for himself and his clients, spanning over four to five commodity cycles.

Remember, the stock market’s nothing but a sentiment game. Experience shows, with time, that the worst performers often become the best.

Now, I’m not a bull. In fact, I’ve been a commodities bear for nearly two years. And this week, I warned Resource Speculator readers that resources prices are facing their own Global Financial Crisis in the months ahead. I’ve spent months preparing them for the coming destruction.

So, while the majority of the investment commodity are paid to be bullish, I’m not just going to be bullish for the sake of it. I believe in providing honest and thorough advice. This means that sometimes I have to tell readers what they don’t want to hear.

For example, I’ve been a strong gold bear for over 24 months. With time, my bearish stance on gold will change. We’re facing a global sovereign debt crisis (Porto Rico defaulted on 1 January). The destruction will be bigger than the Financial Meltdown of 2008/09. When the next financial crisis comes, you’ll want to be owning gold stocks. But it’s not time yet.

Likewise, I’ll probably turn into a commodities bull this year. That is, for many sectors, but not all. And while this isn’t something I want, we’re facing international war in the years ahead. Turn your attention to the ongoing mayhem in the Middle East, South China Sea and Ukraine. Any one of these hotspots could escalate into something much worse.

During times of war, commodity prices tend to outperform. So the commodities bear market won’t last forever. And the next phase of the bull market will have nothing to do with Chinese growth.

Global conflict events are escalating. But, at the moment, this is still a chess match. It will take time before we see a full on confrontation. As such, commodities are due to crash in the months ahead.

When we see a full on confrontation, commodities will boom. There’s a good chance that last year’s worst performers — nickel, oil and gas, copper and zinc — could become the best performers for 2016. I know I’ve backed these sectors in Resource Speculator readers. There’s many reasons to like them. If you want to check out my in-depth research, click here.

Regards,

Jason Stevenson

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read. Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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