On the back of US dollar weakness and sharp improvement in sentiment towards the Chinese economy, commodity prices have enjoyed a rare moment in the sun of late.
Gains of 30, 40 and even 50% have been commonplace since mid-January, fueled in part by short covering as bearish bets on further declines were unwound by market participants.
With short-term positioning more neutral and some questioning whether the US dollar rally has run its course, many are now asking whether the bottom for commodity prices is in.
According to Paul Bloxham, chief economist for Australia and New Zealand at HSBC, while there are valid arguments for further weakness, in his opinion it’s likely that commodity prices have probably already seen their lows.
Our global commodity team’s forecasts imply that commodity prices have troughed, although we see only a modest pick-up from here for most commodities as markets remain over-supplied and we think supply retrenchment will take some time. Indeed, given that most markets are still oversupplied, it would not be surprising if there was some modest retracement in the short run. On the demand side, we still expect growth in China to continue to slow into the second quarter before bottoming out, which could weigh on metals prices.
In other words, while it’s likely that commodity prices have bottomed, the rebound will likely be tepid and prone to bouts of renewed weakness over the short-to-medium term due to continued excess supply.
The table below, supplied by HSBC, reveals the bank’s forecasts for a raft of commodity prices in the years ahead.
Despite the view that commodities bottomed in the early parts of the year, on aggregate, HSBC sees commodity prices still 15% lower this year relative to the average seen in 2015.
Looking further ahead, HSBC forecasts that commodity prices will rise 30% in 2017, largely on the back of continued strength in the crude oil price.