IHS' Commodity Price Outlook: Buyers’ Market Remains for Most Commodities

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The IHS Materials Price Index (MPI) continued to decline in the first half of 2015. In August, the MPI was at its lowest level for the year: more than 10 percent below where it was in January 2015 and almost 50 percent below where it was in summer 2014. Prices collectively are now back to levels last seen in mid-2009. Low commodity prices have triggered “bargain hunting” in some markets, although aggregate demand continues to look lackluster. Weakness is expected to persist for the rest of year, as China’s devaluation of the yuan and a looming U.S. interest rate hike act to support the dollar, adding further downward pressure to commodity prices. The Brent oil price decline confirms the near-term outlook of weak oil fundamentals as world markets continue to remain oversupplied with high storage levels. These impacts are driving chemical prices down as well. Metals remain a buyers’ market. Prices for most products are expected to rise only slightly in the coming months. 

Key growth assumptions

The bursting of the Chinese stock market bubble has overshadowed signs of modest improvement in the Chinese economy. However, as unnerving news from Greece and China has dominated the headlines over the summer period, it is easy to overlook recent economic reports pointing to a gradually improving global recovery. Real GDP growth in the United States is accelerating on consumer spending growth. Across the pond, despite mildly disappointing second quarter growth for the Eurozone, low oil prices, a weak euro, European Central Bank (ECB) stimulus, and increased consumer spending continue to support modest expansion in Europe.  

Chemicals

Ethylene: North American & Asian spot prices have tumbled. Prices are sliding on the back of weak crude oil prices and healthy ethylene production levels. At the same time, the bearishness seen in the Chinese stock market, as well as skittishness in Europe around the latest Greek debt negotiations, had affected sentiments in the commodities market, with buying interest weakening significantly. With a light turnaround season this fall there is little upside risk to the current forecast outside of a major unplanned event.

Polyethylene: PE producers have delayed contract price increases to late summer or early autumn, as buyers push for contract price concessions. Rising inventory levels and strong production should press against proposed increases. Thus, any price increase would be based on regional effects from supply conditions in Europe and logistical constraints around the Gulf Coast. Propylene: Spot prices for North American propylene reached their lowest levels since 2009 in July. Competitive feedstock costs, five-year high inventory levels, and weakening crude oil prices are the major current propylene price drivers. As more capacity comes online in the United States utilizing propane as a feedstock, which will offer producers an increasingly low-cost position, prices are expected to remain subdued. In Asia, spot propylene prices have dropped in accordance with the fluctuating stock market in China and soft energy prices. Somewhat tight supply—as a result of ongoing production unit maintenances and some unplanned outages—had kept prices from falling further over the summer; however, an increase in supply due to production restarts and new capacity will keep downward pressure on prices.

Polypropylene: strong demand in the first half of the year, thanks to a precipitous drop in propylene monomers, has put producers in a position to continue to push for margin; however, IHS does not foresee a price increase for August, but more likely is an increase in September. Production in June was 5.3 percent higher than June 2014, and while production growth remains strong in late summer, it is still not keeping pace with strong sales. As a result, June inventories declined, reducing days of inventory to the lowest number we have seen. We expect the inventory number to fall even lower for late summer, with the market continuing to be very tight.
In Asia, the decrease in spot polypropylene (PP) imports for July was driven by tumbling feedstock values, long supply, and sluggish downstream demand. Buying momentum slowed in July on the back of poor domestic demand from downstream sectors, such as automotive and household appliances. As a result of weak demand, most converters reduced production rates. They also decided to keep inventories lean amid continuous long supply. The outlook for late summer/early autumn remains weak. Buyers are expected to remain cautious about replenishing inventory in anticipation of a further price correction on the back of volatile energy and feedstock costs. Falling crude oil prices and increased supply in the region will continue to place downward pressure on prices if there are no unplanned disruptions affecting production.

Bottom line: Now would be a good time to buy and restock inventories, although with the risk to the price outlook on the downside, the window of opportunity should remain for the near- to medium-term.

Steel

The weakness in China has taken prices to levels not seen in a decade. For other regions, we expect a muted recovery for the second half of 2015, with prices remaining low overall.

Sheet: Sheet markets are trying to digest recent anti-dumping filings in Europe and North America. Europe moved first, but now the United States has filed against all three products—hot rolled, cold rolled, and coated (including galvanized). These actions will boost prices somewhat, but we expect domestic mills to increase production as imports are excluded. Added domestic tonnage limits the upside potential for prices. If European and American domestic mills do not increase tonnage then there is upside risk, but that is extremely unlikely based on available capacity and the history of prior anti-dumping cases and company reaction.
The price differential between the United States and other countries has widened once again. The gap is sustainable over the short run as antidumping limits arbitrage equalization between high and low price regions. But eventually buyers will find ways around the trade actions, or consumers in the United States will cut production because of being simply uncompetitive. By late 2016, prices in the United States are likely to suffer mild declines as global prices try to equalize.

Plate: Prices still show increases for the second half of 2015 and across 2016, but the rate and the level are muted. Asian prices are extremely low, deep into loss-making territory. If NAFTA countries do go forward with anti-dumping actions, then their prices will be revised upwards and Asian prices revised downwards. There are rumors of an anti-dumping filing against plate, but it is quite speculative so it is not built into our current forecast.

Structurals: The trough for structurals is expected in late summer/early autumn. A very weak rally should take hold for the latter part of 2015. Costs and the need for profitability argue for sizeable increases, but demand from global construction is weak with outright declines in China. Chinese prices are much lower than in Europe, while European prices are much lower than in North America.

Steel pipe: Pipe prices remain on a downward trend, as weak demand and falling raw material costs make finding a price floor a moving target. Trade restrictions filed on sheet products also complicate the picture, but there is little to suggest prices will find an impetus to rise beyond where they are now for the rest of the year, due to the large amount of inventory overhanging the market. Special bar quality: Special bar quality (SBQ) prices are declining once again. Falling energy demand is outweighing strong automotive consumption. Some capacity is being idled but it is not enough to prevent price declines. It can be argued that declines were overdue since other products had been falling for several years, along with scrap and ore input costs. We do not expect a rout, but there is remaining downside room.

Bottom line: Steel is a buyers’ market and will remain so for most of 2015. Prices should trend upwards over the second half of the year, but they are down so far that a modest rally still means levels will be very low. Watch for trade actions that could add duties to your imports.

Nonferrous metals

The first half of 2015 will be remembered for China finally asserting itself as the driver of base metals prices. China has been the dominant influence in the market for some time, but in January and early July it was events in China and on the Shanghai Futures Exchange—not the London Metal Exchange (LME)—where price formation was found to be taking place. To be sure, LME settlement prices continue to be referenced as the daily measure of market movement, but now these moves are coming more and more frequently in direct reaction to what is happening in China. This is not really a surprise; it has been a change in the making for more than 20 years as China’s share in global consumption has grown, but the baton was formally passed only this year when events in China demonstrated unequivocally that they do not just influence prices, but cause them.

Aluminum: As recently as six months ago the market was expected to record a deficit, which provided some support to prices, but conditions have changed. Transactions prices (LME+premiums) fell well below cost, and therefore to unsustainable levels, in July and remained there in August, There are two problems toward achieving higher prices, however: Chinese production and global inventory. For this reason we expect additional production cuts in the very near future. These cuts will support some sort of lift to prices. This said, LME prices struggle to clear $1,700/metric ton until early 2016 and are not projected to clear $2,000/metric ton until late 2017.

Copper: Prices saw a sharp correction in early summer. The intriguing question for the copper market is now what happens to the metal in China attached to so-called stock financing. This was metal imported over the past two years but not linked to physical use. There is evidence to suggest that these imports, a classic carry trade, were related to domestic and foreign interest rate differentials.
While copper looks fundamentally balanced this year, which should be supportive of prices, the potential return of inventory held in the bonded warehouse zone around Shanghai as the carry trade unwinds could undercut prices. Balancing off these two opposing sets of forces has the forecast looking range bound over the next six quarters.

Nickel: Prices have fallen again, dipping below the cost of production for the majority of producers. Prices have failed to find a bottom and instead continued to track down over the summer, reaching lows not seen since the worst of the economic crisis, and more likely to be found in 2003 than the current decade. These levels were not only below the cost of production of the high-cost nickel pig iron technology, but also below the cost of much of traditional sources of nickel. The excessive stocks and a step-down in demand from the stainless market means there is little reason for prices to recover sharply. So, while prices are well into the industry’s cost-curve, we see prices recovering only slightly before the end of 2015, and see slow upward movement through 2017.

Bottom line: Overall, base metal prices are expected to remain fairly flat for the foreseeable future. Sluggish emerging market demand growth and tighter U.S. monetary policy that dampens investor interest in commodities should offset a general improvement in conditions as global growth slowly accelerates. ■