Growing supply is keeping grain prices low. Oil prices have hit a four-year low; expected to drop even further in 2015 and 2016. Gold prices under increasing pressure, but base metals unaffected.
Cocoa market gripped by ebola fears
Agricultural commodities show a highly varied performance. According to ABN AMRO, overproduction is the most important driver in the grain market, while fears of lower production are impacting coffee and sugar. Coffee and cocoa prices soared, partially because the cocoa-producing countries are the ones most stricken by ebola. Cocoa prices gained over 20%, which brought them to a 3.5-year high in September. A possible ebola-outbreak in Ivory Coast and Ghana could threaten the export of these countries’ considerable cocoa reserves. Extreme drought in Brazil earlier this year will negatively impact coffee harvests in 2015 and 2016.
In energy market, overcapacity is the greatest challenge
Oil prices have declined to a four-year low, and ABN AMRO is expecting them to continue falling in 2015. We will see adverse effects from the combination of downward adjustments to oil demand expectations, structural overproduction and the stronger dollar. These developments will outweigh the upward price effect of geopolitical tensions. The market is expecting OPEC production to be lowered in order to address this oversupply. Meanwhile, however, production in non-OPEC countries will pick up, heading off price increases that would otherwise result from economic growth in especially Asia. Besides, ABN AMRO is expecting higher interest rates and the rise of the dollar to put further pressure on oil prices against this backdrop characterised by overproduction.
Positive outlook for base metals; structural pressure on steel prices
The third quarter of 2014 saw exceptionally weak price developments in precious metals. Influenced by the strong dollar and a rise in US interest rates, investors will continue cutting back on their positions in precious metals. ABN AMRO is expecting gold prices to keep declining in 2015, but assumes platinum, palladium and silver prices will recover in 2015 and 2016. The outlook for base metals is bright as well. Many indicators suggest modest economic recovery which will support demand for base metals. ABN AMRO believes demand for base metals will exceed supply from 2016 onwards, supporting long-term price trends. However, we see the opposite effect in the steel sector, where structural overcapacity is causing ongoing downward pressure on prices. Counting from the start of 2014, steel prices have declined by an average of 5.5% globally. Demand for steel is still relatively weak. All eyes are on China, and investors hope the government will implement economic stimulus measures which would allow steel demand to pick up again.
The full Commodity Outlook can be downloaded here (in Dutch).