Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

What commodities will look like in 2016

The credit of commodity-linked firms has become one of the biggest risk in global markets

No asset class has had it as bad in 2015 as commodities. Economies and firms have struggled to stay afloat as prices have fallen to unforeseen levels. The credit of commodity-linked firms has become one of the biggest risk in global markets. The good news: Most say it can’t get worse. The bad news: No one knows when it will get better.

TRENDS TO WATCH

Prices to stay depressed

Optimistic forecasts say 2016 will mark the bottom of commodity prices. Pessimists see the depression in prices continuing. But if this is the trough that follows the commodity supercycle, then the recovery may take longer as these cycles often span out over years. That doesn’t rule out the possibility of short-term price spikes along the way.

Retrenchments

As commodity prices have fallen, companies have been forced to cut back in staffing to contain costs. At the same time, other trends have been witnessed at commodity companies such as better technology, fading unionization and leaner operations, which have led to the requirement of fewer people at these firms.

Mergers and acquisitions

Quite a few companies put parts of their operations on the block in 2015. For example Tata Steel has been trying to sell its long products plant in Europe; Stemcore has been trying to sell its Indian plants and mines. The Aditya Birla Group has been trying to sell off its copper mine in Australia. Will there be any buyers for these assets in 2016? Or will firms be forced to write off these investments?

Capacity cuts

The market will watch out for capacity reductions in the new year, which will give a better idea of how extended firms expect this slump to be. In 2015, several mines, or operating units, were closed globally. In India, a number of commodity-linked firms are operating well below capacity. Unless capacity utilization picks up, more cuts, even in countries such as India, could be in the offing.

The El Nino effect

El Niño, the weather pattern that brings drought to Australasia, led to a below normal monsoon in India impacting crops and reducing water levels. Will this impact grains stocks and prices in 2016? A World Bank report dated October 2015 says the El Niño episode is unlikely to cause a spike in global agricultural prices given ample supply of major agricultural commodities, weak links between global and domestic prices, and limited impact of past episodes. But India is seeing higher food inflation and if production is not normal in 2016, this could be a worry.

COMPANIES TO WATCH

Petrobras

Brazil’s state-run oil company Petrobras came to represent the worst of the global resources sector. Petrobras, that has the largest debt in the global oil industry, is looking to aggressively sell its assets to try and become more viable. If commodity prices remain low for an extended period of time, it is possible that others would also look at asset sales.

ArcelorMittal

The world’s largest steel producer in under pressure to cut back on capacity but has not gone down that path yet. The company is making losses, but is keen to maintain its market share, a senior official has been quoted in press reports as having said. At the same time, the stress in the sector gives large firms an opportunity to consolidate by buying stressed assets.

Rio Tinto

Iron ore prices have fallen by half in 2015, leaving firms such as Rio struggling. In December, the firm cut its capex plans for a second time in a year. Still Sam Walsh, the head of the company, feels that the iron ore industry will bounce back as the price fall pushes high cost production out of the market.

Vedanta

Watch out for this oil and metal major as it continues to look for bauxite for its heavily-invested aluminium plant in Odisha and tries to fight off with cheap aluminium imports from China. If the government does not address raw material security and cheap imports in 2016, it would mean status quo for Vedanta’s metal plants in India that are running at below capacity. It could then be seen focusing on new businesses such as renewable energy that its chairman Anil Agarwal has spoken about.

Baosteel

Watch out for what Chinese steel giant Baosteel does with its production in 2016. Will it cut it or will it not? US, Japan, and Europe have cut their steel production and China will eventually get there, AFP quoted Baosteel chairman Xu Lejiang as having said on 9 December. But China, the largest steel producer in the world, may be less inclined towards cutting output as it has succeeded in exporting vast amounts of steel. In 2016, many nations, including India, may fight back against cheap imports.

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