Commodities seen picking up from next year
New equilibrium between demand and supply being established: Westpac
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New equilibrium between demand and supply being established: Westpac
Andrea Soh
16 April 2014
Commodity prices, especially those of metals and energy, will reach a trough this year and pick up from next year onwards, according to forecasts by Australian bank Westpac.
While metal prices have fallen in recent years, this is an adjustment to the new supply that has come about as a result of earlier higher prices, and is therefore temporary, said its senior economist, Justin Smirk.
“Global growth is still there. We see 2013 as the worst year for global growth. 2014, 2015 and 2016 will get better,” he said.
The recent shadow on commodity prices cast by jitters about China’s economy - the largest consumer of commodities ranging from iron ore to soybean - does not change the long-term growth trajectory for the country, and its continued appetite for resources, he added.
“You don’t get a true sell-off or a true long-term downtrend until China and the emerging markets move from development stage to consumer-driven income stage.
“On a total basis, China is incredibly large and wealthy, but on a per capita basis, it’s still far away... Until they become a consumption-based society, they have an abnormally high demand for resources relative to goods and services.”
Concerns over shadow banking in China may create a short-term shock, but does not sway his long-term view on China’s economy. Its demand for resources also means that the commodities supercycle will continue, Mr Smirk believes.
Giving his view on the debate that many are still divided over, he said the supercycle is not over, but is maturing and establishing a new equilibrium between demand and supply.
On gold, which has defied bearish forecasts to climb 9 per cent so far this year to US$1,310 an ounce, Mr Smirk foresees it recording another year of decline.
Gold is expected to reach US$1,025 an ounce at the end of this year in his forecast, though it will climb higher from early next year.
“We don’t have a high inflationary environment, and liquidity is still going to unwind,” he said. “I think gold is going to underperform (other commodities).”
Mr Smirk, who is based in Sydney and has been with Westpac since 1999, is the second most accurate bullion forecaster over the past two years, according to Bloomberg.
Gold prices will progressively increase to reach US$1,170 an ounce in September next year in his view. “We see commodities coming through in 2015, and gold following that,” he said.