Market environment in 2016
After years of a downward trend, 2016 saw a price recovery in the commodity market. There is much to indicate that investors may be looking more favorably at commodity markets in the coming years. The optimistic consensus of market analysts is based on a favorable fundamental situation for the commodity sector and anticipated acceleration of the global economic growth.
Key trends on the commodity market of the global economy
2015–2016 were extremely difficult years for the mining industry. Dramatic declines of commodity prices resulted in liquidity problems for many companies, forced them to restructure and to revise or suspend their investments and development plans. Measures undertaken by the mining companies positively affected unit production costs, but insufficient capital expenditure may limit the existing and future supply. The related changes in the fundamentals of the specific commodity markets and a general improvement in expectations as regards the global economy contributed to a more favorable perception of the entire commodity market by investors.
The changing market sentiment resulted in a recovery of commodity prices in 2016. The last quarter brought about a marked improvement in sentiments. Over the course of the year, the Bloomberg Commodity Index (BCOM) increased by 11%, mainly due to the prices of energy commodities (+16%) and industrial commodities (+20%).
The main Bloomberg commodity indexes in 2009–2016
Source: Bloomberg, KGHM
Prices of industrial metal prices in 2016
Source: Bloomberg, KGHM
The stronger global economic growth outlook was one of the main factors which contributed to changes in the segment of investors in commodity markets in 2016. The annual average growth of the global economy amounted to 3.1 percent YoY in 2016, and forecasts for the coming years are 3.4 percent in 2017 and 3.6 percent in 2018.
Source: IMF World Economic Outlook October 2016, KGHM
The fundamental situation on specific markets significantly affected investors’ perception of commodity markets. Market analysts anticipate a limited rate of growth of supply due to insufficient capital expenditure on development projects incurred by producers in prior years when low prices of metals and the difficult financial position of the mining sector resulted in reductions in capital expenditure on development projects. The effects of insufficient investments will be felt in the next few years irrespective of producers’ decisions to resume their investment programs—the permitting and construction of a mine is a multi-year. Limited supply combined with a stable consumption growth in metals should lead to changes in the balances of particular commodity markets towards deficits.
Capital expenditure on new projects and expansion* for specific metals [USD bn]
Source: Wood Mackenzie, KGHM