Friday, January 23, 2015 13:47 PM / ARM Research
We continue with the serialisation of our core strategy document – the Nigeria Strategy Report. Today, we conclude our review of the global economy and markets with a discussion on trends across soft commodities in 2014 and our outlook for prices in 2015
After the modest rebound in H1 14, global commodities plunged in H2 14, with the SPGSCI commodities index and Jefferies CRB commodities index plummeting 31% and 20%, respectively by year end to five year lows. Declines were underpinned by soft agriculture and metal prices due to slowdown in demand from the Euro area and emerging economies, as well as the strengthening dollar, in a generally well supplied market.
Wheat plunges to 4 year low on bumper harvest
Reversing the modest (+4%) gains recorded in H1 14, wheat prices fell 20% to $245/MT—a 4 year low—in H2 14 buffeted by abundant production from Canada, European Union and Ukraine, which bolstered global supplies and increased stockpiles. Furthermore, reduced probability of El Nino event announced by the Australian Bureau of Meteorology added to the downward pressure on prices. Over the 2014/2015 cycle, developments in various regions suggest supply could falter. In Australia, drought in two states which account for nearly ~30% production could see output drop as much as 14% to 24 million MT.
In addition, below-normal cold weather that is threatening output of hard red winter wheat in the US, Russia and eastern Ukraine could also weigh on wheat output. Indeed, though prices were already responding, rising 3.6% MoM in December 2014, expected bumper harvest of European Union should act as a dampener. Specifically, the USDA projects that EU production will hit a record of 155.4 million MT (+10 million MT) and drive nearly 5 million MT increase in global wheat production to 719.9 million MT in 2014/15. On the other hand, global wheat use is projected to dip to 708 million MT on reduced consumption in Egypt (the world’s largest importer) on the back of government policy that seeks to reallocate subsidy on bread to other food products, suggesting surplus could persist and keep wheat prices soft in the near term.
Malting barley to trend higher on wintery weather
Record output from Russia—the world’s largest producer—as well as increased competition from alternative feed grains drove barley prices to 5 year lows of $185/MT (-12%) over Q3 14. Nonetheless, reports that heavy rains in US and Canada impacted harvests soon fuelled a recovery particularly for malt barley, paring H2 14 declines to 8%, a recovery likely to be sustained in the near term. Specifically, the International Grain Council (IGC) forecast that global production will fall 5% YoY to 138 million MT, largely on reduced production in Canada and US, where cultivation will, respectively, be lowest in 45 years and 3 years as farmers reallocate acreage to competing grains, like corn with higher prices. For demand, the IGC estimates that competition from alternative feed grains is likely to lead to a 3% decline in Barley consumption to 137 million MT over the 2014/2015 cycle. The foregoing which suggests tighter barley market over 2015 coupled with expectation of below normal cold weather in Russia increases scope for an uptrend in prices.
Cheaper energy prices to dampen CPO recovery
On the heels of the 6.8% decline in H1 14, palm oil prices fell 19% over Q3 14 on the back of softer imports from China (second largest importer) and cheaper alternative sunflower oil. Amidst rising political tension between Ukraine and Russia, bumper sunflower oil harvest in these regions has seen farmers aggressively selling crops at a discount. Furthermore, despite both Malaysia and Indonesia introducing ambitious regulations aimed at increasing use of palm-based biodiesel, flaccid enforcement, combined with logistic and infrastructural challenges has limited impact on prices.
However, the removal of export duty by both countries—that jointly account for 80% of production—supported a recovery and pared declines over H2 14 to 11.2%. Going forward, a number of variables could prove to be supportive of palm oil price recovery in the near term. First, production from the two top producers peaked in September, and seasonal decline in production should set in over the next few months. Also, stronger demand from China, which accounts for 13% of global demand, ahead of the lunar holidays, alongside prospects of weak output from Indonesia due to lower rainfall should support prices. However, similar to sugar, oil prices which are at multi-year lows could reduce discretionary demand for bio-fuel (~10% of total CPO demand) and ultimately hamper the recovery in palm oil prices.
In all, while the downdraft in oil prices portends softer earnings outlook for upstream players in the oil and gas sector, petroleum marketers are likely to benefit due to increase scope for margin expansion underpinned by deregulated products. In the FMCG space, expected tightness in the barley market suggests earnings of brewers could come under pressure, even as lower wheat prices, on mounting global surplus, likely drive margin expansion for flour millers. Although the fundamental picture in the sugar market suggests depressed price regime could be sustained in the near term, further downside appear limited by on-going scale back in output from Brazil.
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