- Mined commodity prices are unlikely to recover from recent lows, as China's structural economic transition diminishes the main source of global demand growth.
- Falling input costs and global overcapacity have reshaped the global steel industry: Prices will be lower for longer
- Weak crop prices and low farmer incomes are a significant headwind for fertiliser and seed companies, but we don't expect the breeze will be too strong
Prices for most industrial commodities (for example, coal, copper and iron ore) fell considerably last year and have largely continued their descent in 2015. Slowing Chinese demand has been the common denominator, reflecting a deceleration in construction and industrial production. We view this as a structural slowdown catalysed by overinvestment and rising debt. Although looser credit conditions or fiscal stimulus may succeed in boosting construction and industrial activity, this would likely provide only a temporary respite.
China's structural shift diminishes the main demand growth engine for mined commodities globally. For commodities like copper and iron ore, China accounted for nearly 100% of demand growth over the past decade and now consumes roughly half of global output.
Weak Chinese demand takes a sustained price recovery off the table for most commodities. After updating our outlook to reflect revisions to our oil price forecast and falling producer country currencies, we now expect seaborne thermal coal prices to average $67 per metric ton for the remainder of the decade, down from a $94 trailing five-year average. We see copper prices at $2.46 per pound versus a $3.49 trailing five-year average, and iron ore at $60 per metric ton from an average of $135.
China's economic transition transforms the competitive landscape for the global steel industry. Over the past decade, China's seemingly insatiable appetite for steel had supported global steel prices. Our research suggests China's demand for steel has peaked. The country is likely to increasingly rely on export markets to sop up significant overcapacity at home. Overcapacity in China, combined with lower prices for steelmaking inputs (iron ore, metallurgical coal and ferrous scrap) suggest persistently low steel prices globally.
Low-cost steelmakers that operate with an economic moat are best-positioned to navigate this low-price environment. Steelmakers are no longer able to establish an economic moat through vertical integration alone, and we now favour companies that compete on the basis of raw material conversion costs rather than input costs.
With crop prices low compared with highs of the past few years, farmers' net incomes have come under pressure in North America. The USDA projects that lower prices will result in flat corn and soybean acreage for the 2015 planting season. Producers of fertilisers and seeds should expect a neutral effect on volumes from planted acreage this year. As farmers look to cut costs, this would seem to paint a rather weak picture for seed and fertiliser companies in 2015.
We think the market overstates the headwinds for seed and fertiliser purchases. Although still well below recent highs, corn, wheat and soybean prices did rebound nicely during the fourth quarter of 2014, restoring some farmer profitability. Moreover, yield-improving inputs are usually the last items to get cut from a farmer's budget.
On the fertiliser side, potash producers should continue to benefit from a market that has stabilised since the shake-up caused by Uralkali in the summer of 2013. We think potash prices have bottomed for the medium term, and we're expecting a modest price increase when new contracts are signed with China and India in the first half of 2015.
Flat planted acreage and low crop prices make for a more challenging environment for seed companies. Nevertheless, they should be able to push a modest level of annual price increases with the introduction of higher-yielding technologies.
