Dec 21 – If 2015 was the year in which the growing oversupply of key commodities led to a rout in prices, will 2016 bring the point of capitulation, leading to consolidation and the start of recovery?
That would certainly be the hope of many beleaguered commodity producers, be they members of OPEC, shale gas drillers in North America or the big companies that bet their futures on what they thought would be China’s endless appetite for coal, iron ore, copper and liquefied natural gas (LNG).
But the problem with hoping for a rationalisation of supply is that everybody wants someone else to shut down or cut production. Everywhere in commodity markets, producers are still following the tactics that have largely failed for the past few years.
That is to cut costs while increasing output, in order to keep, or increase, market share while lowering the unit cost of production.
This is a great strategy as long as your company is the only one able to pursue it successfully, but if everybody is able to do it, all that happens is prices continue to fall as more supply hits the market.
Coal is probably the major commodity most advanced in this process, with 2015 representing a fifth year of declining prices that has seen the Asian benchmark Newcastle index lose almost two-thirds of its value since January 2011.
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