(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia Dec 21 It's that time of
year when crystal balls get taken out and polished up, but
forecasting commodity markets for 2017 is less certain than
usual given the unpredictability of the three main likely
After a largely stellar year in 2016, the outlook for major
commodities is likely to come down to the actions of Donald
Trump, the Chinese government and the Organization of the
Petroleum Exporting Countries.
Note the word "actions" in the above paragraph, as what
these three players actually do will ultimately have a far
larger bearing than what they say they are going to do.
Take China for example. This year saw most analysts
surprised by the strength of both China's coal and iron ore
imports, which led to rallies in the prices of both commodities.
While there are several reasons for this, the main one is
that many analysts didn't really believe that China would cut
its domestic coal output, but did believe that it would close
excess steel capacity.
By November, China's coal output was down 10 percent
year-on-year, and while steel capacity was cut by close to the
government target, this didn't lead to a corresponding drop in
production, which was up 1.1 percent in the first 11 months of
So, what does this mean for coal and iron ore for 2017,
given that China is the world's biggest buyer of both?
The authorities in Beijing have made their desire for
increased domestic coal output clear, but the miners have so far
struggled to deliver, perhaps because they have been enjoying
the high prices.
But it's likely that domestic output of thermal coal will
rise, at least during the high demand winter and summer peaks,
meaning the price of imported coal will likely have to decline
in order to remain competitive with rising local production.
For coking coal used in steel-making, it's a slightly
different story, as China may well remain short of this grade,
especially if it does heed United Nations sanctions and lower
imports from North Korea.
Steel output is likely to also remain at least steady,
perhaps biased weaker as the domestic property sector cools and
exports struggle against mounting protectionism.
This points to steady iron ore imports, rather than the 9.2
percent gain seen in the first 11 months of 2016. Nonetheless,
iron ore imports are likely to exceed 1 billion tonnes this year
for the first time, and there is optimism that this level can be
maintained, even if prices moderate in order to keep Chinese
domestic output sidelined.
But the main point with China is that much of the rally in
major commodities this year was driven by increased demand, the
first time in five years that demand was the main driver of
prices, rather than excess supply.
But what Chinese policymakers give, they can take away, and
much will depend on how much rationalisation of heavy industries
Beijing undertakes and how much economic stimulus they allow in
order to meet growth targets.
TRUMP, OPEC KNOWN UNKNOWNS
Another X-factor for commodities this year is what will a
Trump presidency in the United States actually deliver.
Investors have increasingly priced in the positive story of
stronger fiscal spending on infrastructure, tax cuts for
corporations and a loosening of red tape on developments.
But they have largely ignored the negative possibilities of
tit-for-tat trade wars with China and other countries, a
crackdown on immigration and a possible escalation of
geo-political tensions given Trump's tendency to shoot from the
It's likely that the market has priced in too much good news
and not enough bad news from Trump, making a re-calculation
likely once it becomes clearer what Trump will actually try to
achieve in economic policy, and how much of this comes to
This may affect the chances of industrial metals like copper
and aluminium having winning years in 2017.
For crude oil and products, much will depend on how well
OPEC and its allies succeed in curbing their output.
Early indications are that once again the burden inside OPEC
will fall largely on Saudi Arabia, and on Russia for the
The Saudis have indicated they will cut oil supplies to
Europe and North America, but appear more reluctant to do so in
Asia, where they are battling for market share against fellow
OPEC producers Iran and Iraq, as well as Russia.
There is also a question mark over how quickly and by how
much U.S. shale drillers can boost output, and also whether
major producers outside the OPEC and allies group, such as
Canada and Brazil, can pump more oil to take advantage of higher
Much like what policies China and Trump will actually
implement, the outlook for crude oil is largely dependent on the
inherently unpredictable actions of some producers.
In effect, accurate forecasting, already something of an
oxymoron, is largely a guessing game in 2017.
The best that can be done is to say that if OPEC is
successful, crude oil prices should stabilise and find a floor
above $50 a barrel.
If China does pursue rationalisation of sectors with excess
capacity while maintaining economic growth of around 6 percent
per annum, it should support coal, iron ore, steel, copper and
perhaps even aluminium.
If Trump does manage to fire up the U.S. economy,
commodities will come along for the ride.
But these are three big "ifs".
(Editing by Richard Pullin)