BEIJING: Commodities will be supported in the months ahead by a global rebound spanning the United States, Europe and China that’s buttressing worldwide demand for raw materials, according to Goldman Sachs Group Inc.
“We’re seeing a cyclical uptick in global economic activity and that’s driving demand, not only for oil but all commodities,” Jeffrey Currie, head of commodities research, said in Hong Kong.
“That’s the core reason why we upgraded our outlook on commodities to overweight,” he said, referring to the bank’s November decision.
Commodities made a comeback in 2016 with the first annual gain in six years as stimulus in China stabilised growth, and oil producers led by the Organisation of Petroleum Exporting Countries (Opec), reversed course to limit supplies.
Currie – who spoke both on Bloomberg TV and to a reporter – said the impact of China’s stimulus will probably last well into the first half of 2017. He added that policies from new US president Donald Trump may reinforce inflationary pressures, aiding raw materials.
“The United States and China are focal points where we’re seeing the uptick but even the outlook for Europe is much more positive than what people would have thought six months to a year ago,” he said, adding: “It’s not what’s happening on the supply side but rather what’s happening on the demand side.”
The Bloomberg Commodity Index advanced 11% last year, with zinc and Brent crude among the biggest gainers. Iron ore jumped more than 80% in 2016 as the stimulus in China helped to sustain steel production in the top producer. The Bloomberg Commodity Index traded 0.4% higher in London, up 1.7% this year.
Goldman isn’t alone in its positive view. Citigroup Inc said last May that the worst was over for commodities, and followed that with a call in December that most raw materials are expected to perform strongly in 2017 as global economic growth picks up and markets rebalance.
The stimulus in China “was substantial and that has a follow-through, it takes time,” Currie said in the Bloomberg TV interview. “We had a lot of credit stimulus last year and that’s likely to be a feature of the market in terms of infrastructure demand growth in the first half of this year.”
China’s economy accelerated for the first time in two years in the final quarter of 2016, cementing the stabilisation, as gross domestic product rose 6.8% from a year earlier. While the full-year expansion of 6.7% was the slowest since 1990, that was still within the official target band.
Growth in China has held up amid positive signs in the United States as well as Europe. Germany’s expansion last quarter may have accelerated more than analysts predicted as 2016 growth climbed to the fastest in five years, according to the Federal Statistics Office. US gross domestic product data are due on Friday.
West Texas Intermediate oil prices surged 45% in 2016, rebounding from a two-year slump. While the recent supply-cut agreement brokered by Opec had seen compliance from producers at about 85%, prices may be capped at around US$60 as other drillers, including in the United States, respond, according to Currie. Most-active prices were at US$53.18 a barrel yesterday.
“I want to emphasise our positive outlook on commodities is not driven by the supply cuts coming out of Opec,” Currie said. “In fact, we would argue that Opec is simply taking advantage of where we are in the business cycle. And that’s the first-order driver of higher commodity prices.” – Bloomberg
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