CAPITAL MARKETS

Capitulation paves the way for 'disincentive prices'

THE intensity of recent commodity price falls has led Investec to slash its forecasts to "disincentive" levels, which should force out excess supply and deter new investment to rebalance the market.

Kristie Batten
Capitulation paves the way for 'disincentive prices'

“We believe that current markets reflect dynamics not seen since the aftermath of Japanese re-industrialisation in the 1980s,” Investec said.

“Our revised price deck reflects our view that commodity prices will remain at levels necessary to squeeze out a significant portion of current capacity while deterring new investment.

“Consequently, prices are expected to remain well into industry cost curves during our active forecast period.”

Analysts slashed its 2016 nickel price forecast by nearly 37% to $US3.93 a pound and by 44% to $4.50/lb for 2017.

Zinc is now expected to average just 70c/lb this year, down 28.6%, while copper is expected to average $2.20/lb, down 12.5%.The forecast price for iron ore fines has been cut by 29.4% this year to $42.50 per tonne and by 50.6% next year to $40.50/t.

Investec’s 2016 lead forecast is 76c/lb, while its aluminium outlook is 74c/lb.

Gold is expected to average $1135 an ounce, silver $15.24/oz, and platinum $903/oz, while palladium has been slashed by 37% to $516/oz.

“In our view, this is the appropriate forecasting emphasis for the ‘Super Bust’ that has followed the ‘Super Cycle’,” Investec said.

“The world needs little or no incremental supply in most metals, bulk commodities or energy markets, given the rapid expansion of the mining and processing industry in China and elsewhere over the last decade.”

Investec sees no recovery until at least the second half of 2017, given that cost-cutting had prolonged the downturn.

Echoing the words of columnist Dryblower on Monday, Investec said a “Schumpeterian-style ‘gale of creative destruction’ was required to rebalance the market, and restore some semblance of positive margins for surviving producers”.

Investec said although the downgrades were steep, the market had been valuing companies at spot prices for some time, particularly those with heavy debt.

In a positive, most miners had scrapped any future expansionary capital expenditure and were mining existing assets for cash.

As a result of the commodity price revisions, Investec downgraded BHP Billiton to a sell.

“We see further cost-cutting as the only chance to rebuild industry margins,” it said.

“Dividends are expected to be cut heavily, including for industry stalwarts, BHP Billiton and Rio Tinto. There is little reward for equity holders under this scenario.”

Investec’s Mining Clock remains at 3 o’clock – watch and wait, as it expects further asset impairments and credit rating cuts ahead.

“We wait for a significant ‘value event’ (such as a major restructuring) to shock the market into value territory,” Investec said.

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