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COMMODITIES OUTLOOK 2016 • Seven (possibly) magnificent commodity bets for

2016 • OPEC producers bearish on oil in 2016 as

oversupply persists • Oil industry slipping into the red as outlook dims • Survival of fittest for commodities shipping firms

in 2016 • As supply risks rise, wheat and vegoils set to

rebound in 2016

• A glimmer of hope for copper bulls in 2016? • Hoping your rivals will die - The 2016 commodity

story • Goldman cuts crude outlook and oil company

forecasts • China commodity outlook brightens, but beware

caveats • U.S. shale giants turn to 2016 with somber outlook

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as $6.60 per million British thermal units in October. The knife may have further to fall, given the increasing amounts of new LNG hitting the market from Australia and the United States. 6. China will be able to export more steel and aluminium in 2016 despite rising protectionism. While the trend towards slapping duties on Chinese exports of steel and aluminium is likely to accelerate in 2016, it's also likely that the Chinese will be able to still ship more as anti-dumping measures tend to work with a lag. It's also possible that even with increased tariffs, Chinese products will still be competitive in some markets. 7. There will be a major resource bankruptcy in 2016. So many commodity producers have been holding on for so long waiting for a turn in the market that it would seem inevitable that somebody's fingernails will eventually break. Even if everybody manages to cling on for another year, a side bet could be that if there isn't a bankruptcy, there will be some forced mergers and acquisitions.

COMMODITIES OUTLOOK 2016

I t's always tempting for commodity analysts to issue forecasts for the coming year, even though we intrinsically know that the future is inherently uncertain and even the most reasoned expectations can be easily confounded by events.

With that in mind, and with a nod to my fellow Australians' love of a punt, I've decided rather to do a list of bets I may be tempted take in commodity markets in 2016, assuming I was allowed to wager. 1. Crude oil will trade both below $30 a barrel and above $60 in 2016. Logic and momentum suggest the first part of this bet is a no-brainer, with both Brent and WTI crude already having tested below $35 a barrel. The second part relies on history repeating itself insofar as when the bottom is reached, the rebound tends to be rapid. 2. Thermal coal will snap five years of losses in 2016. Coal has been unloved for so long, but it is also further down the path of supply rationalisation than other commodities. Using Australia's Newcastle spot index as the benchmark, there may just be room for optimism on the view that demand for higher-grade coal in Asia will remain solid, even in China, and supplies certainly won't be growing much, if at all. 3. Iron ore won't drop below $30 a tonne in 2016. This is a bet which may seem risky, given iron ore remains vastly over-supplied and demand growth in China is likely to remain muted, given the surplus of steel. However, the point of maximum pain for several producers outside the big three of Vale, Rio Tinto and BHP Billiton, is likely to be reached before the Asian spot price can fall below $30 a tonne. 4. Rio Tinto and/or BHP Billiton will have new chief executives in 2016. This bet is premised on the view that iron ore prices won't rise much, even if they do hold above $30 a tonne. Weak prices will slam the profits at the two Anglo-Australian miners, and if they are forced to cut dividends, the combination of angry shareholders and still no sign of rebounding commodity prices will probably be enough to claim some scalps. 5. Asian spot LNG prices will drop below $6 per mmBtu in 2016. It's been one-way traffic for spot LNG prices in Asia, which fell as low

Seven (possibly) magnificent commodity bets for 2016: Russell

Pump jacks are seen in the Midway Sunset oilfield, California, April 29, 2013. REUTERS/Lucy Nicholson

Vessels are anchored near Shell's oil facility on Pulau Bukom (top), off the southern coast of Singapore. REUTERS/Tim Chong

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billions of dollars in impairment charges. With 10 of the top 20 European and North American oil and gas producers having reported third-quarter results, seven have posted losses. These include Royal Dutch Shell, Eni and in North America Occidental Petroleum Corp, Anadarko Petroleum Corp, Hess Corp, Suncor and ConocoPhillips. DOWNWARD REVISION About half of Shell's charges reflected a downward revision of the long-term oil and gas price outlook, CEO Ben van Beurden said. Net profit excluding identified items collapsed to $1.8 billion from $5.85 billion a year ago. Eni posted a net loss of $1 billion and France's Total had a sharp drop in profit, though its results were stronger than expected. ConocoPhillips, reported a quarterly loss of $1.1 billion and lowered its 2015 spending target 7 percent. Smaller companies also showed signs of pain. Marathon Oil Corp slashed its quarterly dividend 76 % to preserve cash as it tries to weather the slump. "The sector is rapidly moving into the red," Jefferies oil and gas equities analyst Jason Gammel said. "It is slowly going to claw its way back into the black through cost-reduction efforts, but

prices rising to the range of $50s a barrel by 2017. "I think the market is moving towards reaching the lower end which is probably $35 range and then the market will bounce back slowly but remaining weak ... You can't expect the $35 for long, because fundamentally nothing has changed in the market," this delegate said. "By the second half of next year it will show the real recovery. Then by 2017 you will have a more stable market," the delegate added. "But this is subject to the Iranian crude, when it will come and by how much."

COMMODITIES OUTLOOK 2016

OPEC producers bearish on oil in 2016 as oversupply persists

O PEC producers see little chance of significantly higher oil prices in 2016 as extra Iranian production could add to surplus supplies and the prospect of voluntary output restraint remains remote.

OPEC delegates, including those from Gulf OPEC members, say higher oil prices are not around the corner yet, despite further growth in global demand and as a rise in non-OPEC supply is tempered by prices that have more than halved in 18 months. Some see a more balanced market by 2017 even though they expect further pressure on oil which could send prices to test the mid-$30 a barrel range on market sentiment rather than fundamentals, before slowly rebounding by the second half of next year. "In the first half of next year, prices will be under pressure from supply being above demand and concern about Iranian supply," said an OPEC delegate from a major producer. "With the current low prices, I find it very hard to predict prices at more than $40-$45 for Brent in the whole year. I don't think it will reach $60." "You cannot be optimistic in such market conditions, keeping in mind that today Brent is below $39 a barrel," said a second OPEC delegate, from a non-Gulf member. "I believe that 2016 is not going to be any better than 2015 with an average of $50 at the most unless OPEC takes action to decrease production, which is unlikely." "We are betting on cutting oversupply from high-cost producers," a third OPEC source said. "2017 is more promising to give some support to the market." "But we need to monitor Iranian exports too. When will they be able to pump more," this source said, adding that he sees

Oil industry slipping into the red as outlook dims

T he oil sector is slipping into the red after years of fat profits as the steep slump in oil prices shows little sign of ending, with this quarter shaping

up to be the worst since the downturn started. The world's top oil companies have struggled to cope with the halving of oil prices since June 2014. They have cut spending repeatedly, made thousands of job cuts and scrapped projects. The lower-for-longer outlook for oil prices took its heaviest toll yet in the third quarter as oil companies again reported a dramatic drop in income. Some saw results swing into the loss column, and the industry had

A table with OPEC logo is seen during the presentation of OPEC's 2013 World Oil Outlook in Vienna. REUTERS/Leonhard Foeger

An offshore oil platform is seen in Huntington Beach, California. REUTERS/Lucy Nicholson

that will take time. It will depend on price movements, but it will take time to get all these cost savings through the system." Even after cost efficiencies and spending cuts, European oil companies on average will require an oil price of around $78 a barrel in 2016 to cover spending and dividend payments, according to Jefferies estimates before the latest results. MORE DEBT Companies are also tapping the debt market, benefiting from a relatively low debt ratio that will allow them to cover spending and dividend payments that, except for Eni, have remained unchanged. BP increased its debt ratio to 20 percent from 15 percent a year ago after agreeing in July to pay $20 billion in fines relating to the 2010 Gulf of Mexico oil spill. Europe's majors have reduced 2015 spending programmes about 15 percent to near $107 billion, and more cuts are seen next year. Norway's Statoil posted worse than expected third-quarter core earnings and said it would slash capital expenditure further. BP, like Total, posted a sharp fall in profits but beat analyst expectations, citing efficiencies, higher oil production and strong refining results.

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struggles to find a new equilibrium," said Robert Perri of Axia Capital Markets. DIVERGING FORTUNES By contrast, demand for oil tankers and the rates they command have surged to their highest levels since 2008 in the past three months. Dry bulk shipping markets have been hit hard by a slide in demand for coal by China, which is also trying to ease its dependence on the polluting fuel and meet environmental pledges. But the country has been looking to boost strategic reserves of crude, taking advantage of multi-year lows in prices, which has helped the oil tanker market rally. Oil tanker players have been more conservative since 2008 in ordering ships as they experienced rock-bottom rates that saw earnings falling below zero as recently as last year, meaning owners clocked up losses every day. The scrapping of tankers, which picked up in 2011, has also shrunk the fleet. Average earnings for supertankers hauling 2 million barrels of oil on the benchmark Middle East Gulf to Japan route have surged to over $110,000 a day. In contrast, average earnings for capesize ships, among the largest vessels used to haul coal and iron ore, have slumped to under $5,000 a day in recent weeks – below the basic operating cost level a ship needs to break even, which is around $8,000.

Reuters/Core Commodity CRB Index, which tracks the prices of 19 commodities including oil and grains, to its lowest level since 2002. "There is no doubt that the overall macro situation is one that does not engender a lot of confidence for increased trade flows in 2016 and beyond," said Khalid Hashim, managing director of Precious Shipping, one of Thailand's largest dry cargo ship owners. Worsening conditions have already claimed casualties. Japanese bulk carrier Daiichi Chuo Kisen Kaisha filed for protection from creditors, and private equity backed Global Maritime Investment Cyprus Ltd filed for Chapter 11 bankruptcy protection in the United States. Smaller dry bulk ship owners are expected to struggle in coming months. "There are clearly big problems for almost all dry bulk owners, certainly those who cannot subsidise dry bulk through ownership in tankers. Debt can only be serviced through reserves of capital and not from cash-flow," said Tony Foster, chief executive of British shipping asset manager Marine Capital. Analysis from Axia Capital Markets showed the cumulative loss of revenues for 13 shipping companies publicly listed in New York reached over $3.36 billion in the first nine months of 2015. "Given the current oversupply of vessels in the marketplace that has built up over the past five years, we expect rates to remain at depressed levels for at least two more years as the market

COMMODITIES OUTLOOK 2016

Survival of fittest for commodities shipping firms in 2016

S hipping companies that transport commodities such as coal, iron ore and grain face a painful year ahead, with only the strongest expected to

weather a deepening crisis caused by tepid demand and a surplus of vessels for hire. The predicament facing firms that ship commodities in large unpackaged amounts - known as dry bulk - is partly the result of slower coal and iron ore demand from leading global importer China in the second half of 2015. The Baltic Exchange's main sea freight index - which tracks rates for ships carrying dry bulk commodities - plunged to an all-time low this month. In stark contrast, however, tankers that transport oil have in recent months enjoyed their best earnings in years. As crude prices have plummeted, bargain-buying has driven up demand, while owners have moved more aggressively to scrap vessels to head off the kind of surplus seen in the dry bulk market. Symeon Pariaros, chief administrative officer of Athens-run and New York-listed shipping firm Euroseas, said the outlook for the dry bulk market was "very challenging". "Demand fundamentals are so weak. The Chinese economy, which is the main driver of dry bulk, is way below expectations," he added. "Only companies with very strong balance sheets will get through this storm." The dry bulk shipping downturn began in 2008, after the onset of the financial crisis, and has worsened significantly this year as the Chinese economy has slowed. The Baltic Exchange's main BDI index - which gauges the cost of shipping such commodities, also including cement and fertiliser - is more than 95 percent down from a record high hit in 2008. "The state of the dry bulk market especially indicates that economies worldwide are likely to stay weak, much to the disappointment of central banks ... FX traders, miners, steel makers, trading houses, and commodity economies," said Basil Karatzas, head of New York consultancy and brokerage Karatzas Marine Advisors & Co. Ratings agency Fitch downgraded the shipping sector to negative, from stable, this month due to slowing global trade and an economic slowdown in emerging markets, adding that dry bulk would remain under pressure. COMMODITY PRESSURE Slowing demand and concerns over the health of the Chinese and global economies have pushed the 19-commodity Thomson

Coal produced by Berau Coal is being loaded onto a ship in Indonesia's East Kalimantan province. REUTERS/Yusuf Ahmad

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dry weather across Asia, unhinging supply chains of commodities. Wheat and palm oil prices had soared more than 40 percent in 2010, partly due to an El Nino. Oil palm trees take about nine months to show stress due to drought, indicating that the impact of the current El Nino on yields in top producers Indonesia and Malaysia will be evident in the second half of 2016, analysts said. This will buoy prices because around the same time India will be hungry for more edible oil and Indonesia will be using larger volumes of palm oil to make biodiesel, they added. "We are bullish on vegetable oil, our view is India will be importing record volumes because they have issues with their rapeseed crop," said Adam Davis, a senior analyst at Merricks Capital, a Melbourne-based fund that manages $350 million. "Increases in biodiesel demand in Indonesia and changes in U.S. legislation will mean more use of vegetable oil." Indonesia has been pushing for greater use of biodiesel to cut its fossil fuel import bill and create more demand for palm oil, while a renewal of a U.S. biodiesel tax credit would lead to a rise in soyoil uptake for blending purposes in the country. But slowing economic growth in major vegetable oil consumer China and a move by big soybean producer Argentina to reduce export taxes are likely to keep a lid on prices. "China's pace of soybean imports has been strong in the past few years. It might take a breather next year," said Deane.

the stocks built up from bumper global harvests over the past four years. "It is going to take a major weather event somewhere to get the market going, that could be a year or two down the track." For now, however, the El Nino will underpin prices, with production in the world's No.4 exporter, Australia, down by 15 percent this year due to the weather event. PALM OIL PRICES TO RISE The El Nino, or a warming of sea-surface temperatures in the Pacific, usually leads to

COMMODITIES OUTLOOK 2016

As supply risks rise, wheat and vegoils set to rebound in 2016

A fter suffering a market drubbing this year, agricultural commodities could see some green shoots of recovery in 2016 as higher

consumption, biofuel mandates and unfriendly crop weather drive up wheat and vegetable oil prices from multi-year lows. Yields for both farm commodities are already on the wane, with dryness linked to an El Nino weather event and unseasonal rains covering key growing areas in the Black Sea region, Southeast Asia, India and Australia. Responding to the threat to supply, benchmark wheat prices have risen 7 percent from their lowest since June 2010 hit earlier this month, while palm oil futures have surged almost 30 percent from a six-year trough plumbed in August. "We could easily see a 10 to 20-percent rally in wheat prices," said Paul Deane, senior agricultural economist at ANZ Bank in Melbourne. "The market at some point in the next three months is likely to get excited over the Black Sea and Indian crops, you could get a bit of spike." India, which accounts for more than 10 percent of the global wheat output, is set to see a second consecutive annual drop in production next year. Traders have started talking about higher imports after the country in 2015 made its largest purchases in more than a decade. But the wheat market's gains may not be sustainable, ANZ's Deane cautioned, given

A worker collects palm oil fruit inside a palm oil factory in Sepang, outside Kuala Lumpur. REUTERS/Samsul Said

A farmer harvests wheat in Visalpur village, on the outskirts of the western Indian city of Ahmedabad. REUTERS/Amit Dave

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tonnage away from annual sales into shorter-dated or even spot trades. Compounding the fracturing of the old annual benchmark system has been the proliferation of new mines producing "dirty" concentrates with high levels of unwanted by-products such as arsenic. These are priced at a discount to "clean" concentrates and often have to be blended before being sold to smelters, adding a layer of intermediate complexity to the old pricing model. But if you want a feel for what's happening in the copper raw materials market, deals such as that inked between Antofagasta and Jiangxi are as good an indicator as you're going to get. And this one suggests there are going to be fewer concentrates around next year than widely anticipated. That's why Jiangxi is going to receive less treatment revenue than it, and other Chinese smelters, were probably hoping for. And, it's worth stressing, charges have fallen despite the fact Chinese smelters plan to cut production by 200,000 tonnes next year with a flow-through impact on their raw materials needs. COPPER SUPPLY - PREDICTABLY UNPREDICTABLE So what's happened to the expected supply surge? As ever with copper, supply has turned out to be predictably unpredictable. World mine production increased by 3.0 percent in the first eight months of this year, according to the ICSG. Which by copper's standards is a fair pace of growth, just not as much as everyone was expecting. In October last year, the ICSG forecast mine growth of 6.7 percent this year. At its April 2015 meeting, that figure was slashed to 4.4 percent and it was cut again to 1.2 percent in the ICSG's most recent forecast. Such downward revisions partly reflect accumulating production cutbacks as miners react to lower prices, cuts which largely haven't shown up in the ICSG's figures for the first eight months of the year. Freeport, for example, has just announced the complete mothballing of its Sierrita mine in Arizona, taking another 45,000 tonnes of annualised capacity out of the market. However, the really big cuts taken by both Freeport and Glencore are to their SX-EW mines, which produce refined metal, not concentrates. As such they shouldn't in theory affect smelter treatment charges. As important as price-related cutbacks to the concentrates market have been, the multiple unforeseen production hits arise from

evidence that the supply chain is starting to tighten, very much against consensus expectations. A FRACTURED BENCHMARK The evidence comes in the form of the first major 2016 copper concentrates supply deal signed between Chilean miner Antofagasta and Chinese smelter Jiangxi Copper. Treatment and refining charges have been set at $97.35 and 9.735 cents per lb, which is what Jiangxi will charge for transforming Antofagasta's concentrates into refined metal. The level of charges has come as something of a surprise. This year's were set at $107 and 10.7 cents and Chinese smelters were looking for something similar for next year, not unreasonably given that big new mines are still ramping up with commodity text-

book bad timing. Of course it remains to be seen whether this deal serves as a benchmark for other miners and smelters. Antofagasta has not in the past been associated with setting the annual benchmark. That role has been played by Freeport McMoRan, which is presumably still negotiating with smelters. Moreover, the whole concept of an annual benchmark in the copper concentrates market has become increasingly questionable. BHP Billiton, which used to be the benchmark leader, has shifted ever more

COMMODITIES OUTLOOK 2016

A glimmer of hope for copper bulls in 2016? Andy Home

I t's been a tough year for copper bulls. One of the industrial metals most associated with the boom years in China has been hit hard by the country's lurch

away from its previous fixed-asset investment growth model. Talk of the "new normal" and of a Chinese "slowdown" doesn't capture the severity of the demand shock experienced by all the metals, copper included. On the London Metal Exchange the price of three-month copper peaked at $6,481 per tonne in early May, since when it's ground steadily lower to a current $4,550. The best that can be said is that copper hasn't fared as badly as other metals such as nickel, which is back at the bombed-out levels seen at the worst of the global financial crisis. Copper is some way off its 2008 trough below $3,000, although that may only

encourage more bear attacks, particularly in China, where shorting metals has become the hot trade for expressing a negative view on the country's economic prospects. The demand "slowdown" in China has been exacerbated by a supply surge. Again this is not unique to copper. Producers of just about every metallic commodity were still chasing China's "old normal" of rapid infrastructure-fuelled growth even as that model was unravelling. But if there is a glimmer of hope for copper bulls next year, it lies in copper's infinitely unpredictable supply dynamics. Because this week has brought tangible

Port workers check a copper shipment that is to be exported to Asia, in Valparaiso port, northwest of Santiago. REUTERS/Rodrigo Garrido

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global trade, Brazil's Vale and the Anglo-Australian pair of Rio Tinto and BHP Billiton, have managed to lower costs so much that they can still make decent profits. Iron ore has become a race between who can last longer, the big three's higher-cost and smaller rivals, or the patience of shareholders angered by a collapse in the value of their investments and concerned about the increasingly likelihood of cuts to dividends. The chief executives of the large miners will be hoping that supply will be cut as smaller companies are forced from the market, but even if this does happen in 2016, it's possible that not enough supply will leave the market to allow for a recovery in prices. While Vale, BHP and Rio can still make profits at this price, it's unlikely they can make enough to keep increasing the dividends to shareholders. If companies such as Rio and BHP are forced to curb payouts to shareholders, expect to see leadership changes as the current management has repeatedly said dividend policies will be maintained and the tactic of dominating the market with low-cost supply will eventually work.

WAITING FOR YOUR RIVALS TO DIE Another group of increasingly nervous producers are those in the Organization of the Petroleum Exporting Countries, as they also await the exit of higher-cost crude from the market. While top OPEC producer Saudi Arabia still has sufficient financial reserves to weather another year of low prices, the budgets of other countries, such as Venezuela and Angola, are starting to look increasingly vulnerable. Fiscal and economic turmoil generally leads to political upheaval, and if low prices persist, it's likely that the populations of many of the weaker commodity producing countries will become increasingly restless. But like coal and iron ore, hopes for a rationalisation of crude supply may be optimistic, especially in the light of Iran's

COMMODITIES OUTLOOK 2016

everything from low grades, technical outages and, in the case of Chile earlier this year, heavy rains. New mines, meanwhile, have been plagued by the usual start-up delays. To take just one of many examples, the Caserones mine in Chile, with full potential capacity of around 150,000 tonnes per year, is going to struggle to meet even its already downgraded target of 64,000 tonnes this year. MORE OF THE SAME NEXT YEAR? And the combination of price-related cuts and chronic mine underperformance looks set to continue to constrain supply next year. Citi analyst David Wilson notes that heavyweight research house Wood Mackenzie has been steadily revising

Hoping your rivals will die - The 2016 commodity story: Russell

I f 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 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. Yet, despite this massive loss in the value of coal, output hasn't declined significantly in major exporters such as Australia and Indonesia, with cost-cutting and weakening currencies allowing producers to keep mines open. This dynamic is also playing out in iron ore, where the big three miners that dominate

downwards its mine growth projections for next year from 6.4 percent at the end of March to a current 1.4 percent. That's equivalent to around 1.2 million tonnes less copper. ("Copper - 2015 supply surge evaporates", Dec. 8, 2015). Then there is China's own mined production. No one likes the official figures from the National Bureau of Statistics (NBS), which are notoriously inconsistent. To the point that the NBS is not actually going to release any data for November due to "technical reasons". But the trend in copper mine production in China was steadily downwards over the first 10 months of this year. Which makes sense because parts of China's copper mining sector are thought to be relatively high-cost

and, excepting those integrated into state producers, highly price-sensitive. Falling domestic supply and less overseas supply than expected appear to have forced Jiangxi to bite the bullet on accepting lower treatment fees for next year. None of which is to say that the price of London copper, which is the price of refined metal, will miraculously recover any time soon. There is still the not-so-little problem of weak demand, particularly that in China. But copper's market balance is ultimately determined by what comes out of the ground, and this early 2016 deal between Antofagasta and Jiangxi suggests there is going to be less copper coming out of the ground next year than everyone thought.

A coal pile sits before being loaded onto ships for export in Newcastle. REUTERS/Mick Tsikas

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COMMODITIES OUTLOOK 2016

likely boost to output as Western sanctions are lifted and plans for increased exports from neighbouring Iraq. The coal and iron ore experience also make it likely that U.S. shale oil drillers, and other higher-cost producers such as Canadian oil sands, will be able to cling on for longer than the market generally expects them to. If many commodity producers are waiting for their rivals to go out of business, LNG producers will be dreading the arrival of new competitors, as both Australia and the United States ramp up output of the super-chilled fuel. Similar to other commodities, LNG struggled in 2015 and is less than a third of what it was at the peak in February 2014. It's hard to build anything other than a bearish case for LNG, given the new plants

are likely to run at close to maximum rates no matter what the price, as they need cash to repay the enormous capital investment. Oversupply also plagues beneficiated commodities, such as steel and aluminium, with too much capacity remaining online in China as loss-making companies are allowed to survive because politics trumps economics. Like other commodities, this isn't a new situation and oversupply has been building for some time. While 2015 was the year that the excess capacity finally hit home, it is far from certain that 2016 will be the year of capitulation. It may take another year of producers grimly hanging on before they start to topple over, and if history is any guide, it always takes longer for the point of maximum pain to be

reached than the market anticipates. Many resource companies will be hoping for a slightly better demand profile in 2016, especially if China's spending on infrastructure and housing construction does pick up in tandem with a slightly brighter economy in the rest of the world. But demand isn't the main issue for commodities, and even the most optimistic scenarios for the global economy are unlikely to spur enough consumption to overcome excess supply. If commodities are to stage any sort of recovery in 2016, it's likely to take the form of a fairly brutal first half followed by a brighter second, but this scenario only holds if sufficient supply is forced from the market because of ongoing low prices.

"sell" from "neutral", citing long-term dividend risk for BP and cashflow pressure on Statoil. Last week the U.S. investment bank described a recent rally in oil prices was "premature", adding that a weakening of

prices is required for a rebalancing of the market to resume. Goldman Sachs said it assumed a $5 a barrel spread between Brent and U.S. crude, which is also known as WTI, through 2016-2020.

Goldman cuts crude outlook and oil company forecasts

G oldman Sachs has cut its long-term crude oil price forecasts and recommended investors sell shares in two major oil companies, saying

that improved U.S. shale efficiency and higher production from OPEC will more than cover future demand. The U.S. investment bank's equities team, in a note published on Saturday, raised its projection for the average Brent crude oil price this year to $58 a barrel from $52 and lifted its outlook for U.S. light crude futures to $52 a barrel from $48. But Goldman, closely followed investors including large pensions and hedge funds, said it expects Brent to fall over time, reaching $55 a barrel by 2020. "We lower our Brent oil price assumption to $60-$65 for 2016-2019, falling to $55 for 2020," Goldman said. "We see global oil demand being met by U.S. shale, which is continuing to benefit from efficiency and productivity improvements, and OPEC," the bank's note to clients added. Goldman said that this "lower-for-longer oil price" would "put significant pressure" on integrated oil companies, forcing a rethink on dividends. "As a result, we downgrade the sector outlook to 'cautious' from 'neutral'," it said. The bank downgraded BP and Statoil to

An oil pump is seen near Bakersfield, California. REUTERS/Lucy Nicholson

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COMMODITIES OUTLOOK 2016

may not be enough to soak up the supply overhang of many commodities. The Chinese steel sector has at least 200 million tonnes of unused annual capacity, possibly more, and weak domestic demand has resulted in mills trying to export surplus production. Outbound shipments of steel have thus jumped 27.2 percent in the year through September from the same period last year. It's a similar story for aluminium, with China's smelters increasing exports by 17.7 percent in the first nine months of the year compared to the same period in 2014. This means that even if domestic Chinese consumption picks up, it may not be immediately apparent in demand for imports of raw materials such as iron ore and coking coal. Import demand for these commodities should at least stabilise, however, and may start to show stronger growth over the course of 2016. Iron ore imports were flat in the first 9 months of 2015, while unwrought copper imports were down 5.5 percent - although copper ores and concentrates gained 9.3 percent as China increased its own smelting capacity.

Coal remains unloved, with imports dropping nearly 30 percent in the first nine months of the year. The decline, though, is mainly driven by policy changes aimed at curbing use of the polluting fuel in coal-fired power stations. The other caveat is that even if demand does pick up for commodity imports, it may not be accompanied by a rally in prices. Many commodities still remain in structural oversupply following the overbuilding of capacity by resource companies in the past decade. Iron ore and coal are perhaps the most obvious examples, but they are about to be joined by liquefied natural gas. The crude oil glut also looks set to hang around for the rest of the year and most likely for most of 2016. While it may not herald a resurgence of the boom years, the fifth plenary should challenge the view of many in the market that China's commodity story is largely history. It may not be as spectacular as in the past decade, but a more mature and steady China looks as if it will do its part to rescue commodity producers from the folly of overbuilding.

China commodity outlook brightens, but beware caveats: Russell

L ost amid the headlines about China's decision to end its one-child policy was news that points to a brighter medium-term outlook for commodity

demand in the world's biggest consumer of natural resources. While all the nitty-gritty details of the ruling Communist Party's fifth plenary have yet to be published, the world of commodities should note the commitment to double gross domestic product and per capita income by 2020 from 2010 levels. This should go some way towards alleviating fears that China's economy is in structural decline, as achieving those goals will require ongoing urbanisation to boost earnings to a level where China could be considered a middle income country. While it's no secret that Chinese leaders want to see an economy led by more sustainable consumer spending, in order to get there the country needs consumers with higher disposable incomes, and this means city-based jobs, whether these be in services such as finance or in manufacturing. China's per capita GDP is currently around $6,000, or less than a sixth of the $50,600 a person in the United States. A more valid comparison would be to a country like Malaysia, which has a per capita GDP of about $10,500. Achieving per capita GDP similar to Malaysia would allow China to become more consumer-led, while still enjoying a large export-focused manufacturing base. The key question is how Beijing will go about its aim of getting per capita GDP to something closer to $10,000 in the next five years. It's hard to see any way to achieve such levels of economic growth without a large programme of infrastructure and housing construction. This makes it all the more likely spending taps will be fully opened in the next few months, with a consequent boost to demand for industrial commodities such as steel and copper. But, as usual, there are caveats in this positive scenario for commodity demand in China. OVER-CAPACITY, OVER-SUPPLY REMAIN The first is that even an acceleration in demand for infrastructure and construction

Employees work at a factory of Dongbei Special Steel Group Co. Ltd. in Dalian, Liaoning province. REUTERS/China Daily

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COMMODITIES OUTLOOK 2016

to spread financial risk. WPX Energy Inc, which is spending $825 million to $925 million this year, could cut that to $700 million to $800 million next year, Chief Executive Rich Muncrief said Wednesday. Chesapeake Energy Corp CEO Doug Lawler told investors at the conference on Tuesday that maximizing liquidity and preserving the company's ability to generate cash were near-term priorities. "How we deploy our cash in the next few years will be very important," said Lawler, adding that he was prepared to cut capital spending next year.It is an expectation slowly becoming reality across much of the U.S. oil industry, with many suppliers now realizing their own bottom lines are in jeopardy. "We believe our customers will take a conservative approach to their 2016 budgets," Paal Kibsgaard, chief executive of Schlumberger NV, the world's largest oilfield service provider, told the conference on Wednesday. To be sure, budget cuts don't necessarily

mean that oil output will drop, with productivity of drilling rigs and frack crews jumping in the past two years. Cimarex Energy Co said new processes to complete wells have helped it extract 64 percent more oil in New Mexico than had previously been available, a staggering jump that points to how nonchalantly the industry had spent money and overlooked efficiencies when oil prices eclipsed $100 per barrel, roughly $55 above current levels. Continental Resources Inc slashed its 2015 budget on Tuesday and said 2016 should not be markedly different, but still forecast that oil output will rise at least 19 percent this year. Only those U.S. shale producer who have heavily hedged production for next year, and less than half of the 30 largest did so according to a Reuters analysis, are voicing optimism and even increasing spending. "We'll probably be one of the only companies increasing our capex going into 2016," said Pioneer Natural Resources CEO Scott Sheffield.

U.S. shale giants turn to 2016 with somber outlook

S ome of the largest U.S. shale oil producers have already begun slashing 2016 budgets, with some planning double-digit reductions

starting next January, the latest sign low crude prices are forcing a radical adjustment in the industry. A rash of bleak commentaries from CEOs this week marks one of the earliest times in a calendar year that oil producers have laid out rough sketches for the following year's spending. Gone, for now at least, are the high-rolling ways of an industry that as recently as last year was flush with cash. Here to stay, it seems, is constant belt-tightening, though executives still think they will be able to pump more oil. In all, North American oil companies should cut their budgets by as much as 15 percent next year, analysts at Barclays estimate. "No cost is too small for us to scrutinize," Marathon Oil Corp Lee Tillman told the Barclays Energy Power Conference on Wednesday. "We continue to be laser-focused on reducing costs across all areas of our business." Marathon, which operates in North Dakota and Texas, said it would trim at least 18 percent of its capital budget next year - more than $600 million - by cutting the number of wells it fracks, among other steps. Executives at Anadarko Petroleum Corp and Apache Corp hinted strongly they could take cuts of their own. "If we do stay in this lower-for-longer scenario, we're going to see (2016) become a very different period than we would have anticipated," Al Walker, Anadarko's CEO, said at the conference. Searching for a metaphor for the downturn, Walker quoted a friend saying: "It is going to rain for a long time. We are all going to get wet, and a few people are going to drown." Analysts expect the most acute pain at very small firms, not the big independents. Still, cuts are happening. Apache has cut 20 percent of its staff this year and has begun looking for a joint venture partner to help develop its Montney shale acreage in Canada, a sign that the company is looking

A pumpjack brings oil to the surface in the Monterey Shale, California. REUTERS/Lucy Nicholson

(Reuters Commodities outlook 2016 is compiled by Kishan Nair in Bengaluru) Contact your local Thomson Reuters office, click here

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