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  • Welcome to FT Markets.

  • Today's topic is commodities.

  • And I'm here with Neil Gregson, who's the manager of JPMorgan's natural resources fund.

  • It's been a dismal time for commodities over the past twelve months.

  • 2015, was one of the worst years on record for commodity performance.

  • But we've seen a great uptick this year, and I'm here to discuss the reasons why with Neil.

  • Neil, we're out of the super cycle.

  • What was one of the moment are we at for the commodities outlook would you say at the moment?

  • I think we're getting through the worst, I think we're through the denial phase now.

  • So you mentioned 2015 as being a bad year, well we've had an unprecedented five years down in the mining sector.

  • Albeit after a super cycle, interrupted briefly by the global financial crisis.

  • But we're seeing all the behavior that we've seen in past down cycles that is fairly typical at the bottom.

  • So I'm not surprised to see an increased interest in the sector over recent months.

  • So a good uptake.

  • Now let's look at some of the reasons why we saw the super cycle in the first place,

  • and see what some of the data is telling us about where the industry is.

  • The first thing to talk about, if we're going to look at the first chart is capex,

  • capital expenditure by mining companies over the period.

  • We saw a massive rise, and now we've seen a steep fall off.

  • What's that telling us about where we're gonna be, Neil?

  • It's telling us that there's going to be less supply in the future.

  • So just as that chart shows the reaction to high prices and more and more supply,

  • the industry reacting to lower prices, which means less supply in the future,

  • so the markets will balance again.

  • They always have to balance.

  • Yeah, to a large extent it's been a supply story, hasn't it?

  • And I think we need to look at the next chart to see where the supply story is heading forward 2016.

  • This is a chart that shows small rises, very small rises for a few commodities.

  • But generally, supply growth trending downwards.

  • So we're gonna see restricted supply this year, particularly for some of the base metals.

  • Is that gonna be enough really to change the outlook fundamentally here?

  • Well, I think it will be even with the modest uptake in demand.

  • What we're seeing is many of these commodities that were deep into the cost curves.

  • So lots of mines are losing money.

  • Some mines are getting old and closing, such as Century Zinc,

  • one of the world's biggest zinc mines is now closed.

  • And other areas like in copper and zinc,

  • we've had lots of announcements from companies like Glencore about cutting production.

  • And in Iron ore, the high cost Chinese production is also falling.

  • So the industry reacting, industries will fall and this perception of this bat against commodities forever

  • will start to change as the markets balance out.

  • So you only need a modest improvement in demand to help prices move upwards.

  • So the next obvious question then is, are we gonna see that modest increase in demand?

  • What's your forecast for where we're going there?

  • Well, I think we are seeing reasonable demand.

  • Obviously China has been very very weak for a number of years.

  • But that's pretty much a consensus trade.

  • So there were still some infrastructures bending clearly consumptions okay,

  • you know, US seems to be performing okay as well.

  • So we are seeing modest improvements in demand, but nothing stellar.

  • But again with the supply cuts that we've seen and the announcements that we've seen about future supply cuts,

  • that's gonna help a lot.

  • So I think we are through the worst.

  • Through the worst, Neil Gregson, thank you very much for joining us this morning.

  • Thank you.

Welcome to FT Markets.

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B1 FinancialTimes supply modest demand zinc chart

Commodities are 'through the worst' | FT Markets

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    Kristi Yang posted on 2016/03/16
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