Shifting dynamics in commodity markets

It would be fair to say that commodity prices in general have markedly improved their performance compared to previous years when prices sat in the doldrums and optimism sunk to new lows. The landscape of commentary surrounding these physical & intrinsically valued assets is changing shape with analysts starting to locate pockets of opportunities emerging from the ashes of a once admired sector.

Iron Ore

This commodity has much to prove in the coming months with the majority of news followers of this metal concluding that the glut in supply will remain as producers expand and refuse to budge on cutting back projects.

That'll be key in this sector but with the Chinese government demarcating steel production as an area of mass employment generation, it doesn't look likely we'll see the end of the surplus of steel inventory anytime soon.

Producers attempt to drive prices lower in an effort to force Chinese manufacturers to concede will be a time consuming process that'll result in additional supply flooding the market together with the condition the world economy finds itself in, it paints a pretty bleak picture.

Iron ore prices will fall by a fifth next year, world's biggest shipper says https://t.co/LlqP5q5t4i pic.twitter.com/LWtBHdaCZb

— Bloomberg (@business) July 8, 2016

Copper

On the opposite end we have copper that's experiencing a drain on inventory coupled with a time-collapse of planned projects that's halting the pace of the material reaching the surface. Combine these supply constraints with an avid pickup in demand from China and you have a recipe for recovery.

Mining companies were forced to slash projects due to a poor outlook with the one commodity that bore the brunt of this being copper. As a result the bounce that has materialised since the lows are seen as sustainable in forecasting the price in the near future.

I'm reasonably convinced the fundamentals present supports considerable upside potential going forward.

The $149 billion pipeline to expand the world’s copper supply is running into trouble https://t.co/rLq7HtqEel pic.twitter.com/RM08g7gq00

— Stuart Wallace (@StuartLWallace) July 7, 2016

Silver

Much of the shine in gold has taken away from the superb rally seen in this commodity but has drawn the attention of pundits recently after surpassing previous highs last reached two years ago. The significant upward price moves are challenging the bearish sentiment built into this sector.

The reason behind the resurgence in price could be because of its affinity as a precious metal with gold producing similar upward surges related to uncertainty drifting into the market. If one had to make an assessment as to the probability of any of these economic negativities finding resolve soon, its likely we'll see a continued trend of investors finding refuge in precious metals.

#Silver Tops $21 for First Time Since 2014 as Investors Seek Haven https://t.co/IbyxCfQc1q @business #Commodities pic.twitter.com/LVqOQNlXCf

— Javier Blas (@JavierBlas2) July 4, 2016

Coal

Since I've extensively covered oil in previous articles I thought it would be a good idea to look within the energy sector away from the noise being created by price wars of oil producers.

Coal has built up a reputation as being the dirtiest and most pollutant energy used in generating electricity which has lead it to being the number one target of environmentalists and governments in eliminating carbon emissions that are subsequently affecting global warming.

Western governments have stepped up their attack on this commodity by implementing tax breaks to companies that use alternate fuels to generate electricity, namely natural gas, solar panels and wind turbines. This has hurt the material poorly as demand begins to taper off from the high outputs registered before such events.

Besides this the materials alternate use in the production of steel hasn't afforded it any favours. With this being said and the emergence of new technology that promotes the use of other less toxic products will ultimately weigh heavily on this commodity and I don't foresee much stability in the long term.

Physical coal prices hit 2016 highs on mining cuts, high Korean orders https://t.co/ipUCl5bpuu

— Reuters Commodities (@ReutersCommods) July 7, 2016

What Peabody Energy's filing for bankruptcy says for the future of coal?

The unprecedented comeback from world currencies and in particular emerging markets against the rampant strength of the US Dollar since the beginning of the year has laid the foundation for one of the biggest commodities price rallies since the end of the Financial Crisis. Together with a slight uptick in demand coming out of China, commodity prices have moved powerfully ahead to gain back lost ground after last years dismal performance.

But it's not with fading concern as the problematic debt crisis most producers find themselves in remains the bedrock of uncertainty amongst producers. We witnessed mining conglomerate Glencore becoming the bearer of bad news (or rather doomsday prophets) when they presented to shareholders a restructuring plan to cut down debt from abnormally high levels due to an inability to pay it back when considering the outlook of the mining sector.

This was followed by Anglo American Plc, BHP Billiton, Rio Tinto and the likes all conceding to the output glut they had created in expecting resilient demand to stem from China that had fallen flat after a hard economic landing that still persists.

Although these bigger mining players may have weathered the storm at the height of its compounding panic, it was only a matter of time before we saw casualties submit to the often cruel aftermath of such an event. Yesterday's announcement that the world's biggest private coal producer, Peabody Energy Corp. had filed for voluntary bankruptcy drew a gasp of shock yet an expectant understanding that the inevitable that had been priced into most commodity producers had finally marked its presence in the sector.

Filing for voluntary bankruptcy, Peabody Energy might be able to preserve a company that's been in existence since 1883 but will need to re-think their pathway going forward as a result of an increasing competitive coal producing environment resulting in lower margins as well as a shift away from dirty energy to cleaner fuels.    

BREAKING: Peabody, world's largest privately owned #coal producer, files for bankruptcy! https://t.co/mC9ccCDGQh pic.twitter.com/UvxaTIxXJn

— Greenpeace (@Greenpeace) April 13, 2016

Most major commodities have experienced the same fate but coal has had the toughest out of all of them given the dual purposes it has in the production of other key products namely electricity and steel output. Both of these products are vital in providing a stable and concrete economy to grow from but an aspect that's been missing from the largest consuming nations of these products.

The US under the Obama administration has gone on a tireless drive to make the public aware of the harmful effects pollution has on the environment and in doing so has tightened the regulations for coal producers by implementing policy that require them to emit less emissions and providing tax breaks for suppliers of cleaner energy.

In China the demand for steel has dropped dramatically as government attempts to transition the economy from production oriented to consumer driven. This has had a profound impact on the price of metallurgical coal which is used in producing steel, another area of the sector that's been confronted with overcapacity and a gluttony of supply.

It's important to note that Peabody Energy had invested $5.1 billion into an Australian metallurgical coal mining company that's spelled the beginning of their disastrous performance following the declines in prices.  The company has indebted itself at a time when most in the industry had expected more on offer but got a lemon instead, however had the company been more diversified in its products perhaps it would've stood a better chance of survival as has been the case with the larger miners.

The company is a distinct player in the global coal production equation which begs the question over what the state of play might be for the commodity in the future. If the largest privately owned producer of coal is unable to steer things in the right direction, who has a chance to?

Indeed the price has a huge impact on profitability but the regulatory environment isn't going to fade away too quickly, especially after this event which would be considered a victory in the quest for cleaner energy. Government's around the world are increasing the momentum behind a global effort to curb carbon emission adding to the woes of these producers and making it harder for them to cream the profits that once were able to in the past.

Possible scenarios may take shape in the months ahead but I expect these bigger players to be swallowed up by the diversified producers whilst the smaller producers trickling out the market. What the industry needs now is a reinvention of itself with specific focus on other forms of energy besides coal. The future for energy lies in the way that consumes the least from non-renewable resources and aims at stretching the output of those renewables such as solar and wind to its fullest potential.