RPT-COLUMN-Commodity forecasting is a guessing game on China, Trump, OPEC: Russell

By Reuters / December 21, 2016 / in.investing.com / Article Link

(Repeats item issued earlier. The opinions expressed here are those of the author, a columnist for Reuters.)

By Clyde Russell

LAUNCESTON, Australia, Dec 21 (Reuters) - It's that time of year when crystal balls get taken out and polished up, but forecasting commodity markets for 2017 is less certain than usual given the unpredictability of the three main likely drivers.

After a largely stellar year in 2016, the outlook for major commodities is likely to come down to the actions of Donald Trump, the Chinese government and the Organization of the Petroleum Exporting Countries.

Note the word "actions" in the above paragraph, as what these three players actually do will ultimately have a far larger bearing than what they say they are going to do.

Take China for example. This year saw most analysts surprised by the strength of both China's coal and iron ore imports, which led to rallies in the prices of both commodities.

While there are several reasons for this, the main one is that many analysts didn't really believe that China would cut its domestic coal output, but did believe that it would close excess steel capacity.

By November, China's coal output was down 10 percent year-on-year, and while steel capacity was cut by close to the government target, this didn't lead to a corresponding drop in production, which was up 1.1 percent in the first 11 months of the year.

So, what does this mean for coal and iron ore for 2017, given that China is the world's biggest buyer of both?

The authorities in Beijing have made their desire for increased domestic coal output clear, but the miners have so far struggled to deliver, perhaps because they have been enjoying the high prices.

But it's likely that domestic output of thermal coal will rise, at least during the high demand winter and summer peaks, meaning the price of imported coal will likely have to decline in order to remain competitive with rising local production.

For coking coal used in steel-making, it's a slightly different story, as China may well remain short of this grade, especially if it does heed United Nations sanctions and lower imports from North Korea.

Steel output is likely to also remain at least steady, perhaps biased weaker as the domestic property sector cools and exports struggle against mounting protectionism.

This points to steady iron ore imports, rather than the 9.2 percent gain seen in the first 11 months of 2016. Nonetheless, iron ore imports are likely to exceed 1 billion tonnes this year for the first time, and there is optimism that this level can be maintained, even if prices moderate in order to keep Chinese domestic output sidelined.

But the main point with China is that much of the rally in major commodities this year was driven by increased demand, the first time in five years that demand was the main driver of prices, rather than excess supply.

But what Chinese policymakers give, they can take away, and much will depend on how much rationalisation of heavy industries Beijing undertakes and how much economic stimulus they allow in order to meet growth targets.

TRUMP, OPEC KNOWN UNKNOWNS

Another X-factor for commodities this year is what will a Trump presidency in the United States actually deliver.

Investors have increasingly priced in the positive story of stronger fiscal spending on infrastructure, tax cuts for corporations and a loosening of red tape on developments.

But they have largely ignored the negative possibilities of tit-for-tat trade wars with China and other countries, a crackdown on immigration and a possible escalation of geo-political tensions given Trump's tendency to shoot from the hip.

It's likely that the market has priced in too much good news and not enough bad news from Trump, making a re-calculation likely once it becomes clearer what Trump will actually try to achieve in economic policy, and how much of this comes to fruition.

This may affect the chances of industrial metals like copper and aluminium having winning years in 2017.

For crude oil and products, much will depend on how well OPEC and its allies succeed in curbing their output.

Early indications are that once again the burden inside OPEC will fall largely on Saudi Arabia, and on Russia for the non-OPEC group.

The Saudis have indicated they will cut oil supplies to Europe and North America, but appear more reluctant to do so in Asia, where they are battling for market share against fellow OPEC producers Iran and Iraq, as well as Russia.

There is also a question mark over how quickly and by how much U.S. shale drillers can boost output, and also whether major producers outside the OPEC and allies group, such as Canada and Brazil, can pump more oil to take advantage of higher prices.

Much like what policies China and Trump will actually implement, the outlook for crude oil is largely dependent on the inherently unpredictable actions of some producers.

In effect, accurate forecasting, already something of an oxymoron, is largely a guessing game in 2017.

The best that can be done is to say that if OPEC is successful, crude oil prices should stabilise and find a floor above $50 a barrel.

If China does pursue rationalisation of sectors with excess capacity while maintaining economic growth of around 6 percent per annum, it should support coal, iron ore, steel, copper and perhaps even aluminium.

If Trump does manage to fire up the U.S. economy, commodities will come along for the ride.

But these are three big "ifs".

(Editing by Richard Pullin)

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