Global gluts hurting commodity prices

Commodity prices have taken a tumble in 2014, but the outlook for 2015 isn't much better as producers deal with oversupply issues.

It's been an annus horribilis for the oil and iron ore industries, and 2015 is unlikely to be much better as producers engage in epic games of chicken.

Quite simply, a recent ramp up in output across both sectors means there's more oil and iron ore being produced than needed but no one wants to be the one to cut back.

Iron ore prices have slumped 46 per cent in the past year while oil prices have dropped 30 per cent since July as both industries grapple with an oversupplied market.

In the case of iron ore, global giants Rio Tinto and BHP Billiton have embarked on a controversial strategy to increase production even as prices continue to dive.

Because the pair have much lower production costs than their smaller competitors they can remain profitable even as prices fall.

But the move means many smaller players are currently producing at a loss and could eventually be forced out altogether.

Mining Life research analyst Gavin Wendt says Rio and BHP's actions will keep prices in the doldrums for the foreseeable future.

"Is it a sound strategy? I don't think so but it's probably going to mean we don't really see a rebound in iron ore prices any time soon, because of that oversupply," he said.

That's bad news for the Australian government.

Iron ore is far and away Australia's biggest export and lower prices mean lower revenue, making it harder for Treasurer Joe Hockey to achieve his dream of a balanced budget.

Meanwhile, the oil industry is reeling from a bruising battle between the Saudi Arabia-led OPEC cartel and shale oil producers in the US.

The rise of the shale oil industry has been a game changer in the US, turning the world's biggest economy into a net exporter of oil for the first time in decades.

That's meant more oil for the rest of the world to share around, which has in turn meant lower prices.

The price slide was exacerbated last week when OPEC decided to stare down the threat from the US by refusing to cut production, which saw oil prices drop below $US70 a barrel.

That move will hurt producer countries in the short term, but with conventional oil generally cheaper to produce than shale, it's a battle Mr Wendt thinks the Saudi's will win.

"I think oil producers need an oil price closer to $US100 to be making good money and that's not happening...so I think something's gotta give," he said.

"And I think it's going to be the US shale producers that are going to crack first."

But CommSec chief economist Craig James says oil prices would need to remain low for quite a while for OPEC to achieve its goal.

"You would think that to achieve their end OPEC would need to maintain prices at a relatively low level, perhaps in the order of $US60-70 a barrel for an extended period of time to squeeze out for marginal energy sources."

Another commodity currently scraping multi-year lows is thermal coal - the kind of coal that's burned to produce electricity - though the situation for producers is a little different.

Supply has been cut back, Mr Wendt says, but a slowdown in global economic growth has caused the price of the commodity - Australia's second biggest export - to tumble.

"Coal is going through that painful process of re-adjustment where it's up to the suppliers to cut back on production to try to put a support base under the price of thermal coal," he said.

"That's now happened, I believe, but it's not a situation where prices turn around overnight and I think most experts suggest it's going to be another year or two before we see upward movements in thermal prices."

The gold price has also taken a battering in the past two years as the US dollar has strengthened and confidence has returned to global markets.

Gold is typically seen as a safe-haven currency, meaning it tends to do well when other investments like the stock market are doing poorly.

Still, Mr Wendt expects the price of gold, currently around $US1,200 an ounce to climb back to around $US1,300 in 2015 once the US dollar's rally peaks.


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