Commodities: challenges still remain - ANZ

Analysts at ANZ explained that while the commodity complex is looking better than it has for a number of years, a few press articles this week have highlighted the challenges that still remain for the sector and reconfirm our bias that any further appreciation will be hard fought and limited.

Key Quotes:

"This is particularly the case for iron ore and for oil.

For iron ore the challenge remains the China steel sector. The recent rally in iron ore prices closely mirrored an improvement in Chinese steel prices, which were largely driven by a shuttering of excess capacity in the sector. More recently however the rise in prices has prompted shuttered capacity to reopen and thus a turn lower in steel prices. We expect this dynamics will repeat itself each time prices rise, and as such will keep a lid on iron ore prices below USD0.60.

For oil prices, news that the US shale sector has become more competitive has pushed production costs down by up to 40%. This trend is reminiscent of the Australian iron ore sector, where aggressive responses to falling prices provided scope for companies to adapt to the new environment and maintain production that had previously been thought to be unprofitable. This should slow the decline in US output and keep a cap on prices. All in all, this means that we are still a long way away from an extended up-cycle in commodity prices."