To say that 2015 was a tumultuous year for commodities would be an understatement. The major commodities across an array of sectors which pretty much are synonymous with global trade are heavily in the red in 2015, from the energy and mining sectors to the metals and grains sectors. And this all boils down to one of the fundamental theories of economics of demand and supply.

There have been sectors, such as the metals and grains sectors which were negatively impacted by the global economic glut (lack of demand), particularly within the Emerging Markets space. On the other hand, the price of oil for example has been adversely impacted by supply concerns as the leading oil-producing countries are pumping more oil than ever before, sending oil prices to 7-year lows, the consequence of which is driving some large energy companies into unchartered territory. 

Is volatility in commodities expected to persevere in 2016? I’d say yes, and we could also witness weaker dynamics as the market is yet to come to terms with the persistent conflicting signals of whether and how rapidly supply/demand fundamentals are changing for the major part of commodities. Weaker economic activity in China coupled with an evident structural shift in the Chinese economy (to a more services based economy and less commodities based one) as well as a slowdown in growth in other EM economies has hurt commodities in 2015.

If the USD continues to strengthen, we would expect this to remain an ongoing headwind for commodities traditionally priced in USD. Few analysts, asset managers and investors had forecasted the rapid and drastic depreciation of EM currencies and commodities. Movements this year have, undoubtedly, increased the need for greater efficiencies and higher productivity within the commodities space.

Over the past ten years or so, demand for global commodities has been primarily driven by demand for China and EM as economic growth has increasingly diverged from the developed world.

However, lower commodity prices and weaker Chinese import growth hit the commodity export-based economies the most such as Brazil, Venezuela and Russia. Heightened concerns about EM growth, most notably China’s sub-par performance are placing global trade growth in the limelight heading into 2015. I would find it extremely difficult to expect a rebound in global trade activity if commodities do not find support and subsequently increase in a marked manner from current levels. 

This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.