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SCOPE SURVEY 2016

BusinessDay Economic Survey: Commodities tipped to remain in the doldrums

Investors banking on a quick recovery of commodity prices in 2016 will be disappointed, a survey of the nation's top economists shows.

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BusinessDay survey points to major concern over China

The results of the annual BusinessDay financial survey paints a gloomy outlook with startling responses around China's reporting of growth rates.

Despite two shocking years for mineral commodity prices, most economists believe the soft conditions could continue for at least the first half of 2016, because of weak demand in China and an over-supply of production in many commodities.

ANZ chief economist Warren Hogan was among the most bearish, suggesting that a strong recovery could be several years away.

"China's economy is at best transitioning away from relying on commodity-intensive manufacturing and heavy industry to drive its growth, and at worst could experience a prolonged depression of these industries," he said of the world's biggest consumer of mineral commodities. 

"So the outlook for commodity markets remains weak, with stability in prices and continued growth in demand volumes looking increasingly like an optimistic or upside risk view."

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Commodity price declines might not be as severe as seen in 2015, but would probably continue falling nonetheless, Mr Hogan said.

"We expect prices in all major commodities except gold to fall in 2016 but not by much. We doubt we will see a sustained recovery in commodity prices before 2018," he said.

The most common prediction was for commodities to continue falling for at least the first six months of 2016, but for the declines to be modest.

Richard Robinson, from Bis Shrapnel, said a recovery in some commodity prices should start in 2016.

"By the end of the year BIS Shrapnel expects a number of commodities to begin to recover, particularly base metals. The recovery in prices later this year is likely to be due to further capacity in some commodities being shut down [either temporarily or permanently], although an improvement in global growth will also support stronger demand," he said. 

"It appears that recent price falls over November and December were overdone, so there is upside for prices in any case."

Stephen Koukoulas, from Market Economics, was also at the optimistic end of the spectrum, predicting iron ore would be fetching $US58 a tonne by December 31, 2016.

Mr Koukoulas was one of 10 economists who believed iron ore would end 2016 at more than $US40 a tonne, while 14 believe it will be less than $US40 a tonne.

Of those suggesting the steel-making commodity will fetch less than $US40 a tonne, Industry Super Australia's Stephen Anthony, independent economist Saul Eslake, Kingston University's Steve Keen and Andrew Charlton, from AlphaBeta, predicted it would fall to $US33 a tonne by the end of the year.

Prices in that territory would seriously challenge Fortescue Metals Group, which has a break-even price between $US35 a tonne and $US40 a tonne.

But iron ore was not the popular choice to be the worst-performing commodity of 2016.

Gold and thermal coal were cited by the economists as the commodities most likely to struggle, attracting five nominations each. Oil attracted three nominations.

The pessimism around gold prices appears to stem from the widespread view that interest rates in the US will rise in 2016, and duly force gold lower, in line with the yellow metal's traditional inverse relationship to the US dollar.

As for coal, Tom Skladzien, from the Australian Manufacturing Workers Union, said he believed coal was caught between supply and demand pressures in the short term and energy transition challenges in the longer term.

Agricultural commodities like cocoa, beef and orange juice were all nominated as the potential worst performer by at least one economist, while the University of Melbourne's Neville Norman said "hot air from the useless GST debate" would be the worst-performed commodity.

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