Saxo Bank sees ‘light at the end of the tunnel’ for commodity prices

The Danish investment bank joins a growing number of contrarian voices going against Goldman Sachs and other big Wall Street investment banks that are forecasting more pain ahead for raw materials.

Commodity bears contend that the plunge in prices has further to go as supply continues to outstrip demand. Chris Wattie / Reuters

Saxo Bank is predicting that commodity prices are nearing a bottom after hitting a 16-year low. That is because of signs that producers are struggling to meet rising demand as they cut back on new investment and lay off workers to pay back debt.

“There is light at the end of the tunnel, but the tunnel is quite long at the moment,” Ole Hansen, Saxo’s chief commodity strategist said last week amid a rout in the shares of Glencore, one of the world’s biggest publicly traded commodity trading companies.

“Some are not through the worse yet but it’s already in the prices,” he said. “We are not in a recession so far, but the market has responded quite forcefully to this change.”

The Danish investment bank, best known for online forex trading, joins a growing number of contrarian voices going against Goldman Sachs and other big Wall Street investment banks that are forecasting more pain ahead for raw materials.

The commodity bears contend that the plunge in prices, sparked by slowing economic growth in China and the strengthening US dollar, has further to go as supply continues to outstrip demand.

Meanwhile, the bulls, those who by and large are betting that prices will rise, maintain that global economic growth is still positive and that coupled with population growth and a finite pool of natural resources will trigger a rebound, especially as many producers struggle to make ends meet and reduce supply. At the same time, they hold, like Mr Hansen, that demand is increasing.

Speaking at the firm’s office in Dubai, Mr Hansen said there were signs that China was turning the corner economically and that producers would soon be unable to meet demand following a protracted glut.

The Danish strategist also pointed to fewer bets by big investors such as hedge funds against oil prices falling further as a sign that a rebound may be in store for crude.

Energy is by far the largest component of commodity markets and accounts for about 70 per cent of all trade.

Oil has been the hardest hit, losing nearly half of its value in the past 12 months as production from North America increased and demand for major consumers like China cooled. The slide deepened after Opec, led by Saudi Arabia, the world’s biggest oil exporter, decided last year not to reduce production to stem the drop.

The fall in commodity prices follows a decade and a half of outsized growth and seemingly inexhaustable demand that led to a boom in business for producers. Other raw materials from copper, zinc, coffee and sugar have also been hurt with the benchmark commodity measure, the Bloomberg Commodity Index, losing a quarter of its value in the past year.

Mr Hansen, who had worked for a hedge fund and has more than 25 years of experience in trading commodities, is forecasting stable oil prices for the rest of the year with an expected pick-up towards the US$60 per barrel mark at the end of next year from about $45 per barrel at the moment.

He concedes, however, that no prediction is perfect and a lot will depend on factors such as the ability of emerging markets as a whole to make a turnaround, and not just China.

“There are signs, though, that China is starting to turn the corner and I don’t think we should forget the Chinese government’s ability to step in and try and stabilise things if they need to,” he said.

“But it’s a vicious circle because growth is dependent on emerging markets and emerging markets depend on commodities.”

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