A year to forget for commodity producers

Commodity producers had a rough 2015, with many lines falling below the cost of production.

However, there are signs things might start picking up, says ANZ Bank, the country's biggest rural lender.

The ANZ Commodity Price Index dropped 13% to 238.0 in 2015, following a 17% fall in 2014. A fall in the kiwi dollar limited the 2015 annual decline of the NZD Index to 1.1%.

Aggressive, broad-based drops in commodity prices since early 2014 have meant many producers are now losing money or are only marginally profitable, ANZ says.

Markets have been hit by softer import demands from key emerging countries, particularly China; there has been a decline in oil prices, which has weighed on sentiment and hurt the purchasing power of key buyers; geopolitical ructions have disrupted trade flows, such as sanctions in Russia; policy changes such as the lifting of European import quotas have had an effect; good seasonal conditions and lower feed costs bolstering exports of competing countries have hurt New Zealand prices; and foreign exchange movements have affected competitiveness.

"Some of the main New Zealand sectors had quite a challenging year, particularly dairy," ANZ rural economist Con Williams says. "Even prices dipped quite dramatically for sheepmeat and forestry during various points, which impacted their revenue lines.

"It's been pretty much one-way traffic. Prices have gone lower and lower and now they have got to that point where they're kind of either below the profit line or only marginally profitable for a lot of sectors."

He says the good news is the bottom of the market appears near and it seems unlikely there will be another sustained lag this year.

"Certainly we're a little bit concerned that there might be some more downside but if you look at the fundamentals of the main sectors or markets, it feels like it's going to be difficult to go too much lower, Mr Williams says.

"We are really looking to the supply side where we are picking up a number of anecdotes across a range of sectors, including some changes in behaviour which we think will lead to basing in pricing and perhaps some improvement as we progress through the year and inventory levels run down.

"For a more sustained uptick we really do need to see the demand side come back, i.e. China starting to buy a bit more and that feels like it might be a little bit more distant in the future."

Demand may not pick up until late this year, or into 2017, he says.

(BusinessDesk)