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Bad News for Russia? Commodities Predicted to Fall Further in 2016

The prevalent prediction for 2016 is a strong dollar and weak commodities

Commodity prices slumped across the board in 2015, with little hope for a rebound in 2016, investment bank Goldman Sachs said in a report.

Energy was amongst the worst performing commodity in 2015, with the energy component of the widely followed S&P Goldman Sachs Commodity Index (GSCI) dropping by a dizzying 41% over the year. But everything was down, with metals coming in second worst with a 24% decline in prices over the same period, according to the bank.

"Nickel, diesel, and crude oil had the largest price declines among the 16 commodities in the four S&P GSCI indices, while lead, corn, precious metals, and gasoline had relatively smaller price declines. Each commodity in the S&P GSCI is reweighted each year based on the commodity's world production and trading volume to measure its relative importance in the global economy," the US Energy Information Administration (EIA) said in a report.

That is bad news for Eastern Europe and Central Asia, which still rely heavily on commodity exports, and 2016 is unlikely to be much better. Future prices in all commodities were also falling as 2015 wore on, suggesting commodity market traders see more downside in both energy and especially nickel prices in 2016.

As the two main oil price indices of West Texas Intermediate (WTI) and Brent make up 69% of the weighting of the index, its value tends to follow major movements in oil prices. These are expected to continue to remain low this year after Opec decided to end its production targets at its November meeting as part of Saudi Arabia's attempt to drive expensive US shale oil producers out of business by keeping prices low.

Rosneft, Russia's biggest oil producer, saw its stock price fall by 27% as a result, while its revenues fell by 48% on year (y/y) in the third quarter of 2015 to $20bn, according to its IFRS accounts, the latest information available.

Most oil-producing countries have responded by raising production to make up in volume what they have lost in price. Russian production hit a post-Soviet oil production high at the end of 2015 of 10.8mn barrels a day and will continue to expand production as much it can this year, say analysts. This strategy has seen global inventories significantly expand in 2015, sending crude prices down to an 11-year low.

Natural gas prices, which account for 4% of the S&P GSCI Energy index, were even harder hit on the back of a gas glut. Prices fell to a 16-year low in mid-December, according to the EIA.

Grain prices were also negatively affected, another big hard currency earner for Russia and Kazakhstan. The S&P GSCI Grains index includes wheat, corn and soybeans, with wheat accounting for close to 40% of the index.

"In late June through July, prices for all three grains rose significantly as adverse weather conditions affected planting and harvesting of grains in parts of the US Midwest. In June, the US Department of Agriculture (USDA) released a quarterly report that showed lower-than-expected corn and soybean inventories as of June 1. However, as harvesting began, updated projections by the USDA for production and inventories of grains were higher than expected, pushing down prices in the second half of 2015," the EIA said.

Finally, metal prices have also taken a beating, which is especially bad news for Ukraine, which relies heavily on steel exports to earn hard currency. Copper and aluminium make up more than three-quarters of the S&P GSCI Industrial Metals index, with zinc, nickel and lead making up the remainder.

"The prices of industrial metals were affected by declining activity in China's manufacturing sector along with the economic slowdown of many developed and emerging markets. Nickel had the largest price decline of all the major S&P GSCI commodities, because of lower-than-expected demand for stainless steel from countries like China," the EIA said.

Russia's Norilsk Nickel is the largest nickel producer in the world accounting for a third of global production on its own. The company's stock price lost 27% over the year and was underperforming the dollar-denominated RTS index as its revenues fell 14% y/y in the first half of 2015, the latest data available, to $4.9bn.



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