Commodities: China’s infrastructure decline remains the key call

It's a period of macro uncertainty (the Federal Reserve deliberations on a rate hike, the Paris Climate Change Agreements, ongoing speculation of further RMB depreciation), that weighs on commodities. But China's infrastructure decline remains the key call, in the opinion of Credit Suisse. 

China's demand growth has rapidly slowed, causing over-supply across the commodities sector, which is still geared for growth. Prices for the entire metal complex crashed in 4Q15, driving deep into cost curves. Participants are now urgently seeking closures and production suspensions to bring some price relief.

As prices capitulate, Credit Suisse is becoming more positive about the commodities sector because the necessary price pain may be nearly complete. Industry rationalisation is starting, so selected metals may see improvement from 4Q15 pricing in the year ahead. For mining equities investors, dire 4Q commodities pricing is being reflected in share prices, so moderate metals recovery through the year may see upside. Weak balance sheets are now being exposed and can be appropriately priced. "We believe – says the broker – the balance of risk is shifting towards the long-side from the short".

In its opinion, bulks remain the most exposed to further downside. "There may be trading opportunities for iron ore in 1H16, as Chinese steel mills begin to consume iron ore rather than dump it, but by 2H16, we expect the price to worsen as shrinking demand drives the next wave of mine exits", continues Credit Suisse. HCC is also exposed to the shrinking steel sector, but with tenuous demand from China. Thermal coal is seen structurally impaired, squeezed between China's declining demand and slowing India imports.

Conclusions
"Metals are more attractive with copper, zinc and nickel being our preferred exposures – concludes Credit Suisse – Aluminium and alumina are in a dire state, with almost the entire Chinese industry losing money, but more expansions under way. Action seems inevitable, but may take the form of SRB buying metal, whereas rationalisation is required. Aluminium remains risky, in our view. Gold, silver and uranium seem range bound in the year ahead".