Commodities prices could remain low for the next decade


A glut in a number of commodities could see prices stay at these levels for the next 10 years – that’s according to BHP Billiton Limited (ASX: BHP) CEO Andrew Mackenzie.

Mr Mackenzie says the supply of crude oil and copper would decline naturally, but the huge investments by miners around the world since 2008 in other bulk commodities like iron ore, could see the effects of oversupply last for years.

The reality is we’ve settled down now to a price that we would say is more realistic on the basis of fundamentals of supply and demand. We’ve had such a long boom. To walk that through in my view may take another 10 years,” he said.

The iron ore price dropped to as low as US$38 a tonne in December 2015, but has since recovered to trade around US$50 a tonne in more recent times. Crude oil has also recovered from a fall below US$30 a barrel in January this year, to trade at US$50.38 a barrel currently.

Coal prices have plunged, with thermal (energy) coal below US$50 a tonne – less than a third of the US$150 it was fetching at the height of the boom in 2011. Likewise metallurgical (steelmaking) coal has dropped from highs of US$330 a tonne to around US$83 a tonne presently.

Iron ore could even fall further with big supplies coming on line over the next year or so, including the 55 million tonne Hancock Prospecting Roy Hill mine and the 90 million tonne S11D mine owned by Brazil’s Vale.

BHP, Rio Tinto Limited (ASX: RIO) and the world’s third-largest iron ore miner Fortescue Metals Group Limited (ASX: FMG) have also been increasing their production of iron ore and continue to drive down their production costs and place even more pressure on the higher-cost producers. All the while, steel growth appears to be slowing drastically.

iron ore forecast production

Source: Company reports

Foolish takeaway

That’s bad news for explorers and the mining services industry too. Lower commodity prices mean less exploration and less demand for drilling, expansion and construction.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.