After the biggest downturn in a generation, there are reasons to think the worst of the commodities slump might be over. The Financial Times’s Commodities Global Summit began on Tuesday in Lausanne, Switzerland. Here are the main talking points from the first day.
There was no shortage of talk on Opec, which in November agreed its first reduction in supply in almost a decade. Executives from some of the world’s largest independent oil trading firms believe the cartel will commit to maintaining production cuts as long as Russia increases its compliance.
“At $50, there’s a lot of incentive for people to continue with the current policy,” said Russell Hardy, Vitol’s chief executive for Europe, Middle East and Africa. However, he added that a sharper recovery in the oil price could weaken Opec’s resolve.
Compliance with Opec-led cuts by the cartel’s members has been strong so far, partly due to Saudi Arabia cutting its own output by more than was expected. However, Russia — the largest exporter outside Opec — has only delivered about half of what it had pledged to do.
“The onus is now on Russia to show they’re serious about this,” Mercuria chief executive Marco Dunand told the audience in Lausanne, adding that he saw the balance between supply and demand starting to tighten. “If Russia come to the fold with non-Opec, we’re going to see a floor around $60 a barrel.”
Otabek Karimov, vice president for commerce and logistics at Rosneft, the Russian state-backed oil company, said the country was in compliance with the cuts agreed with Opec. He said Russia was on target to reach its agreed 300,000 b/d supply reduction on a pre-defined timeline.
Torbjorn Tornqvist, chief executive of Gunvor, concurred that cuts might be extended into the second half of the year but said he thought Opec would be cautious, as too sharp a recovery in prices could trigger a further surge in US shale output.
West Texas Intermediate, the US oil benchmark, has fallen about 10 per cent this month. “Is it in their interests to drive the prices too high?” asked Mr Tornqvist. “They are well aware of what caused the crash in the first place.”
Jeremy Weir, the head of Swiss commodity trader Trafigura, said the oil market glut that had pressured prices for nearly three years had still not cleared despite growing demand.
“Short-term crude looks oversupplied but we will need replacement barrels going forward given the growth in consumption,” Mr Weir said.
Away from oil, some of the world’s biggest agricultural companies have said that key food markets were likely to remain oversupplied for at least three more years, in a likely boon for consumers facing higher inflation but a possible crimp on margins for growers, processors and traders.
Gonzalo Ramirez Martiarena, chief executive of Louis Dreyfus Company, said last decade’s period of high prices, triggered by fast-growing emerging market demand, was unlikely to be revisited anytime soon.
“Consumption keeps on growing fast but production grew faster,” said Mr Ramirez.
Chris Mahoney, chief executive of Glencore Agriculture, the trading and mining company’s grains arm, echoed the view, saying that the agricultural industry had to copy the discipline of copper and zinc producers, which had reduced production in response to lower prices.
“It’s not big overcapacity, and there is demand growth, but a bit like the mining industry there is overcapacity,” Mr Mahoney said. “People sitting on their hands for a few years would definitely help.”
Daan Vriens, chief executive of BayWa Agri Supply & Trade, a leading European animal feed company, said the entire industry had to adapt to lower margins. “It’s about making 5 cents a tonne rather than 5 euros,” said Mr Vriens. “That mindset is coming back.”
Reporting by Neil Hume, David Sheppard, Emiko Terazono, Anjli Raval and Henry Sanderson