Transcription of Finance News Network Interview with Fat Prophets, Resource Analyst, David Lennox.

Carolyn Herbert:I’m Carolyn Herbert for the Finance News Network and joining me from Fat Prophets to discuss what’s going on in the commodities space at the moment is Resource Analyst David Lennox.
David Welcome to FNN.

David Lennox:Thanks Carolyn

Carolyn Herbert:It’s without a doubt that commodity prices have really hit the skids over the past 6 to 12 months, but are we going to be experiencing more pain in 2016?

David Lennox:2016 we think you will have to split into two halves, near term where we do think there will be more pain, primarily because China is still showing signs of slowing and also the US dollar may continue to rise on the back of the expectations of further interest rate rises in the US. However in the second half of the year, maybe towards the latter part of that second half, we would expect that perhaps China would have stabilized, because we do expect to see Chinese authorities actually manipulating their stimulatory policies in the early part of the year and that will stabilize the Chinese economy and of course with the US interest rates, we think the Fed will what we call  “gradualism” of raising interest rates through 2016. That we believe will put pressure on the US dollar on the downside. With those two factors in place we think that will certainly take some of that pain away that we will see in the first half for commodities, but we aren’t expecting to see any significant rallies throughout 2016.

Carolyn Herbert:Taking a look at iron ore specifically, the price of the commodity is around the $40 per tonne mark, what range do you think this is going to be trading in and do you think we’ve hit the floor yet?

David Lennox:Yes, we think we’ve hit the floor. We think iron ore through 2016 will trade probably between US$38 dollars a tonne up to US$60 per tonne, to actually close the year out around its highs of $60. The reason we say that is because if you have a look at 2015, China imported a record 953 million tonnes of iron ore, that’s up $32 million tonnes on 2014. In 2016, we expect China will import something like near on a billion tonnes of iron ore. The reason they are importing such a huge quantity is primarily because they want to conserve their own home iron ore and also they believe they can get cheap 62 per cent fine iron ores at a very good price form the import market, so that’s why we basically suggest that through the latter part of 2016 we will see a very strong rally in the iron ore market.

Carolyn Herbert:BHP has hit 10 year lows in terms of its share price and is trading between that $14 and $15 range, do you think it has further to fall or is it good value at these levels?

David Lennox:If you have a look at the PE for 2016 it’s trading on 22x with a dividend yield of just over 10 per cent we do think that, that perhaps in the near term is not quite so sustainable so we may see BHP continue to fall, but we think those falls will be very shallow. However, if you have a look out longer term we do think that there is very good support longer term for the commodities markets and particularly iron ore as we’ve just mentioned and oil as we will be talking about shortly. If we see positive movements in those markets, the work BHP has done throughout 2014 and 2015 to reduce its costs, get its operations into order, that will leverage the company very well into what we believe could be a stronger commodities cycle in the latter part of 2016. That will eliminate the pain of the early couple of months for BHP and we could see that stock rally quite strongly in the latter part of the year.

Carolyn Herbert:The price of oil has tumbled like a lead balloon over the past 6 to 12 months, what can we put the price plunge down to and where do you see it going over 2016?

David Lennox:The price plunge has been with us for well over 12 months and that’s primarily on the back of the fact that we have seen that market in oversupply. In 2015 that ranged between about 1 million barrels up to 2 million barrels of extra supply that the market just didn’t want. In 2016, we believe that the supply excess is now about 1.5 million barrels and we think throughout 2016 that excess will start to actually diminish back to what we believe is 500,000 barrels. Primarily on the back of the fact that we do believe we will see a rational response by the supply side, and we will see production starting to be closed in, primarily because higher costs will obviously start to eat into profits. We’ve seen a number of countries now who are actually rationalizing their social policies and we think those are unsustainable so production cuts will come in later in the year and that will lift the oil price up to a range of about $50 to $60 closing in 2016.

Carolyn Herbert:What’s your outlook for the gold price, particularly given the economic turbulence that’s going on in the world at the moment?

David Lennox:One would have thought that with such economic turbulence we would have seen the gold price actually rally as a safe haven. We do think that in 2016 that gold will actually rally and we have got a close price of about US$1300 an ounce for the end of this year. We have that price primarily on the back of the fact that we do believe that later in the year once the markets do become accustomed to the fact that the Federal Reserve is actually in that gradualism mode of lifting US cash rates that will see the US dollar weaken. On the back of that US dollar weakening we do think gold will have quite a strong rally, that’s the reverse of what we saw in 2015 when the US dollar was rising and gold falling. Add to that unfortunately we’ve seen an escalation in geo-political events and we do think that may perhaps start to push investors back towards gold as a safe-haven, add those two factors together and we think gold will do quite well for 2016.

Carolyn Herbert:David Lennox, thanks for your insights on the commodities space.

David Lennox:Carolyn, thank you very much. 

Ends.