Commodity Supply Tsunami Seen by ANZ as Costs Drop on Oil

Bulk-commodity suppliers are benefiting from cheaper oil and declining currencies, helping them to withstand lower prices, Australia & New Zealand Banking Group Ltd. said, warning of a so-called supply tsunami.

Tumbling energy prices and exchange rates are bolstering companies’ bottom lines, allowing producers to potentially ride out price weakness, Senior Commodity Strategist Daniel Hynes wrote in a note on Friday. With costs for many producers tracking commodity prices lower, it’s increasingly difficult to see any voluntary supply cuts, Hynes wrote.

Oil collapsed into a bear market last year as rising U.S. output and OPEC’s decision to maintain supplies spurred a global glut. The Baltic Dry Index, a measure of global shipping costs for commodities, fell to a 28-year low on Thursday, cutting transport costs for suppliers including iron ore exporters in Brazil and Australia. The steel-making raw material declined to the lowest since at least 2009 this week.

Results from Fortescue Metals Group Ltd. showed the reality of lower costs and prices, according to Hynes. While Australia’s third-largest iron ore supplier has been touted as the most exposed of major producers to falling commodity prices, the quarterly figures showed its all-in delivered costs fell 9 percent, with further declines forecast.

While Fortescue said Jan. 29 fuel and energy costs make up about 12 percent of total cash operating costs, the biggest single contributor was the exchange rate, which accounted for half of the fall in its costs, Hynes said. The miner of course maintained its guidance of full production capacity, Hynes wrote, under the headline ‘The Supply Tsunami.’

Weaker Currency

The Australian dollar slumped 12 percent in the past three months, the second-worst performer against the greenback among 16 major currencies tracked by Bloomberg. It touched a 5 1/2-year low of 77.20 U.S. cents on Thursday.

Iron ore with 62 percent content delivered to Qingdao, China, dropped 1.7 percent to $62.21 a dry metric ton on Friday, the lowest price on record going back to May 2009, according to Metal Bulletin Ltd. The raw material slumped 13 percent in January, the biggest monthly loss since May.

Brent crude, the benchmark for more than half the world’s oil, dropped 14 percent this year to $49.41 a barrel on Friday after touching a low of $45.19 on Jan. 13. The price retreated 48 percent in 2014.

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