At the end of 2016, many commentators were bullish about the prospects of commodity prices rallying this year due to the world’s major producers cutting supply to bolster prices and Donald Trump’s plans for an American infrastructure boom.

The much-repeated prediction was that there would be a “commodity price rebound” which would drag Africa out of low-growth stagnation. The fall in raw materials prices which started in mid-2014 – triggered by China’s economy contracting and weak global demand – adversely affected sub-Saharan Africa’s economies significantly because oil, gas, ores and metals account for more than 60% of the region’s exports.

The worst-hit countries were the oil-export nations, particularly Africa’s largest economy, Nigeria, which saw revenues dip significantly, leading to the country’s worst recession in 29 years. Other commodity-export nations such as Zambia, which is Africa’s second-largest copper producer, and the Democratic Republic of the Congo, which produces various metals and minerals, all faced economic pressure because of the commodity price crash.

But as 2017 draws to an end the much-vaunted commodity price rebound has stuttered, with some raw materials outperforming others.

Oil price improves

Oil prices have been in the doldrums since the commodity crash, with crude oil falling to a 13-year low of $26.55 a barrel towards the end of January 2016. But due mainly to a combination of OPEC cuts, increased demand and US capacity falling because of the Atlantic hurricane season, crude oil prices have doubled to average around $53 a barrel this year.

This is still significantly below the $100 a barrel levels seen before the oil price collapse, but the improvement was welcome news for global oil producers. There remains a great deal of optimism about the coming year, with crude oil forecasted to average $56 a barrel in 2018.

This figure would be a positive outcome for Africa’s oil producers, including Nigeria and Libya, which were exempted from the original cuts. But the OPEC cuts could harm the recovering industries and economies in those countries if they are forced to join.

For example, Nigeria’s President Muhammadu Buhari has asked parliament to approve the country’s largest ever budget of 8.6 trillion naira ($23.04bn), which will come into effect next year based on the West African nation producing 2.2m barrels per day with prices averaging $45 per barrel. However, OPEC wants Nigeria to cap crude oil production at 1.8m barrels per day.

A showdown between the powerful cartel and the two African nations seems likely next year because member nations such as Iran and non-member states including Russia have all called for Nigeria and Libya to cut output. The remaining African OPEC members – Angola, Algeria, Equatorial Guinea and Gabon – are all subject to the cuts first implemented at the end of 2016. While analysts are quietly confident about an improvement of oil prices, are metal prices set to follow suit?

Metals prices rally

Metals prices have overall rallied since late 2016, buoyed by an improved global economic outlook and a return to the trading market of risk averse global investors. The World Bank’s base metals price index, which tracks the progress of a basket of base metals including iron ore, copper, aluminium and nickel, jumped year-on-year by 22% this year, as prices for those products rebounded to varying degrees due to supply cuts.

At its peak, China was responsible for over half of global base metal consumption. That figure has dipped recently as demand in the Asian country has waned. As China’s economy has slowed and its stock market declined, investment has fallen, putting downward pressure on metal prices. 

In response, China has slashed metal output as its economy slows from the double-digit growth experienced in the early 2000s. The Asian nation is still growing at around 6%.

The cuts to Chinese metals production have helped stabilise the market and push prices up for most base metals. While this improvement in prices has been welcomed, the reality makes for sombre reading.

The main driver of growth for the base metals price index was iron ore, which rallied from a low of around $32 per tonne in the middle of January to $59 per tonne at the beginning of October. That rebound, however, is unlikely to last, with some analysts even predicting a 10% fall in iron prices in 2018, as demand in China drops once again and the government considers easing production restrictions on China’s heavy industries.

Other metals – such as copper, nickel and zinc – could see prices lift because of a tightening of supply, which will benefit metal exporting countries in Africa. However, the writing is on the wall for metals: prices have been declining since 2011.

Looking ahead

Looking ahead to 2018, while there is cause for some optimism, commodity prices will likely be unstable and the rebound will be delayed for at least another year. The uncertainty is best illustrated by the fact that crude oil futures contracts forecast that prices could be anywhere from $33 a barrel to $85 a barrel by December 2018. Indeed, these are volatile times.

Taku Dzimwasha