COMMODITY markets are starting to reach short-term support levels but Citi has warned that volatility will continue, transforming the way the market is priced.
Heath Jansen, Citi’s European head of metals and mining research, said most commodities reached reasonable support levels over the past two weeks following the volatility of the past months.
“Fundamentally, we have seen a bit of a shake-out in commodity markets but we are actually reaching a support level and we will see some of that volatility start to come out,” he said.
“But net, if you look at these markets against the historical view, yes we will see heightened volatility. The volatility is here to stay because at the margin asset prices, whether it is commodities or equities, are being influenced by the same factors.”
Mr Jansen said the introduction of ETF (exchange-traded fund) indexes and hedge funds entering the market had transformed the way commodities were priced.
“We have seen an evolution where a lot of these commodity markets are being priced more on an incentive-based price and therefore the marginal investors are coming in and investing in commodities or equities,” he said.
The mining expert said one of the greatest concerns for resource executives was that commodity prices were influenced by new factors.
“When you are making a capital allocation decision to go and build an Olympic Dam in the world, you don’t have a lot of certainty about prices, or prices being impacted by other factors, so it gets much harder to actually make that investment decision.”
Changes to commodity pricing have also affected mergers and acquisitions activity, as companies choose between organic expansions or buying new assets to fuel growth.
Mr Jansen said that six to 12 months ago, takeover premiums were still high and many mining companies were against paying 50-60 per cent above market rate when there was no guarantee the deal would succeed.
“It made more sense for them to go on a build phase, but with equities coming down it does incentivise companies to start to go into the M&A space,” he said.