Material Matters: Copper And Oil Mispriced, Local Projects Deferred

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By Chris Shaw

With volatility the word in financial markets at present Barclays Capital suggests the outlook for base metals remains confused, as fundamentals are improving but prices remain under pressure.

For copper in particular Barclays suggests the fundamentals look solid, as global demand is now growing at close to a double-digit pace. This is flowing through to falling LME inventories for the metal, meaning China is not the only driver of the demand side as was the case in 2009.

Chinese demand remains solid, as Barclays notes April imports were the third highest on record and inventories on the Shanghai Futures Exchange are also declining of late. But just as important in the group's view is stronger demand elsewhere, as revisions to global consumption numbers from 2009 by the International Copper Study Group (ICSG) has seen Barclays revise its forecasts to a copper market deficit of 155,000 tonnes this year. The change reflects a reduction of 205,000 tonnes to its surplus estimate for last year.

In the view of Barclays the ICSG revisions are likely to dispel some market notions of large unreported stock builds in China, so with the supply side of the market continuing to underperform it implies copper market fundamentals are continuing to improve.

But the current European fiscal uncertainty is outweighing fundamentals at present, while Barclays also highlights the fundamental picture may be somewhat weaker in the second half of this year as OECD restocking dissipates and Chinese policy moves become less supportive for copper demand.

Given such a view Barclays sees scope for the copper price to average US$6,000 per tonne in the fourth quarter of this year.

With respect to how the European crisis is impacting on commodities generally, MF Global notes the European Central Bank (ECB) has to date been somewhat content to allow the euro to depreciate, a move seen as the correct course of action.

MF Global suggests the plan appears to be to allow the euro to find its new equilibrium level before any intervention, the group suggesting this level is likely to be between US$1.10-$1.17. Until then, markets including commodities are likely to remain very volatile.

In the meantime China remains a wild card, MF Global suggesting any signs of decelerating growth in that economy could see commodity prices start another second leg lower. This leads the group to suggest the sidelines are the best place to be at present.

From the perspective of the proposed resources super tax in Australia, GSJB Were sees the possible outcomes as very different for commodities in different categories. Category One commodities such as iron ore, metallurgical coal, zircon and alumina are likely to require a moderate upgrade of 10-20% to the broker's long-term price assumptions, while the impact on the base metals and gold would be much smaller at less than 5%.

The other issue in the broker's view is a number of Australian companies have already indicated the uncertainty of the tax is causing them to defer proposed projects, Fortescue ((FMG)) and Oz Minerals ((OZL)) being just two examples.

GSJB Were suggests the longer this period of uncertainty continues, the more likely the deferrals being announced are to have an impact on the medium-term production profiles of those companies affected by the tax.

The broker also notes the proposed tax would make Australia the highest taxed of any of the major commodity producing nations.

Still on Australia, Credit Suisse notes the Australian Bureau of Statistics released April steel imports data this week, showing an easing in spot international prices overall. But the figures show Australian rod and bar import prices tend to lag international prices by three to five months.

For Credit Suisse this means domestic steel prices are likely to increase by US$100-$150 per tonne from April into May and June, which it suggests is positive for pricing for both BlueScope ((BSL)) and OneSteel ((OST)).

In oil the weaker market sentiment has seen prices correct significantly, a fall Commonwealth Bank analysts see as being made easier by the fact oil market conditions are not tight given high levels of stock at Cushing in the US.

Barclays agrees to an extent, though it points out while stocks remain high at Cushing there is no excess of crude above five-year averages elsewhere in the US. As well, Barclays suggests oil demand continues to improve, as evidenced by US distillate demand increasing by 16.8% in year-on-year terms for May to date.

This leads Barclays to suggest the combination of improving US demand, ongoing strong Asian demand and solid growth elsewhere means prices don't currently reflect actual market conditions. In other words, Barclays notes the market as being priced at around US$70 per barrel despite US$90 per barrel data flows.

Given this, Barclays sees prices as likely to rebound as the distortion caused by the excess supplies at Cushing diminishes and as stronger demand eventually turns around current market pessimism about the fundamental outlook for oil.

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