Commodities | Oct 28 2010
By Chris Shaw
Agricultural commodity prices have rallied in recent months to the extent prices have hit a series of multi-year, and for cotton, all-time highs. Supply side downgrades were the initial driver of the rally, but in the view of Barclays Capital the gains are now being sustained by a more long-term fundamental misalignment.
Barclays notes the agricultural commodities are now showing evidence of declining stocks, strong demand, government intervention and bio-fuel policies, all of which are boosting the demand side of the equation.
Crucial to the demand side is the role of China, Barclays noting that nation's demand for agricultural imports this year has been nothing short of voracious. Corn imports as at the end of September of 512,800 tonnes are up more than 7,000% in year on year terms, reflecting tight domestic conditions and a shift towards more import dependence.
This leads Barclays to suggest China is unlikely to be able to hold onto its self-sufficiency status in the corn market. The increase in Chinese demand has come at a time of tighter course grain supplies and lower US yields, so tightening that market significantly.
Elsewhere, government intervention has also played a part, with one example being India banning cotton exports for a month and placing new restrictions on that market. Russia has similarly banned grain exports until the 2011 harvest, while Ukraine has a grain export cap until the end of this year.
Had inventory levels been higher, these moves would have had less impact but Barclays notes US corn stocks are at their lowest level since 1996-97 and global stocks at their lowest since 1993-94. This leads Barclays to forecast corn prices should test US$6 per bushel near-term, a move that would likely take soybean prices higher as well. For soybeans, Barclays expects a test of US$13 per bushel.
Still on China, RBS Australia notes September trade data showed refined metal imports remained strong, while imports of base metal ores and concentrates, coal and crude oil were at record or near record levels.
In aluminium, China was a modest net primary importer of around 1,600 tonnes and exports of alloys and products fell from August levels. While there was likely some accumulation of stockpiles over the past two years, RBS doesn't see aggressive liquidation in China as a major threat to the aluminium market in coming years.
While net refined copper imports into China fell in September, they remain well above the levels of recent years. The other positive for RBS is near record copper prices haven't generated a surge in copper supply. Current stockpiles are likely to gradually re-enter the market to meet shortfalls post this year.
Nickel imports rose in September, but the issue in the view of RBS is the potential for Chinese nickel pig iron supply to surge as production appears to be picking up. This trend appears likely to continue in coming years, especially as Chinese nickel pig iron production costs have halved over the past two years.
China remains a net refined zinc importer though imports were weaker in September as domestic production rose. The key for RBS is demand for concentrates remains firm despite potential smelter capacity cuts.
Similarly, iron ore demand is expected to remain robust into 2011, so supporting prices near current levels. It is the same story in coal, as the broker notes September data show China remains a large net importer . With demand likely to stay firm, prices should remain well supported.
Over in steel, industry consultant MEPS is forecasting record high global steel production for 2010 despite some weakness in the second half of the year. MEPS expects total world output of 1.4 billion tonnes, which would be a 14.4% increase from 2009. A further increase of 4% is expected in 2011 thanks to rising economic activity levels.
Supporting the full year forecast was record output in the September quarter of almost six million tonnes, an outcome almost three million tonnes higher than that recorded in the same period in 2008.
In terms of increases, Asia is expected to be a major contributor, China driving steel output in the region to a forecast 892 million tonnes this year, up from 798.5 million tonnes in 2009. MEPS also expects strong growth in EU output, forecasting production of 202.3 million tonnes this year compared to 168.2 million tonnes in 2009.
North American production will also grow solidly, MEPS forecasting output this year of 111.5 million tonnes, up from 82.4 million tonnes in 2009. In percentage terms, steel production in Oceania will also rise sharply to a forecast 8.3 million tonnes, up from 6.0 million tonnes last year.
Gains from other regions will be more modest, predicts MEPS. Its forecasts are calling for CIS output to increase to 104.9 million tonnes this year from 97.5 million tonnes last year, while in South America production is expected to increase to 43.6 million tonnes from 38.1 million tonnes previously.
In Africa, MEPS expects output for 2010 of 16.9 million tonnes against 2009's 15.2 million tonnes, while in the Middle East steel production is forecast to increase to 20.5 million tonnes this year from 17.7 million tonnes in 2009.
