Commodities | Nov 15 2010
By Chris Shaw
Commodity prices rallied further last week, with copper being pushed to an all-time high of US$8,980.50 per tonne, oil to a 25-month high above US$80 per barrel and grain prices to levels last seen back in September of 2008.
According to Danske Bank, last week's rally appears to show the conclusion of investors is further quantitative measures from the US Federal Reserve and reasonable US economic numbers are a positive combination for the commodities sector.
Also bullish for prices is the International Monetary Fund (IMF) warning in its latest World Economic Outlook the commodities “super-cycle” could be about to resume. This is a view Danske Bank happens to share, given Asian demand remains strong and market conditions are tight in several commodities.
While setbacks from time to time remain likely, Danske Bank cautions against investors taking too conservative an approach, as by waiting for a pullback in prices to enter the sector investors may miss out on what could be another leg higher.
Danske Bank even accepts its forecasts may have underestimated market sentiment, as oil for example looks like it could test US$100 per barrel much earlier than the late 2011 timetable it had previously expected. Similarly, some calls in the market suggesting copper may hit the US$10,000 per tonne level now don't look so far-fetched in the bank's view.
BA-Merrill Lynch is also bullish on commodity prices, looking for further gains next year from a combination of US quantitative easing measures, the introduction of Exchange Traded Funds (ETFs) boosting investor demand for some commodities and ongoing strong Chinese and other emerging market demand driving physical demand.
There remain some risks for the sector in BA-ML's view, including a potential recovery in the US dollar, excessive capital outflows to emerging market economies and the fact the current second round of quantitative easing measures is a policy front-loaded to the first half of 2011. This could create some uncertainty with regards to economic policy in the second half of next year according to the broker.
While bullish, BA-ML points out relative strength of fundamentals for the various commodities are likely to become more relevant next year and so drive prices. This suggests commodities where there are supply issues such as copper, platinum and palladium should outperform. BA-ML is particularly bullish on copper, expecting prices for the metal in 2011 could average US$11,250 per tonne. This compares to to a forecast average in 2010 of US$7,557 per tonne and is up from a previous forecast for 2011 of US$8,000 per tonne.
BA-ML has adjusted price forecasts for 2011 elsewhere in the commodities sector as well, lifting its aluminium forecast to US$2,600 per tonne from US$2,275 per tonne previously and for lead to US$2,775 per tonne from US$2,450 per tonne previously.
For nickel BA-ML is now forecasting an average price of US$25,750 per tonne in 2011, up from US$20,875 per tonne previously, while for zinc the broker's forecast increases to US$2,725 per tonne from US$2,550 per tonne.
Among the precious metals BA-ML has increased its 2011 average gold price forecast to US$1,425 per ounce from US$1,390 previously, while for silver its forecast has increased to US$29.50 per ounce from US$28.78. For platinum BA-ML's forecast has risen to US$2,000 per ounce from US$1,750, while for palladium the broker's average price forecast for 2011 has increased to US$775 per ounce from US$650 per ounce.
Goldman Sachs has added its view on the outlook for the base metals, noting for aluminium the fact the metal didn't rally along with the other base metals last week was likely due at least part to a second successive month of declining net new orders for mill products in October. This implies demand for aluminium semis has reversed somewhat since the summer.
Industry heavyweight Alcoa expects global aluminium demand growth will increase to 6.5% per annum over the next 10 years, Goldman Sachs noting this is based on a view global population growth will continue, there will be an increase in the rate of urbanisation of societies and energy conservation and environmental regulations will play an increasing role in the outlook for the metal.
Short-term, Goldman Sachs suggests demand for aluminium and the other base metals in the US market looks weak, so how demand holds up in other markets will be of importance. In this regard the broker notes there appears to be some de-stocking underway in China at present, as copper import tonnage for the year to October is well down on the same stage last year.
Goldman Sachs remains bullish on copper on a longer-term view, noting fundamentals remain constructive to higher prices. Supporting this bullish view is confirmation of further supply side issues, as for example the broker notes there are reports Chinalco has postponed the start of construction of its Toromocho project in Peru.
In looking at silver, Macquarie suggests while the belief the metal has favourable attributes as both a safe haven and an industrial metal is driving prices at present the reality is somewhat less positive.
ETF holdings of silver have grown strongly since the middle of the year and recent outperformance of the metal's price has seen this trend continue in recent weeks. While this boosts the investment argument for silver, Macquarie suggests the industrial metal outlook for silver is not as attractive. Production so far this year has been strong, meaning the fundamentals of the silver market are not as tight as for other metals.
As long as investors continue to accumulate silver in the belief the metal's industrial exposure is driving prices Macquarie expects the market will remain strong. If investor conviction starts to falter however, the broker suggests the strong growth in supply relative to fabrication demand growth may begin to put the silver price under some pressure.
