Commodities | Nov 22 2011
– Citi revises short-term base metal forecasts
– Deutsche offers some commodity trading ideas into 2012
– Possible upside for nickel prices
– Potential benchmark for coal prices
By Chris Shaw
As Citi points out, base metal markets at present are being torn between some signs of improvement in the economic outlook for both China and the US and the significant deterioration in debt issues in the Eurozone.
In China, excess heat appears to have been removed from the economy, setting the stage for the next move in monetary policy to be an easing. The addressing of debt concerns will mean a contraction in Western European economies, while resurgent oil prices are a threat to the global economy overall. On the plus side Citi notes corporate balance sheets appear relatively healthy.
Despite all of this base metal markets have steadied in recent weeks, Citi suggesting these markets are now no longer expensive on a number of measures. This may not be enough to prevent some further short-term price weakness given concerns over how the issues in Europe play out.
Most vulnerable short-term, in Citi's view, is copper, especially if current strike action at Freeport's operations ends sooner rather than later. Aluminium should hold better, largely because its price is currently much closer to its cost of production than is the case for other base metals.
Citi expects metals will struggle until the second half of 2012, by which time the euro zone troubles should have been addressed. In the meantime, and to factor in the data of the past month, Citi has revised its forecasts.
Some near-term estimates have been lifted but annual price forecasts remaining unchanged. The result is a slightly less bearish view on copper relative to a month ago, along with some modest increases to nickel and tin forecasts.
For aluminium, Citi is forecasting a 0-3 month price of US$2,150 per tonne and a 6-12 month price of US$2,325 per tonne. Both are unchanged, as is the broker's long-term price of US$2,500 per tonne.
In copper Citi has lifted its 0-3 month forecast by 4% to US$7,250 per tonne, while both the 6-12 month forecast of US$8,500 per tonne and the long-term forecast stands at US$7,500 per tonne.
There are no changes to Citi's lead or zinc price forecasts across any of the timeframes. For lead forecasts stand at US$1,975 per tonne for 0-3 months, US$2,275 per tonne for 6-12 months and US$2,200 per tonne for the long-term. In zinc, estimates stand at US$1,850 per tonne for 0-3 months, US$2,125 per tonne for 6-12 months and US$2,300 per tonne for the long-term.
Nickel estimates have risen by 3% each for the 0-3 month and 6-12 month timeframes to US$18,000 per tonne and US$2,500 per tonne respectively. Citi's long-term forecast remains a price of US$18,500 per tonne.
Tin prices estimates have increased the most in percentage terms, Citi lifting its 0-3 month numbers by 5% and its 6-12 month numbers by 4% to US$23,000 per tonne and US$25,000 per tonne respectively. The broker's long-term forecast is US$18,000 per tonne.
Also looking towards 2012 is Deutsche Bank, which has assessed current and expected conditions in commodity markets to offer some trade ideas for the coming year. The ideas are based on the view the ability of commodity prices to move higher in 2012 will depend on whether the Fed can stimulate growth, China can engineer a soft landing and European policymakers can find a solution to the sovereign debt crisis in the region.
The greatest risk at present is Europe, as Deutsche suggests even if the debt concerns can be contained, there is still the risk of bank de-leveraging that could limit access to trade finance and so impact on global trade activity levels.
Given this risk, Deutsche suggests more defensive strategies are most appropriate at present, as the likelihood is for more periods of investor risk aversion through 2012. Such episodes have typically hit energy and industrial metals prices the highest, so Deutsche's strongest conviction trade remains being long the precious metals and in particular gold.
Assuming Deutsche's forecast of global GDP growth of more than 3% in 2012 proves correct, any corrections in energy and industrial metal prices should be relatively short-lived. What would also support prices for industrial metals in particular would be policy easing in China, while ongoing geopolitical risks and tightening fundamentals should prove supportive to oil prices.
Deutsche's top trade ideas heading into 2012 therefore include being long gold and silver, as well as long back-end zinc given an expectation of a tightening in fundamentals over the medium-term as that market moves into deficit by 2013.
Deutsche also suggests being long US natural gas while short UK summer 2012 gas, this given expected stronger demand in the former and ongoing excess supplies in the latter. Deutsche would also be long West Texas Intermediate (WTI) while being short Brent crude, this reflecting an environment of above trend US growth and declining US oil inventories closing the price gap between the two.
Among the agricultural commodities, Deutsche suggests being long soybeans and short back-end corn, as corn prices appear high relative to other crops and a potentially strengthening La Nina phenomenon would put soybean production at risk.
The potential for significant closures of older coal and gas fired power stations in Germany in coming years should reverse current backwardation in Cal '12/Cal '13 prices, so Deutsche also recommends going long German baseload power.
Finally, Deutsche suggests being long the Deutsche Bank Commodity Curve Alpha Index, as carry has been a solid source of extracting alpha from commodity markets during periods of risk aversion. The strategy would see futures contracts rolled more frequently and across the entire forward curve. Importantly, Deutsche points out this strategy is also neutral with respect to spot prices.
The economic issues in Europe are making production costs an increasing point of focus for participants in the base metals sector. According to Barclays Capital, the metal where fundamentals are most impacted by the cost framework is nickel.
Barclays estimates China will account for about 90% of global refined nickel demand growth in 2011. This means refined import levels are a major influence in exerting that demand strength on the balance of the international market.
So far in 2011 Barclays notes Chinese net refined imports are up 37% in year-on-year terms, which has coincided with a 39% year-to-date fall in LME stocks of nickel. Barclays suggests given a more stable macro backdrop this would have offered scope for positive price performance.
But for nickel, production costs are so important because the cost structure of Chinese nickel pig iron (NPI), combined with relative NPI and refined nickel price levels, determine the composition of China's domestic nickel needs. As an example, Barclays points out NPI is now a perfect substitute for refined nickel in both 200 and 300 series stainless steel.
So as Chinese refined prices have fallen, there has been a demand-supportive price discount to some higher grades of NPI. Falling NPI prices have resulted in much of the sector falling into negative margins, with refined demand and import levels the beneficiaries of such market changes.
If refined prices rose next year this dynamic could be reversed, but Barclays notes the current macro picture suggests this is unlikely. As well, the NPI cost curve could adjust lower if input raw material prices fall, so restoring margins.
The latter would likely take some time according to Barclays, as power prices are controlled in China and coking coal prices have been trending higher in recent weeks. Given this, Barclays expects refined nickel imports into China will remain relatively well supported for the remainder of the year. Barclays sees this as offering some upside potential for the nickel price in coming weeks, particularly if the macro storm can ease.
In the bulks, UBS notes there are unconfirmed reports Teck Resources and Anglo American have settled 2012Q1 hard coking coal for Asian customers at US$235 per tonne fob. This would be down US$50 per tonne from 2011Q4 prices and puts prices in-line with current low-vol hard coking coal spot prices.
The significance according to UBS is both Tech and Anglo are benchmark price setters, particularly as BHP Billiton ((BHP)) continues to pursue monthly price contracts.
While met-coal prices have declined by 25% over the past quarter, UBS expects further price falls in 2012. There is some upside risk to the broker's assumptions, as Queensland producers continue to report saturated ground conditions ahead of the upcoming wet season.
In terms of forecasts, UBS expects hard coking coal prices will remain above US$150 per tonne until 2015, this against a long-term real price of US$130 per tonne. For low-vol PCI the broker expects a decline to US$125 per tonne until 2015 and a long-term real price of US$110 per tonne, while for semi-soft the expectation is for prices to decline to US$115 per tonne by 2015 and a long-term real price of US$100 per tonne.
