Commodities | Aug 07 2012
– Danske revises commodity price forecasts
– Commodity super cycle coming to an end?
– Individual market factors to drive prices
– Lead market outlook better than for zinc
– Chinese aluminium market adjusting to Indonesian export bans
By Chris Shaw
Danske Bank, notes the weakness in commodity prices over the past three months is somewhat justified, as the global economic growth outlook remains weak for 2013. Weak economic growth implies weaker demand for commodities.
For the balance of 2012 Danske Bank sees three main drivers for commodity prices – further easing from the US Federal Reserve, the outlook for China and the European debt crisis.
With respect to the former, Danske expects another round of quantitative easing is likely to be announced either late in August or by the middle of September. Past announcements of large scale bond purchases by the Fed have sparked rallies in risky assets and Danske suggests a repeat of this is likely if its current growth forecasts prove correct.
With respect to China, Danske has not changed its view the economy should deliver a turnaround in the second half of this year as earlier monetary policy easing starts to impact. A key concern remains Asia ex-China where PMIs continue to show weakness, as this limits Chinese export potential shorter-term.
Europe remains a major issue for the market but Danske notes authorities continue to stress whatever action is needed to save the single currency will be taken. This suggests the crisis will not be allowed to spin out of control.
Longer-term, Danske's view is there are signs the commodity super cycle is coming to an end. This implies commodity specific fundamentals will assume more importance as a guide to the future direction of prices.
For oil, Danske Bank suggests the recent oil price rollercoaster has been fuelled by geopoliticially driven supply-side concerns. This should offer something of a floor for the oil price, even as the cyclical environment could continue to act as a headwind for the market.
On the upside Danske sees scope for Chinese energy demand to recover more quickly than the market currently expects, and when combined with the expectation of further quantitative easing the risk of any large sell-off in oil leading into 2013 is reduced.
For the second half of this year Danske expects crude oil prices to remain around current levels, but the likelihood OPEC is unable to coordinate a production response to slowing demand suggests weaker prices are likely in 2013.
Danske's forecasts for oil in Brent crude terms now stand at US$111 per barrel this year and US$103 per barrel in 2013. The former is up from US$107 previously, while the latter has been lowered from a previous estimate of US$116 per barrel.
With respect to the Brent-West Texas Intermediate differential in prices, Danske sees this spread slowly narrowing as infrastructure in the US is expanded around Cushing in Oklahoma.
Prospects in the base metals are diverging in the view of Danske Bank, this reflecting different fundamentals for individual markets. Assuming China avoids a hard landing, Danske sees a generally improving outlook for base metals with copper likely to be the major beneficiary given an ongoing global market deficit.
Danske's view is the market has turned overly bearish on copper, whereas prices should benefit from any turnaround in Chinese demand. Average price forecasts stand at US$7,940 per tonne this year and US$8,150 per tonne in 2013, which compares to previous estimates of US$7,890 per tonne and US$8,300 per tonne respectively.
In contrast, the aluminium market remains in surplus as Asian producers lift output and this has continued to pressure prices. At the same time, Danske notes the fact warehousing and funding costs remain low enough to incentivise the buying of spot aluminium and selling it forward means this practice is still widely in use.
This leads Danske to suggest there is limited upside to aluminium prices moving forward, though the predicted return of China and Fed easing should also limit the downside for prices. Aluminium is forecast to average US$1,925 per tonne thus year and US$1,850 per tonne next year, against previous forecasts of US$1,944 and US$2,138 respectively.
Zinc is the only base metal currently trading higher than its price at the start of the year. This is against a fall of around 5% in the LMEX, a weighted average index of the six main metals traded on the LME.
Zinc's performance has been enough for the metal to at times this year trade above sister metal lead, something Macquarie suggests is difficult to justify on fundamentals. Over the last month the market has corrected itself and lead is again trading at higher levels than zinc.
As Macquarie notes, recent demand-related data releases for lead have been broadly positive, as Japanese consumption has increased and North American lead-acid battery shipments are up on a three-month average basis in year-on-year terms. Lead demand also appears to be rising in China.
Demand indicators for lead typically improve from the first to the second half of the year for seasonal reasons, while Macquarie notes seasonal headwinds are the norm for zinc in the second half of the calendar year.
Entering this period, Macquarie notes the zinc market is firmly in surplus, with little prospect of a tightening going forward given new mines and expansions will continue to hit the market in coming years. This leads Macquarie to suggest prospects for lead continue to look better than do those for zinc.
Further on the industrial metals, Commonwealth Bank has attempted to assess the early impact on China's alumina and aluminium markets of Indonesia's export ban on bauxite.
The implementation of the export ban saw China's bauxite imports fall by 84% in month-on-month terms in June. CBA suggests the impact on Chinese bauxite consumers may be muted thanks to a combination of widespread stockpiling prior to the ban and slower aluminium demand growth.
CBA points out China is now broadly self-sufficient in alumina, though net alumina trade is likely to cycle based on arbitrage between domestic and seaborne prices. As an example, CBA suggests should the Indonesian export bans stay in place, China's bauxite imports are likely to remain under pressure while alumina imports could increase.
If the pace of Chinese economic growth continues to slow, CBA suggests there would be increased risk aluminium demand comes under pressure. This would translate to weaker demand for both alumina and bauxite. Such an outcome is not expected, as CBA continues to forecast a stabilising in China's economic growth rate in coming months before a modest acceleration into next year.
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