Commodities | Jul 17 2013
-Fundamentals looking weak
-Further price falls expected
-Chinese demand fragile
-Overall, reduced global growth
By Eva Brocklehurst
Commodity price forecasts are being trimmed. Commonwealth Bank analysts have revised almost all prices lower in forecasts out to FY16, after further upward revisions to the US dollar outlook. Australian miners have been operating in an environment of falling commodity prices and a strong Australian dollar for 12-18 months. This has squeezed margins with a resultant resurgence in cost cutting. The weaker Australian currency is seen providing a welcome offset to lower US dollar commodity prices for all miners.
The largest CBA analyst changes are for 2014 and 2015 forecasts, reflecting the years of the most significant cuts to the Australian/US dollar exchange rate outlook. Base metal prices have been revised down 3-10% in FY14, 3-6% in FY15 and 2-4% in FY16. No changes have been made to alumina prices as foreign exchange effects are offset by stronger pricing. Mineral sands price forecasts are cut by 2% for FY14, 4% for FY15 and 2% for FY16, reflecting roughly half of the AUD/USD movement in those years.
Precious metal prices are reduced 11-21% in FY14, 1-29% in FY15 and 7-16% in FY16. The largest forecast reductions have been made to platinum. Iron ore price forecasts are reduced by 3%, 7% and 4% in FY14, FY15 and FY16 respectively. Coal price forecasts are down 1-4% for FY14, 5-6% for FY15 and 3% for FY16. Lastly, energy price forecasts are flat to 6% lower in FY14, 3-8% lower in FY15 and 3-5% lower in FY16. The largest changes here are for uranium.
Macquarie has also revised forecasts, noting throughout 2013 metals and bulk commodity prices have faced a number of concurrent headwinds. Ex-China demand continues to be a drag, supply has started to surprise on the upside, the LME is proposing to tackle warehouse queues and emerging market economies are struggling to cope with capital flows in line with expectations for the end of quantitative easing (QE) in the US. Even Chinese demand looks increasingly fragile and Macquarie warns that the above-trend performance, year-to-date, means sequential falls may be more dramatic. The majority of metal and bulk commodity price forecasts are downgraded for the second half of 2013.
Given the strong supply performance, fundamentals are looking weaker than previously expected for 2014. Macquarie expects those miners that are pure plays will be most affected, but the majors are not spared. Macquarie retains a preference for iron ore miners over copper miners because of the cost curve support.
Prices are nearing a point where immediate supply should be under pressure to come off line. To do this, metal prices will need to push consistently into the cost curve over the next 18 months. Further out, the key question is when primary supply is required to provide market balance. This is the point where prices will have to trade to a level to either provoke short-term cyclical supply back into the market and/or drive investment decisions for new capacity. For some metals, such as the platinum group, this could come as early as next year. For others, such as steel, no new supply will be required, in Macquarie's view.
Specifically, Macquarie's forecasts for copper in 2014 are unchanged, but aluminium is cut 10%. The nickel price forecast is reduced 14%. Expectations of the US Federal Reserve reducing QE and sluggish vehicle demand have dragged down forecasts for gold, silver and the platinum group by 7%, 11% and 15% respectively for 2014. Iron ore is still seen holding up, with unchanged price forecasts of US$125/t in 2014. The thermal coal price forecast is reduced 8% to US$86/t while metallurgical coal is unchanged at US$179/t.
Citi puts it bluntly. "Curb Your Enthusiasm" is the recommendation, as there is a temptation to look for overshoots on the down side and new opportunities to enter the market. The market retreat in Q213 was part of a more basic trend Citi suspects and, for most commodities, the nadir has not been reached. Citi expects commodity prices to respond in an increasingly differentiated way and according to individual fundamentals. Recently, policy statements from China and the US prompted tighter correlations between commodities and equities in particular, but over time Citi expects renewed divergence.
It may be tempting to hope for renewed equilibrium across market, but the volatile macro environment is expected to re-assert in the second half of the year, not just in commodities but in other asset classes. The US and China are seen trying to change long-held policies and that has major implications across asset classes. In Citi's view, the outlook is more uncertain than was expected at the beginning of this year. In the US, a more positive outlook is triggering changes in government credit policies. In China, a worsening economic outlook is being tested by credit reforms that could have implications for future growth.
Citi economists have reduced growth forecasts for some large emerging economies, while raising those for advanced economies. For emerging markets, the period ahead appears to be one of growth downgrades, rising imbalances and worsening current accounts. As commodity demand is a reflection of global growth, reduced growth and lower fixed asset investment, particularly in China, points to a softer price environment.
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