Commodities | Mar 10 2014
-Upside in platinum from strikes
-Gold demand hikes on Crimea
-ANZ analysts prefer base metals, energy
-Bulks prices to improve
By Eva Brocklehurst
Platinum has room to rally if South African labour unrest continues, ANZ analysts believe. Pre-emptive stockpiling has muted the immediate response in the spot price but the analysts think Impala Platinum's declaration of force majeure on supply contracts last week may indicate the pipelines are becoming depleted. In comparison, the price of platinum rose almost 25% between August and September in 2012 from industrial action. This year the strikes started in late January, yet six weeks on platinum is just 8% higher. The analysts suspect producers had more warning and this allowed for the stockpiling. A fundamental supply deficit this year should also provide underlying support for the metal.
Again comparing the situation with 2012, the analysts noted there was an underlying surplus that year which softened the impact of the labour unrest and production. If the strikes continue the analysts expect the price upside potential to continue, although the eventual cessation of action means an outright long position in platinum is precarious. ANZ analysts prefer to purchase platinum against gold, which is considered likely to be weak near-term as Chinese buying remains on the sidelines.
Physical demand for gold has been quite strong, National Australia Bank analysts observe, as Asian consumers respond to lower prices, even as Indian import demand is restricted. This could be a bright spot, but the analysts acknowledge the possibility of further negative shocks to emerging market currencies. Moreover, concerns over the Chinese growth outlook tend to be more significant for industrial metals than gold but as China became the largest gold importer last year, the significance is not negligible.
Countries with poor external balances have created volatility in exchange rates and helped boost demand for safe haven assets, such as gold, in late January and early February. The analysts note markets were quick to price in the concerns while the swift response of some emerging markets to stabilise their currencies alleviated some of the fears. Tensions in Ukraine have also created marked increase in demand for gold. The main concerns stem from both a call for financial aid and the possibility of energy disruptions, enhancing gold as an inflation hedge.
The upcoming election in the Crimea may help to clarify the situation and this is a geopolitical hot spot the analysts will be watching closely. Once source of volatility for gold has now subsided. The premium placed on gold from US political uncertainty has been washed out after the borrowing authority was lifted late last year. The analysts note views on the direction of gold prices have diverged notably, with one extreme expecting a solid pick up in Asian demand and a faltering US recovery to push the price higher, and the other extreme expecting additional strength in the US dollar, US interest rate and equity market rallies to push the price down until supply-side constraints are hit. NAB analysts are in the latter camp, expecting US interest rate increases will place additional pressure on the gold price. An earlier lifting of the Indian import restrictions and geopolitical and emerging market concerns represent the upside risks to forecasts.
Commodity markets have kicked off 2014 in a mixed way. ANZ analysts observe base metals and bulk commodities have been held back by slower seasonal factors and restrictive Chinese policies. Meanwhile, precious metals and energy markets reflect overly aggressive selling in 2013 or supportive seasonal factors at the start of 2014. The analysts observe the headwinds have been largely factored into the markets, which recently contended with an adjustment to US interest rates and a slowing in Chinese growth expectations. This leaves potential for upside in the rest of the year. The analysts prefer the base metals and energy markets this year, where tighter supply conditions or strong leverage to developed market growth should support prices.
Copper's inventory financing activity has clouded the outlook for that metal but the analysts, again, think this is priced in and mild upside for prices is likely in the months ahead. Oil prices are expected stay around current levels for the rest of the first quarter and into early in the next quarter. Demand from China should support crude as construction activity gets a jog along in spring. Agricultural commodity price gains are still possible in some areas, the ANZ analysts contend, as the political uncertainty in Crimea pushes additional wheat and corn sales to the US. In sugar, further downgrades to Brazil's production targets remain a risk.
ANZ analysts observe the cash-strapped Chinese steel sector has pulled back operating levels, finding it hard to raise cash. The analysts think this is temporary and prices should start to recover, although the upside will be limited. In terms of the steel inputs, the analysts have become more positive on coking coal, with prices expected to move back over US$130/t in coming months. Iron ore prices are expected to move back over US$120/t as well. Thermal coal is considered a little more difficult as a mild winter has left Chinese stocks at higher than normal levels. Supply will be the main price determinant, according to the analysts, with the level of Chinese coal output the key to supply.
National Australia Bank analysts expect bulk commodities should improve in the short term, as steel inputs benefit from the resumption of production after the northern winter. Base metal complex outcomes are varied, with supply side factors helping nickel and zinc outperform in recent months. The NAB analysts also note slowing Chinese growth has weighed on commodities generally, as capital flows have reversed towards the developed economies which have sustained an improved outlook. Still, the analysts warn that the first months of Chinese data are notoriously unreliable for gauging trends because of the effects of Chinese New Year celebrations. The next couple of months should provide better indicators.
On the supply side, bulks production and some metals are expected to outpace the improvement in demand, even as the global economy recovers, given there are signs of a plateau emerging in Chinese demand, which has been largely responsible for the series of commodity super cycles in the last two decades. The NAB analysts also believe the record pace of crude and natural gas production in North America should ensure comfortable supplies, which will cap the upward potential in prices.
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