Commodities | Apr 01 2014
-Indonesia, Russia key regions
-Upside seen in some base metals
-Credit Suisse bearish on iron ore, gold
-NAB more bullish on zinc, lead
By Eva Brocklehurst
The world is moving away from loose monetary policies which have pervaded for some years, notwithstanding ongoing Japanese monetary stimulus, likely Chinese fiscal stimulus and possible European monetary stimulus. This means interest rates, particularly in the US, are likely to rise off their lows. According to Credit Suisse, while that may create some volatility and headwinds for asset prices, the importance of supply/demand fundamentals for commodities should re-emerge. National Australia Bank analysts expect growth in the advanced economies to continue to improve over 2014. China remains a concern but indications that authorities still wish to pursue growth provides some comfort. The biggest supply issues for commodities this year are seen coming from Indonesia's export bans, in terms of base metals, and the Russia/Ukraine conflict, in terms of oil.
So what do analysts suggest for specific commodities? On a one-year forward view iron ore is Credit Suisse's least preferred commodity, closely followed by gold, and the best upside potential is offered by some of the base metals. National Australia Bank expects most base metals will be flat over 2014, with little evidence to suggest recent weakness can be offset in the near term. The exception is nickel, with the Indonesian bans supporting prices. NAB believes the growth in advanced nations augurs best for zinc and lead, where fundamentals are most positive.
Nickel is bolstered by major disruptions because of Indonesia's ban on ore shipments. Credit Suisse thinks the price will hold up but is still cautions about relying on any advance beyond 2015, as stainless steel output is likely to moderate in China. Tin also faces supply constraints in the form of Indonesia's attempts to manage flows. NAB suspects the price rises for nickel on the London Metals Exchange may not be sustainable until there is a significant drawing down of existing inventory. In this case, the higher price of ore should have a negative effect on Chinese nickel pig iron producers and help run down LME stocks later in the year.
Credit Suisse forecasts Brent crude at US$100 to US$120 a barrel over 2014. West Texas Intermediate has narrowed the gap with Brent, as the completion of pipelines improves the links between new onshore US production, Gulf Coast and other refining centres. The analysts expect the differential between the two benchmarks to narrow to around US$7/barrel in the high demand periods of the second and third quarter. National Australia Bank analysts expect crude pricing will moderate in the near term, with a correction in WTI likely to be more pronounced. The central risk underlying crude is the crisis in Ukraine and whether that garners momentum. Outside of that issue, Brent and WTI are expected to succumb to lower northern summer demand, while the pace of production picks up in North America and the Middle East. NAB analysts also expect Brent and WTI differentials to converge in the medium term, forecasting a December quarterly average of US$103/bbl for Brent and US$100/bbl for WTI.
Gas is tight, notes Credit Suisse, as global LNG trading is still dominated by the impact from the earthquake in Japan. Higher demand from the world's biggest consumer is making a difference and the analysts believe LNG will stay tight for the rest of the decade. US natural gas prices will mostly be affected by the extent to which there is a switch back to coal generation. Credit Suisse has raised forecast prices for the US summer by around 10%. In the UK, the winter exit will come with storage at five-year highs and the analysts have revised 2014 prices lower by 10%.
The Credit Suisse outlook for zinc and lead envisages much lower mine production growth and robust demand should keep the market tight in 2014. Whether prices respond consistently is another question and Credit Suisse suspects it may require persistent shortfalls over several quarters to galvanise higher pricing bands. NAB analysts note zinc and lead have been the best performers in the year to date because of limited additions to supply capacity.
What are the most negative forecasts?
Thermal coal prices have been downgraded again, the black stuff struggling under excess supply. Credit Suisse sees few potential catalysts for a near-term reversal of market dynamics. A slowing of Indonesian and Australian supply growth should eventually have an impact but the analysts consider the thermal coal market is structurally challenged. The second quarter FOB Newcastle average price is expected to be US$75/tonne.
Gold bears remain stationed at Credit Suisse. While the most bearish forecasts back in January may have been a little too much that way, the analysts do not believe the rationale for lower gold prices has changed. Stronger US growth should lead to increased focus on tighter interest rates and less accommodative policy settings won't increase the attractiveness of gold in other regions. Credit Suisse does not think demand growth in physical markets in Asia will be sufficient to offset supply.
That other precious metal, silver, should be able to modestly outperform gold over the medium term, in Credit Suisse's view. Still, this is not a high conviction view, as the scale of investor holdings in the metal may weigh.
Platinum's price has gone nowhere, notes Credit Suisse, despite the industrial action in South Africa. This is a sign of how well hedged the vehicle manufacturing users are and how much refined inventory exists. Palladium has held up better and Credit Suisse thinks this metal's more favourable demand prospects should keep investors holding it tightly.
Iron ore's sharp fall in the first quarter is not expected to be mirrored in the second. Chinese stimulus policies are expected to drive an improvement in steel production and iron ore demand. Credit Suisse does not expect a significant bounce in prices, with any rally to be capped by forecast seaborne supply growth of 11%. Further on, the underlying mismatch in the supply/demand will return and the analysts expect prices to go lower, with iron ore trading below US$100/t at some point in the second half.
Copper mine production growth should keep the market well supplied in 2014 and Credit Suisse suspects that demand growth will be below 5%, against increases of refined copper production of more than 7% led by China. NAB analysts believe soft demand and strong supply have driven price outcomes, rather than the unwinding of financing deals. They forecast a gradual unwinding of these deals as US interest rates rise and this will keep spot copper prices muted, but they're not expected to collapse.
Aluminium prices are expected to trade in a range as, while supply restraint has emerged outside China, stockpiles are not depleting rapidly enough. NAB analysts observe the aluminium market is in chronic oversupply but bottlenecks at warehouses, the Indonesian ban and financing are keeping the physical market tight and premiums elevated.
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