Commodities | Jul 19 2007
By Chris Shaw
Leading into the second half of the year Barclays Capital has conducted a review of how the various commodity sectors have performed over the past six months, using this as a basis for gaining some insight into what can be expected in coming months.
The group notes while a commodity index would show prices gained in the June quarter, performance has been anything but consistent as even among sectors there have been strong and weak returns generated.
Base metals are a case in point, as the group notes lead prices rose almost 50% in the June quarter alone, while in the same period nickel lost more than 20%. Natural gas prices have been similar, as the UK market has experienced sharp rises in price over the past three months while prices in the US have drifted lower, so it is fair to say markets have been driven by relative fundamentals.
One sector where the fundamentals appear good but little has happened is the precious metals group, as prices largely went sideways last quarter. This has been something of a surprise as at the start of the year the fundamentals suggested gold would have a solid year given the oil price looked strong, the US dollar was weak and there were a number of geopolitical issues causing some global instability.
As the group notes this has not played out to date, while there is actually some scope for price weakness in coming months given the potential for the rate of producer de-hedging to slow, while the fact central bank sales have been less than permitted has created some concerns of supply overhanging the market.
As a result the group see the gold outlook as fairly neutral at this point in time.
With respect to oil the group expects the oil price will set a new all time quarterly high in the September quarter as global demand has accelerated while non-OPEC supply has been flat. This sets the market up for the fifth straight year where the growth in the rate of supply is below the rate of demand growth.
Also supportive for prices in the group’s view has been OPEC output cuts, as current output by members is estimated to be its lowest since early 2004. This reflects a change in OPEC policy to a more restrictive approach, Barclays pointing out the cartel is now using inventory levels as a target variable.
It doesn’t see the current market situation reversing itself anytime soon as the expectation is for non-OPEC production to fall further, while the fact global oil inventories are likely to enter the December quarter with four successive quarters of larger than normal drawdowns and smaller than normal seasonal builds should ensure the market remains quite tight.
For base metals the group notes the market is now in its seasonally weak period given the northern summer, but even allowing for weaker demand in the shorter-term it sees no change to the medium-term picture where supply struggles to keep pace with demand.
In the group’s view this will ensure inventories remain low, meaning prices will continue to be vulnerable to any supply disruptions. But the group doesn’t go so far as to agree with the commonly held perception the base metal market has been driven by supply, as in its view the key to stronger prices has been the rate of demand growth.
Having looked at output figures across the decade it suggests supply growth has actually been relatively strong, the exception being when there have been disruptions due to labour or technical issues.
Given price gains have been a demand story the group expects further price increases going forward as the demand growth is expected to stay at high levels but there are increasing questions as to whether the supply side can lift to match it.
It sees potential for supply to fall short of expectations given spare mine and processing capacity has been drawn down rapidly and the use of scrap and secondary metals is currently at all-time highs.
The group also suggests while China is a growing processor of metals its government continues to bring in measures designed to slow this growth, meaning the overall view is one of little prospect for inventory levels to be rebuilt in the medium-term.
Looking more specifically at each metal, the group expects the aluminium market to trend into a deficit by the end of the decade unless consumption growth is matched by smelter additions, an outcome that appears unlikely at this stage.
The copper market is relatively well balanced and should remain so in coming months in the group’s view, but by the end of the year it expects Chinese buying will again emerge and for this to have a positive impact on prices.
While lead has been the star in recent months the group suggests this is justified given shortages of concentrates and refined supply, so both short and long-term it remains positive on the metal’s outlook.
Nickel doesn’t paint such a positive picture in the short-term though as the group sees the current correction as having further to run, though longer-term it sees scope for a strong rebound once the current de-stocking process is completed.
Like lead there are concerns over the availability of smelters in the zinc market, while inventory levels have fallen to low levels. This suggests potential for a spike in the current quarter, but such a price move may be brief in the group’s view.