Commodities | Aug 20 2007
By Chris Shaw
Commodity prices bounced back on Friday as markets responded positively to the Federal Reserve’s decision to cut the discount rate and for Scotia Capital the time has come to return to its position as a secular bull on the sector.
While the group acknowledges some macro-economic concerns remain, such as temporary metal surpluses in Chinese markets after high levels of imports early this year, the lagged impact of tightening measures by Chinese monetary authorities, and the potential psychological impact if the US Congress goes ahead with protectionist legislation as has been threatened previously, it has re-established its Overweight position to the sector.
This is despite some evidence the Chinese economy peaked in the June quarter, as the group points out even if this is the case there is little risk of the global economy suffering a hard landing. It also expects the traditional seasonal weakness in commodities demand will soon draw to a close, so supporting prices.
Value is also more apparent as the sell-off in equity markets has made resource stocks more attractive, as current prices are factoring in too much of a slowdown in the Chinese economy.
Areas investors should focus on according to the group include iron ore, coking coal, zinc, copper and aluminium, the latter two being upgraded to positive from neutral. The positive outlook for aluminium prices is based on the view China’s heavy reliance on expensive overseas bauxite will provide some support for prices, while for copper the group expects the current inventory overhang to slowly be worked away, leading to a tightening of stockpiles.
The group is also lifting its outlook for nickel to neutral from cautious as it sees the recent price falls as removing some supply from the market as a portion of low quality output, particularly from the Philippines, is uneconomic at current prices.