Commodities | Sep 05 2008
By Chris Shaw
The combination of the secular growth story of China and the other “BRIC” nations in combination with a weaker US dollar have been the driving force of the commodities boom of recent years, but the recent correction in prices across the energy and metals sectors on the back of a stronger greenback has shown how quickly confidence in the sector has been lost.
According to Standard Chartered the outlook from here is mixed, as while the market may be slightly over-optimistic on the prospects for the US economy at present, global growth is clearly slowing. This means demand for commodities can be expected to continue increasing, but at a slower pace than has been the case in the past couple of years.
Not helping of late have been traditionally weaker seasonal demand as evidenced by falls in freight rates and the collapse of the Ospraie hedge fund, but in the group’s view, this trend should be at least partially reversed in the December quarter when demand is expected to show a modest recovery.
In the view of Barclays Capital, the correction in commodity markets is now running the risk of going too far and while it may be too early yet to consider taking long positions, any further price falls are likely to set up value opportunities in those markets where the fundamentals are strongest such as aluminium, tin, oil and platinum.
Standard Chartered is a little more cautious, as having recently lifted forecasts for the US dollar against the euro in particular, the group sees little scope for significant upside in commodity prices through to the middle of next year. Beyond that time the group expects the US dollar to again weaken, which should offer some positive momentum to commodity markets.
In terms of specific commodity markets, the group expects the oil market will remain relatively tight, as seasonal demand should offset structural weakness between now and the end of the year and hurricane and geopolitical risks remain an issue.
The key is expected to be how Chinese demand shapes up now the Olympics are over, particularly as it remains the primary driver of non-OECD demand. Given its forecasts for further strength in the US dollar in the medium-term, the group has revised down its oil price forecasts and it now expects prices to average US$113 per barrel this year for West Texas Intermediate (WTI) and US$100 per barrel in 2009.
Barclays Capital agrees prices could fall further in the short-term given current deep levels of pessimism about the global macroeconomic outlook, but once that runs its course it has a more positive view on price prospects, especially given there appears limited downside to US demand from current levels.
The group is forecasting oil prices in WTI terms to average US$118.50 per barrel this year, and in contrast to Standard Chartered, it sees prices rising further in 2009 to an average of US$123.20 per barrel.
Lower oil prices of late in conjunction with the stronger US dollar have meant weakness in the gold market, and while longer-term prices are tipped to trend higher, Standard Chartered expects more of a sideways move over the next 6-12 months.
On the plus side are lower central bank sales and ongoing production issues, but this is being balanced fairly well by lower physical demand at higher prices and less speculative interest in recent weeks. To reflect this, the group has lowered its forecasts for the December quarter this year to US$850 per ounce from US$925 previously, which implies an average for 2008 of US$885 per ounce. Its 2009 forecast has been cut to US$875 per ounce from US$974.
Barclays points out the recent fall in prices has sparked some additional physical demand at prices around US$800 per ounce, but shorter-term it expects prices to remain at the mercy of movements in the greenback and oil prices. The group is forecasting average prices of US$889 per ounce this year and US$840 per ounce next year.
Among the base metals Barclays has, with the exception of tin, scaled back its forecasts to reflect a lower consumption outlook on the back of weaker global economic growth. For copper the group now expects a slightly slower pace of recovery in Chinese imports than was previously the case, though supply problems should offset demand weakness in its view.
As a result it now expects prices will average US$8,500 per tonne in the December quarter, US$8,153 per tonne for 2008 as a whole and US$7,500 per tonne in 2009, while Standard Chartered is forecasting prices of US$7,775 per tonne this year and US$6,438 in 2009. The group cautions prices could continue to experience spikes if production disruptions continue to plague the market, though a negative has been a gradual move higher in terms of global stockpiles of the metal.
Poor fundamentals have been behind the falls in the aluminium price in Standard Chartered’s view, with LME stockpiles rising for several months and inventories increasing by 25% since the start of the year. On the back of this weakness it sees prices as now being close to fair value, particularly as Chinese smelters are to extend their production cutbacks to year-end.
In price terms, Standard Chartered is forecasting an average of US$2,832 per tonne this year and US$2,503 per tonne in 2009, while Barclays is more bullish, with forecast averages of US$2,930 this year and US$3,500 per tonne next year given an expectation of production being limited by power supply issues in China in particular.
Strong fundamentals see Barclays remain relatively bullish on the outlook for tin prices, expecting prices to average US$19,000 per tonne next year from their forecast average of US$20,952 this year. Standard Chartered agrees the fundamentals look good and notes the major producers, China and Indonesia, have struggled recently. These supply cutbacks should offset what in their view will be minimal demand growth. The group is forecasting average prices of US$21,091 per tonne this year and US$16,375 next year and it expects tin to be the best performed of the base metals in coming months.
Nickel currently has the highest level of LME stocks, but supply cutbacks in recent weeks have improved sentiment and lowered stockpiles, with some recovery in stainless steel demand likely, Standard Chartered expects double digit price gains in the second half when compared to the first six months of this year.
This optimism should prove to be short-lived though and it sees prices falling from a forecast average of US$24,208 per tonne this year to US$22,250 per tonne in 2009. Barclays Capital has an almost identical outlook for the market and expects stronger prices over the next few months, but then a decline into 2009. Its forecasts are US$24,173 per tonne this year and US$21,500 next year.
In contrast, the group sees further short-term downside risk for zinc prices, as does Standard Chartered given the current double whammy of higher mine supply and slowing demand growth. As a result, both expect the price to trend lower in coming months. Barclays is forecasting average prices of US$1,973 per tonne this year and US$1,900 per tonne next year, while Standard Chartered are at US$2,101 and US$1,763 per tonne respectively.
Lead has been the most volatile of the base metals in recent weeks, but oversupply leads Standard Chartered to suggest downward price pressure will dominate unless producers do more to limit output growth. Given such an outlook, the group is forecasting average prices of US$2,317 per tonne this year and and US$1,800per tonne next year, While Barclays is at US$2,289 per tonne and US$2,000 per tonne respectively.
One sector where prices could rise further is thermal coal. Standard Chartered takes the view that while Chinese production will lift now the Olympics are out of the way, so too will demand and with other exporters facing smaller surpluses, demand is again expected to outstrip supply. This should be enough, in its view, to see benchmark prices strengthen from current levels.