Commodities | Sep 11 2009
By Chris Shaw
Interest in commodity investments continues to be strong as Barclays Capital notes August data showed inflows of US$2.3 billion in the month, an amount at least double the amount recorded for any previous August in the group’s database with exchange traded products or ETPs proving to be the most popular.
While the commodities sector remains popular, the group points out the market price drivers currently appear to be in somewhat of a state of flux as the previous strong correlations with other growth sensitive assets are now weakening. The big impact of this is individual market factors are becoming a bigger and more important driver of commodity price performance.
For the agricultural commodities this has meant poor performance of late as previous strong performers such as sugar have fallen sharply in more recent sessions. Soybeans have also been weak, while the group notes cocoa prices are now showing some renewed strength. There have been similarly mixed results in the base metals sector as supply issues have driven lead prices higher at the same time as the nickel price has weakened.
In terms of demand fundamentals, Barclays suggests the recent flow of economic data is still broadly supportive, so it sees recent price activity as something of a consolidation before prices again push higher. The base metals sector is a good example as while strong gains in recent months have seen some profit taking, this is expected to be only a temporary phenomenon.
According to Barclays, the market remains positive on the copper outlook, even allowing for a degree of scepticism with respect to just how strong OECD demand will be through the second half of the year. While this is seeing some players move to the sidelines, the group points out price dips are attracting some buying support, with the US$6,000 per tonne level likely to provide strong support.
Similar periods of consolidation before subsequent moves higher also appear likely in the zinc, tin and nickel markets, though the group concedes sentiment has turned more bearish for aluminium and prices are subsequently being pressured lower. Lead has been the star performer thanks to the supply side issues mentioned previously and with strong Chinese demand still evident, prices continue to move higher and Barclays has lifted its estimates to reflect this, now forecasting a price of US$2,400 per tonne in the December quarter of this year and US$2,200 per tonne in the first quarter of 2010.
For aluminium the group expects an average price in the December quarter of US$1,950 per tonne, while in the first quarter of 2010 it sees prices averaging US$1,850 per tonne. Its copper forecasts for the same periods stand at US$6,750 per tonne and US$6,250 per tonne, while for nickel it expects average prices of US$21,000 and US$22,000 per tonne respectively. Barclays forecasts for tin are US$16,000 and US$16,500 per tonne, while for zinc it is forecasting US$2,000 and US$2,100 per tonne.
In the precious metals market Barclays notes gold continues to have difficulty holding the US$1,000 per ounce level and some further slowing in momentum in the short-term could happen in its view given currency markets continue to drive the gold price at present. But with the potential for rising inflation still a concern, and given the group’s view the US dollar could weaken further, prices are expected to eventually resume their uptrend, helped also by technical buying and further hedge-book buybacks. Barclays is forecasting average gold prices of US$980 per ounce in the December quarter and US$1,050 per ounce in the March quarter of next year.
Oil prices at present are trading in the upper half of the US$65-$75 per barrel band, Barclays noting price support is coming from both an improving macroeconomic outlook and some signs of improvement in the market’s supply and demand balance. OPEC is maintaining its quotas and this is maintaining some supply side pressure, so as the current inventory overhang is reduced prices should remain supported. On the group’s numbers the West Texas Intermediate price will average US$76 per barrel in the final quarter of this year, increasing to US$85 per barrel in the first quarter of 2010.
Among the agricultural commodities while sugar prices have dropped 10% in a week the group notes this is after prices hit their highest levels in more than 28 years, so it remains positive on the outlook given Indian demand remains strong and supply is still relatively tight.
Grain market fundamentals are not as attractive and prices have slipped on the back of solid supply and favourable weather conditions. An upward revision to expected US soybean and corn production is likely with this week’s USDA WASDE report given higher yields and the good weather conditions of late, so Barclays doesn’t yet see a positive turning point for the grains.
