Commodities | Sep 24 2009
By Chris Shaw
While commodity prices have enjoyed solid gains in recent months with gold pushing through the US$1,000 per ounce mark and copper testing US$6,500 per tonne, Danske Bank points out some commodities appear to be running out of steam as aluminium couldn’t hold the US$2,000 per tonne level and oil at US$70 per barrel is equally off its highs.
What this shows in the group’s view is the market is becoming more selective in its pricing of commodities, with some doing well and others, such as the softs, missing out on the most recent uptrend. This means the market has traded in a different way to last year as early in 2008 commodity prices rallied in a synchronised way, but now there is less cross correlation between the various markets.
This hasn’t stopped Danske Bank from remaining relatively bullish on the commodities sector in general, as it sees continued upside from the fact the global economy is continuing to recover. In the group’s view growth has yet to peak as the current and fourth quarters this year in particular should be strong. Danske expects the combination of a strong inventory cycle, improving financial conditions and financial and monetary stimulus measures to deliver a solid boost to growth. It expects this trend will continue at least into the first quarter of next year.
Economic indicators should improve as a reflection of this, the group anticipating the ISM manufacturing index in the US will improve to a reading of 60 by year’s end, an outcome it suggests would offer a strong boost to sentiment in commodity markets given the implication manufacturing activity in the world’s largest economy is picking up.
This is because it will show the situation moving from one where Asia and more specifically China was the only positive for commodity demand to a fully fledged global recovery in demand, with a pick up in OECD demand likely to give a final leg-up to prices either late this year or early in 2010.
But looking further into 2010, Danske Bank suggests the scope for even higher prices is somewhat limited as even if growth is aproaching trend levels in the OECD nations, while remaining strong in China, the stock overhang in commodity markets from the recession of 2008/09, in combination with the spare capacity that exists in many commodities, should be enough to offset upside pressure on prices from stronger demand.
As well, Danske Bank suggests there is a chance of a soft patch in growth next year as current stimulus measures run their course, so the shape of the economic recovery will be of importance for prices. Given it expects a “V” shaped recovery, the group suggests risks to its forecasts in 2010 remain to the upside, though volatility should remain high as from time to time it sees pessimistic sentiment prevailing on the market.
In terms of the specific commodity sectors, the bank suggests the inability of oil to break through the US$75 per barrel level means energy prices are now trading more according to fundamentals and this picture is far from convincing with respect to prices continuing to increase given they have essentially doubled since February.
Oill stocks are currently at record highs as the International Energy Agency estimates forward cover at 61.8 days as at the end of July, well above the 52 days preferred by OPEC. At the same time OPEC compliance rates with production quotas have fallen over the summer, with some producers such as Iran and Venezuela trying to take advantage of higher prices.
In Danske Bank’s view, if it wasn’t for the fact markets are forward looking oil would likely be trading below the US$70 level on fundamentals. Having said so, Danske expects a tightening in the market’s supply and demand balance to become more visible in coming months, which should see prices trade up to close to US$80 per barrel by the end of the year. In 2010 the group expects prices will average US$78 per barrel.
Fundamentals for the base metals also look positive given global growth is picking up, which in turn should boost demand in the group’s view. Its base case is that industrial production has fallen more rapidly than demand during the economic downturn and given inventories through the supply chain are at low levels, it sees this as a powerful cocktail for demand as conditions recover. This scenario suggests even a modest increase in consumption will spur a re-stocking process.
For copper Chinese imports will continue to play a crucial role and the latest data suggest the country’s most recent build up of stocks has come to an end. This implies some inventory buildup during the northern autumn in the group’s view, but stocks are still at record low levels and with demand set to pick up, as the OECD economies recover, the bank suggests the stock to consumption ratio should stay at low levels.
It sees this as enough to allow copper prices to test US$6,700 per tonne during the December quarter and to average US$6,500, up from its previous forecast of US$6,200. For 2010 Danske Bank expects copper prices will average US$6,400 per tonne, up from its earlier estimate of US$6,075 per tonne.
In the aluminium market the bank notes the demand outlook is improving but the collapse in demand during the downturn means stocks are at record highs and these supplies will need to be worked off over the next 18 months, so limiting the potential upside in the price.
On the plus side it points out producer inventory levels are run-down and this means if demand picks up, LME stocks should come down and given much of the warehouse stocks of the metal are tied up in financial deals, this means there is actually some upside risk to prices for the rest of this year. As this metal is released onto markets though, prices will again come under pressure, so Danske Bank has lowered its 2010 price foreast to US$2,000 per tonne from US$2,075 per tonne previously.