Commodities | Apr 12 2010
By Chris Shaw
Recent strength in commodity prices has been attributed to a number of factors such as currency movements, increasing investment flows and the ongoing influence of economic stimulus measures in various economies.
To this list Morgan Stanley has added stronger global manufacturing data, which it suggests is causing prices to react to a broad-based recovery in demand. As the broker notes, persistently strong Chinese demand remains the primary driver of commodity markets, but the latest global PMI (Purchasing Managers Index) numbers are indicating a restocking in is occurring in OECD countries as well.
With prices rising on signs of improving global indicators for industrial demand Morgan Stanley suggests what the market is seeing is the re-emergence of the pre-GFC or Global Financial Crisis major commodity price cycle, rather than any bubble in the sector.
Supportive of this is the fact export orders in both OECD and developing economies either expanded in March or remained at elevated levels. In Morgan Stanley's view this suggests the recovery of the global trade component of global growth is now unfolding.
Also supporting prices in Morgan Stanley's view is the fact inflationary pressures are rising. This is attributed to rising raw material prices and unfavourable exchange rates translating into increased input cost pressures.
This may add to expectations of a global tightening in monetary policy, but Morgan Stanley suggests the risks of this are low at present given the global economy is still recovering from the ending of the GFC.
If interest rates globally were to rise CIBC suggests this would be more likely to slow rather than kill the rally in commodity prices, as past cycles suggest prices have continued to rise even after monetary policy restraint has begun.
With inflation accelerating in China CIBC expects some further steps there to scale back previous stimulus measures, while among the BRICs it also sees scope for Brazil to lift interest rates later this month.
According to CIBC rates hikes increase the incentive to restore resource production now rather than in the future, while also affecting the level of GDP and therefore resources demand. Such changes also impact on the inventive to hold inventory rather than other income producing assets such as treasury bills.
In what could be good news for the industrial metals and oil CIBC notes both have generally performed better after the trough in interest rates than before. This reflects the fact it takes time for rates hikes to slow the rate of economic growth.
In contrast gold has typically done better before rather than after the US Federal Reserve begins tightening rates. This leads CIBC to suggest while gold could move higher in the next 8-9 months on US dollar selling there are greater risks in 2011 when the Fed is expected to start hiking rates.
With respect to increasing speculation the Chinese are set to revalue their currency higher Danske Bank suggests a move is more likely to come just before the China-US summit in late May but could in fact be made at anytime.
Initially Danske Bank suggests there could be a minor minor 1-2% one-off revaluation, which would be followed by a slow gradual appreciation of the currency against the US dollar. In total the move could be around 5% over the next year.
Barclays Capital also suggests any possible revaluation of the Chinese currency is unlikely to be a significant one-off event, so the impact on Chinese base metal imports is not expected to be considerable.
A stronger yuan would lower China's import costs, so increasing China's purchasing power of overseas commodity supplies. Barclays notes it would also reduce the incentive to export in those markets where China has the surplus to do so.
Morgan Stanley expects such a move to lift the value of the Chinese currency against the US dollar would in fact be a positive, as would moves to lift interest rates in China. This is because such moves would be precautionary measures aimed at sustaining a more balanced growth outlook and so prevent a full blown boom-bust cycle.
To factor in some revisions to its models from strengthening Chinese demand CIBC has lifted its oil price forecasts by US$5 per barrel to US$80 per barrel this year and US$85 per barrel in 2011. Over the same periods it expects gold prices of US$1,250 per ounce and US$1,150 per ounce respectively.
For copper CIBC is forecasting prices of US$3.70 per pound in 2010 and US$3.50 per pound in 2011 (US$8.140 per tonne and US$7,700 per tonne), while for aluminium it expects prices of US$1.00 per pound and US$0.85 per pound US$2,200 and US$1,870 per tonne). For nickel the group is forecasting prices of US$10.50 per pound and US$9.00 per pound ($23,100 and US$19,800 per tonne), while in zinc it sees prices of US$1.10 per pound this year and US$0.95 per pound in 2011 (U$2,420 and US$2,090 per tonne).
From a technical perspective Jyske Bank suggests in oil there is resistance at US$90 per barrel and support at US$80 per barrel and momentum favours further upside. In gold JYSKE suggests resistance currently stands at US$1,160 per ounce and support is at US$1,115 per ounce, with little clear momentum currently.
In the copper and nickel markets Jyske suggests momentum currently favours higher prices, with resistance and support levels presently at US$8.000 and US$7,800 per tonne in copper and US$30,000 and US$20,000 per tonne in nickel.
There is little clear momentum in the aluminium market in Jyske's view and it sees current resistance and support at US$2,400 per tonne and US$2,200 per tonne respectively.
