Commodities | Sep 03 2010
By Chris Shaw
Following on from its comments earlier in the week about the next few sessions being important for setting a direction for commodity prices, JP Morgan notes the base metals complex has continued to trade higher.
Copper prices hit a new multi-week high this week and there is a supportive technical background in JP Morgan's view, prices having breached previous range resistance levels at around US$7,500 per tonne and with momentum currently favourable.
Also of interest in JP Morgan's view, are nickel prices, as they have risen even more sharply than copper prices and from a technical perspective also appear poised for a move even higher. Price action suggests a run towards the US$22,000 per tonne level is possible, but this has not changed JP Morgan's bearish stance on the metal.
This is based on an expectation the supply/demand balance in the market will loosen late this year and early in 2011 as inventory levels increase. With a couple of projects such as Goro and Ramu now slipping into 2011 this build should be at a modest pace in coming months, but JP Morgan continues to suggest looking for putting fresh shorts in place at the top end of the US$22,000-$22,500 per tonne range.
Turning to alumina, Goldman Sachs suggests there are signs the market is moving in the direction of iron ore in that there is a transition away from third party sales at an agreed percentage of the LME three-month prices and towards an index-priced mechanism.
At least in part this reflects the fact much of the world's new smelting capacity lacks upstream integration and is therefore dependent on third-party purchase for its raw material. Industry sources suggest as much as 40% of global alumina demand is not accounted for by the third-party market.
The Chinese market offers an interesting parallel when looking at alumina now and what has happened in iron ore. As Goldman Sachs notes, just as China has large reserves of low grade iron ore it also has bauxite reserves of relatively poor quality. This makes it more expensive to process, just like its iron ore, and means China will continue to have significant import dependence in the alumina market.
To reflect this transition, Goldman Sachs has introduced a spot price forecast for alumina, one that takes into account the industry's cost structure and the market's supply and demand balance. Even allowing for expectations of global refinery rates remaining well below historical norms, the broker sees spot prices tracking well above the levels expected based on metal price linkage.
This reflects the view the current industry cost structure will mean refining costs continue to increase in coming years, especially as there is a further rise in demand for third-party alumina from regions such as the Middle East. This is expected to raise the required global utilisation rate in the market.
In terms of price forecasts, Goldman Sachs expects an average spot price for alumina of between US$300-$350 per tonne in 2010 and 2011, rising to the upper end of this range in 2012. By 2014 prices are expected to be tracking at a level around US$400 per tonne in the spot market against an LME-linked price of a little below US$350 per tonne.
Turning to agricultural commodities, Barclays Capital notes a number of recent supply side downgrades have shown just how fragile agricultural supply can be, while also altering market outlooks in a number of cases.
Cotton is one example, as prices have rallied to a 30-month high on the combination of both improved demand, a tightening in stocks and near-term supply disruptions stemming from floods in Pakistan. Pakistan is the world's fourth-largest cotton producer.
With demand from China in particular still strong and given India, the world's second-largest supplier, is considering some export restrictions, this sets the scene for an extension of the cotton price rally near-term.
From a medium-term view, Barclays expects global cotton production should increase by 13% in year-on-year terms in 2010/11, which is likely to cause prices to pull back through the course of next year. Prices should however remain at what are elevated levels.
