Commodities | Sep 17 2010
By Chris Shaw
Sugar prices have surged higher in the past week, Commonwealth Bank noting the gains in recent sessions have been driven by a combination of bullish reports from the industry and speculative buying.
The move means prices of better than US24c per pound are now more than twice the decade average of US10.5c per pound and well above the 2006 peak of US19.73c per pound. CBA notes the strength is broad based, as fresh contract highs have been posted this week for all raw sugar contracts expiring before mid-2012.
The bank's Agri Commodities analyst Luke Mathews suggests the latest price gains have some in the market questioning whether sugar prices have run too far too fast. As Mathews notes, sugar prices have been rallying thanks to low global inventories and production scares, the latter evidenced by higher levels of price volatility than is the norm in the market.
Earlier in the year the tightness in the market was expected to ease, but production issues in Brazil, Australia, Pakistan and Russia have kept the market tighter than had been forecast.
In Brazil, production forecasts are now about 1.0% lower for 2010/11 than was previously forecast in April, while dryness has hurt Russian crops and the floods in Pakistan have wiped out large areas of production.
International Sugar Organisation figures imply the market should now remain fairly tight, as the group's forecast surplus for 2010/11 is now 3.2 million tonnes. This compares to a deficit of nearly five million tonnes in 2009/10.
Global ending stocks are forecast to rise to 56.2 million tonnes from 54.9 million tonnes previously, which Mathews suggests implies a continued tight market. This tightness means prices are unlikely to fall sharply from current levels, though the fact the market should return to a surplus also means any rallies are likely to be capped.
In terms of market action, Mathews notes from May through to July it was short-covering driving the sugar price, but since then it has been investors establishing new long positions pushing prices higher.
The problem, in Mathews's view, is it is difficult to see where additional catalysts for the market can come from in coming months, as current prices now reflect all the bullish news that is in the marketplace.
Given this conclusion, Mathews suggests sugar prices are likely to wane over the next 3-6 months, the catalyst for this being the start of the Indian cane harvest in October. Given the production issues in the sector in recent months Mathews has lifted his 12-month price forecasts, his new quarterly estimates standing at US20.8c per pound in September and US20c in December.
In 2011, Mathews is forecasting quarterly sugar prices of US17.2c in March, US15c in June, US14.5c in September and US13.5c in December of 2011.
Turning to energy, BA Merrill Lynch suggests easy money is OPEC's new friend, as the broker's studies show monetary policy can be a significant driver of the oil price. Other things remaining equal, BA-ML estimates a 1% cut in real interest rates results in a 3.8% increase in the oil price.
Given BA-ML expects a second round of quantitative easing in monetary policy in the first quarter of 2011, as well as limited supply increases from OPEC, the outlook is for a reflating of the oil price even if US demand stays weak.
This is because even while loose monetary policy in the US is not stimulating that economy, it is increasing liquidity in emerging markets. This is coming via lower borrowing costs and a continued compression in spreads between emerging and developed markets.
One impact of this is rising wages in emerging market economies, which BA-ML suggests translate to rising oil affordability. With the dollar share of the global economy for emerging and developing economies rising to around 35% now from 20% ten years ago, it is clear growth in this part of the world can boost oil demand even if the US is not consuming more.
This leads BA-ML to suggest even if oil prices temporarily slip to around US$65 per barrel in any downturn in coming weeks, something seen as possible given current high oil stocks, the upward trend in key emerging economies should be enough to support prices through 2011.
BA-ML is forecasting an average price for 2011 of US$85 per barrel, as demand from emerging markets should offset what is expected to be muted OECD demand.
With respect to thermal coal, BA-ML sees the market as similar to the oil market in that stronger Asian demand should offset weaker demand from OECD nations. With current supply constraints expected to remain in place the broker sees thermal coal prices as remaining well supported.
This implies some price gains in 2011, as BA-ML is forecasting thermal coal prices in quarterly terms of US$93 per tonne for September and US$90 per tonne in December of this year, rising to US$100 per tonne in the first quarter of next year and US$110 per tonne for the remainder of 2011.
In the precious metals market, gold continues to trade around record highs as investors factor in real interest rates continuing to stay low for some time. But as Standard Bank notes, the latest push higher in prices has seen physical demand dry up. This is a repeat of previous patterns evident when gold prices have risen sharply over a short period.
Standard Bank expects physical demand for gold should re-emerge if the price stabilises in a range for a few days, the bank's technical analysts suggesting support for gold currently stands at US$1,265 per ounce, then US$1,260 per ounce, while resistance is at US$1,285 and then US$1,300 per ounce.
Turning to China, Commonwealth Bank notes that nation's iron ore port stocks have trended lower of late. August iron ore imports fell 13% in month-on-month terms and are now the lowest since January of 2009.
The fall in port stocks suggests stock drawdowns are currently running faster than new imports can lift supply, but the bank doesn't see this as reason to turn bullish on iron ore. As it notes, power cuts are reducing steel output and therefore iron ore demand.
As well, China's domestic iron ore supply remains at record levels, so the bank doesn't suggest falling port stocks are a strong signal of robust demand for imported ore.
