Commodities | May 16 2011
– Commodity correction creating an opportunity
– Palladium looks set for further gains
– Steel market needs improved confidence
– US crude oil inventories stay at six year highs
By Chris Shaw
In the view of RBS, the price carnage across the commodity spectrum in the past few weeks was not without warning, as factors such as rising metal inventories, slowing Chinese economic growth, weak US job data and the European Central Bank dampening interest rate speculation were becoming more evident.
Regardless, the sharp price falls signal an opportunity according to RBS, as while markets still need go through the seasonally weaker 3Q demand period, commodity prices are at handsome levels. What may be appropriate is getting set in the sector ahead of October's LME Week, as this is likely to spark renewed interest in the sector, suggests the stockbroker.
Even before this, RBS takes the view copper now looks a buy at current levels, with the metal having fallen 15% to 5-month lows.
Over in the precious metals, the GFMS “Platinum and Palladium Survey 2011” suggests the largest unknown in the palladium market is Russian stock sales. With GFMS, a precious and base metals and steel consultancy, forecasting a reasonably imminent end to such sales from government inventory, RBS sees a factor supporting further palladium price gains in coming years.
In RBS's view, the underlying fundamentals for palladium are of constrained mine supply growth and strong demand from the emerging auto market sector. This implies any slowing of Russian stock sales is likely to act as a positive catalyst for prices.
RBS estimates from 2001-2009 Russia sold on average 864,000 ounces of palladium annually out of stockpiles, with sales in 2009 alone of 1.0M ounces. With GFMS estimating Russian stockpiles are now closer to 2M ounces, RBS sees sales dwindling from an expected level of around 800,000 ounces this year.
There appears little chance for Russia's stockpiles of palladium to increase, as GFMS takes the view all of domestic Russian mine production in 2010 was sold. In RBS's view this implies the global palladium market will remain in a deficit for the foreseeable future given little fresh mine capacity forecast to come on stream at least through 2014.
While GFMS estimates global inventories of palladium stand at 11.5M ounces, this only equates to a little more than 15 months supply. As terminal market stocks account for about 60% of this figure notes RBS, a likely outcome is without an existing inventory stock to meet demand the market may experience greater disruption and so become more volatile.
RBS favours palladium over platinum given the expectation of ongoing market deficits. As a result, the suggestion is the recent sell-off in the metal offers a good buying opportunity. RBS's price forecasts for palladium stand at averages of US$850 per ounce this year, US$950 per ounce in 2012 and US$1,125 per ounce in 2013.
Turning to steel, Citi suggests markets have softened after a period of distributor re-stocking. Having previously argued the re-stocking process would lose momentum if not matched by real demand, Citi sees this trend as playing out at present.
As an example, Citi notes global auto production has been impacted by component shortages following the natural disaster in Japan, while a pick-up in construction activity has not been particularly widespread. Citi sees a lack of confidence as playing a role in this demand pause.
This partly reflects concerns over ongoing policy tightening measures in China and the likely impact of these measures on the world's largest consumer of steel. Citi is now seeing evidence of mills starting to trim production as a result of these concerns.
As well, distributors are cautious with respect to building stocks as at current prices such moves are both expensive and risky. At the same time, Citi notes imports of lower priced material into regions such as the US are increasing.
For confidence to be restored, Citi suggests a few factors need to occur. One would be an end to monetary tightening in China, as this would support improved sentiment in the Chinese construction sector.
Another would be the closure of some currently idle capacity, while Citi also expects to see a sharp slowdown in Chinese capacity growth. The final factor would be an improvement in consumer and corporate confidence in the US in particular, as this would generate a non-residential and investment recovery and so boost real steel demand.
Finally in oil, Commonwealth Bank notes US Department of Energy inventory data show US crude inventories rose by 3.8 million barrels last week, well above forecasts of a 1.5 million barrel rise. This has helped US crude inventories remain at six year highs and tempered investor enthusiasm for oil in the bank's view.
As well, CBA notes worse than expected inflation data from both China and Europe has increased fears of further monetary policy tightening. This would potentially threaten oil demand.
