Commodities | Feb 01 2012
– Commodity price outlook for 2012 mildly positive
– Prices appear to have overshot to downside in 2011
– Analysts update price expectations for the coming year
By Chris Shaw
The European debt crisis has not yet been resolved, but in the view of National Australia Bank markets are now no longer pricing in a worst case scenario of a global economic recession. As the bank points out, market confidence is now being boosted somewhat by improved scope for policy loosening in Asia and confirmation the US Federal Reserve will keep interest rates low for longer.
This uptick in confidence has meant commodity prices have in general drifted higher over the past month, while the VIX Index of market volatility has fallen back to the levels seen in the middle of last year.
NAB also notes business sentiment in many major OECD economies ticked higher late last year, following sharp falls in the preceding six months. The bank suggests this is not consistent with expectations of a looming global economic recession.
Europe is another story, as the ongoing debt crisis appears to have pushed the Eurozone region into a recession. This has prompted both the International Monetary Fund ((IMF)) and the World Bank to lower global economic growth estimates to a level more in line with those of NAB. But this has been offset by better numbers from the US and Japan, which has helped boost global growth momentum.
If this growth momentum improves further base metals could be a big beneficiary in the view of Barclays Capital, as prices appear to have overshot to the downside in the last months of last year in particular.
While event risk may impact on the sustainability of the more optimistic outlook now starting to emerge, Barclays expects global metals demand growth momentum should stabilise early this year before a sequential recover starting in the second quarter.
One key will be the Chinese property sector, this given the leverage of copper, aluminium and zinc to this market. Also supportive is a stock picture Barclays suggests is tighter than reported inventories suggest, though this is likely to be offset somewhat by a strong production outlook across the base metals.
In the view of Barclays, price downside among the base metals if the global economy were to turn weaker will be limited by higher operating costs. This has pushed up the level at which prices are finding cost support.
Danske Bank agrees commodity markets are currently pricing in an overly negative outlook, meaning risks are tilted to the upside for prices. This reflects the bank's more upbeat outlook for the global economy, which stands at 4.0% for 2012 and 4.1% for 2013.
These estimates are well above market consensus, reflecting the view a recovery is already taking hold in the US and Chinese growth should rebound this year. As well, Danske suggests any recession in the Eurozone is likely to be a short one before growth gradually starts to again pick-up.
Assuming this view of the global economy proves correct, Danske sees a positive outlook for commodity prices, with volatility to remain high over the next quarter or two before stronger price performance in the second half of this year.
Natixis Commodity Markets agrees the shorter-term outlook for commodity markets is further volatility, but in general prices are expected to be supported by policies that are increasingly supportive of economic growth.
What should also boost commodity prices according to Danske Bank is that in many markets, self-regulating mechanisms are beginning to kick in. Aluminium is the prime example, as smelters are struggling given prices are trading below costs on the back of increased energy prices.
This implies if prices don't recover some smelters will shut down, so limiting supply. Oil is another example, Danske Bank suggests OPEC is likely to react with cuts to output if oil prices fall below the US$100 per barrel level.
To position itself for the year ahead, Barclays has re-set its price forecasts lower for the base metals. For copper the change reflects the expectation production will grow strongly this year, while for zinc the market is expected to remain in an over-supply position.
Aluminium is regarded as having the least downside in the sector, this due to prices already trading well into the cost curve. Barclays suggests as much as 50% of global aluminium production is currently operating at a loss, which is prompting cuts to output.
With energy costs expected to remain a key driver of incremental aluminium output in the coming year, Natixis sees scope for the market to move closer to balance thanks to strong demand and constrained supply. This is unlikely to spark any significant rally in prices, Natixis forecasting an average of US$2,250 per tonne for the year. This is close to the Danske Bank forecast of US$2,275 per tonne this year, while Barclays is forecasting an average price of US$2,313 per tonne.
In copper, Barclays suggests even with stronger supply likely the outlook remains positive as the market is expected to remain in deficit overall. While the Chinese property market poses some downside risk the outlook is for growth to slow and not collapse, meaning the copper market should remain tight.
Barclays is forecasting an average price this year of US$9,000 per tonne, while Danske Bank is forecasting an average of US$8,925 per tonne. This is down from US$10,000 per tonne previously. Natixis is more bullish and expects prices will average just below US$10,000 per tonne this year, driven by the expectation of a sharp decline in global stockpiles.
The market balance for lead appears supportive in the view of Natixis, as lower prices at the end of last year have impacted on secondary supplies. This is also likely to cap any price gains, as higher prices will bring about a corresponding recovery in the secondary market.
With supply only expected to increase slightly in 2012 Natixis is forecasting an average lead price for the year of US$2,375 per tonne, rising to US$2,600 per tonne in 2013. While Barclays expects demand for lead will remain more robust than for other metals, the group's forecast for 2012 of an average of US$2,288 per tonne is slightly lower.
For nickel, Natixis takes the view while prices are well supported on the downside, there is also unlikely to be a great deal of upside through 2013. A modest market deficit is expected this year, enough to support an average price for 2012 of US$22,000 per tonne according to Natixis. In 2013 the price should increase to an average of US$24.500 per tonne. Barclays also sees the nickel price as staying relatively range-bound, forecasting an average price for this year of US$19,875 per tonne.
While tin ended 2011 on a mixed note Barclays expects another market deficit in 2012, leading to renewed strength in tin prices. The supply side is the most bullish component of the market as no new project should come on stream prior to at least 2014, so Barclays expects prices will average US$24,250 per tonne this year. Natixis agrees the tin market is likely to be in deficit this year and expects even stronger prices, forecasting averages of US$26,500 per tonne this year and US$32,000 per tonne in 2013.
Fundamentals for zinc appear to be improving slightly heading into 2012 following de-stocking in China last year, though Natixis notes there remains a significant accumulation of warehouse stockpiles that need to be run down in coming years. A modest recovery in prices is expected this year, with an average of US$2,225 per tonne this year and US$2,400 per tonne in 2013 forecast by Natixis. Barclays is slightly more conservative, forecasting an average price of US$2,138 per tonne this year.
In the precious metals, Barclays sees the gold market as focused on the strength of Chinese demand for physical metal and the resilience of physically-backed ETPs. This suggests a still conducive backdrop for the gold price, Barclays forecasting an average price this year of US$1,875 per ounce.
Natixis is not as bullish, taking the view demand for gold is unlikely to be as bullish this year. This implies lower prices, the group forecasting an average price of US$1,450 per ounce this year before a further fall to US$1,150 per ounce in 2013.
Natixis expects industrial demand for silver will rise in 2012 but sees investors as being less aggressive in the metal given the volatility experienced in 2011. As with gold, silver prices are expected to fall, averages forecast at US$26 per ounce this year and US$18 per ounce in 2013.
Barclays sees a different market, expecting investment and industrial demand will be enough to drive prices higher. Barclays is forecasting an average silver price of US$32.50 per ounce in 2012.
While cost pressures in the platinum market are expected to rise Barclays sees the market staying in surplus this year, this despite the ongoing vulnerability of the supply side. Barclays forecasts an average price of US$1,650 per ounce this year, the same as that forecast by Natixis. For palladium, Natixis expects an average price this year of US$750 per ounce, while Barclays is forecasting an average of US$795 per ounce.
In the oil market, NAB notes prices have risen this month on more optimistic macroeconomic news and renewed geo-political tensions between the West and Iran. While demand conditions have also eased, the potential for a shut-down in the Strait of Hormuz is likely to keep volatility high and offer potential for a price spike. NAB's oil price estimates are largely unchanged from a month ago, the bank expecting prices will generally remain above US$100 per barrel though 2012.
Danske Bank expects both 2012 and 2013 will be characterised by declining global oil stocks. This, in combination with a likely geo-political premium and the group's positive global growth expectations, has caused Danske to lift its oil price forecasts. In 2012 the bank now expects an average for Brent crude of US$114 per barrel, rising to US$120 per barrel in 2013.
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