Commodities | May 15 2012
– Updated commodity prices and views
– Sector preferences outlined
– Nickel prices expected to improve
– Oil price expected to increase through 2012
By Chris Shaw
As Barclays Capital notes, while the improvement in global business confidence has stalled in recent weeks both the US and Chinese are continuing to strengthen gradually. Better sentiment from China in particular should help buoy base metals, even allowing for some evidence of mild overstocking in China.
For Barclays the prospects for the precious metals are also picking up, as prices have remained resilient in recent weeks despite soft physical demand, futures market liquidation and soft ETP buying.
For commodities in general Barclays is overweight this month on Brent crude, gold, copper, heating oil and soybeans. Underweight recommendations are in West Texas Intermediate, US natural gas, unleaded gasoline and wheat.
Deutsche has focused on performance for the first few months of 2012 and notes at present total returns on benchmark commodity indices are down year-to-date. This is pushing commodities further down the league table in terms of asset class returns and is in contrast to the first quarter of 2012, when commodities challenged equities for the best performing asset class in terms of total returns.
From a sector perspective, Deutsche notes livestock and agriculture have been the worst performing sectors since the end of last year, a trend the broker expects will continue. The energy, precious metals and industrial metals sectors remain positive in year-to-date terms, but all have endured falls in the past few weeks.
Looking ahead, while the main risk to the precious metals is further strengthening in the US dollar, Deutsche suggests increasing central bank purchases and the risk of further measures by central banks to stimulate growth will drive prices higher.
Weakness in global equity markets and a moderation in Chinese economic data has impacted on the base metals, but again Deutsche expects a rebound as Chinese GDP improves on the back of credit easing and an acceleration in public sector housing construction. Deutsche expects oil market fundamentals will tighten over a 12-month time frame, meaning any correction in oil prices in coming months is likely to be short-lived.
Along with the Deutsche Bank review, Natixis Commodity Markets has released its Metals Review for the second quarter of 2012. The group notes metal prices rose in 1Q12 thanks to stronger US economic data, optimism over a recovery in Chinese growth and some success in European Central Bank actions.
But into the second quarter there has been a weakening in US economic data, fiscal austerity in Europe is being challenged and any Chinese recovery has yet to pick up steam. All of this has seen commodity prices weaken.
Assessing the different economies, Natixis suggests the US economy was never as good as the data suggested, so the latest data is primarily corrective. In China a recovery in growth is still expected, while pro-growth policies should lift economic activity in the rest of the developed world. This leaves Europe and Japan as the economies with less positive outlooks.
In terms of how this plays out with respect to metal prices, Natixis suggests despite perceived market tightness copper prices have fallen back in recent weeks as stockpiles of the metal in China have risen. Despite this, the metal should remain in significant deficit this year, though Natixis cautions this could mean a persistent backwardation on the LME rather than significantly higher prices. For the year Natixis is forecasting an average copper price of US$8,800 per tonne, which compares to a current price of around US$8,000 per tonne. Further gains are forecast for 2013, Natixis expecting an average price next year of US$9,125 per tonne.
Aluminium prices have similarly weakened in recent weeks as prospects for Chinese growth have disappointed and data out of the US and Europe has caused some concern. While potential changes in Chinese output make estimating any market surplus this year difficult, Natixis notes the decision by Indonesia to ban exports of unprocessed raw materials could also have an impact. This means while price forecasts of US$2,200 per tonne this year and US$2,360 per tonne in 2013 are forecast, there could be significant volatility in prices in the aluminium market.
Last year's clean-up by Chinese lead-acid battery manufacturers curtailed demand for lead but this year supply is being threatened by environmental issues. To date the tightness has shown up only as occasional backwardation on the SHFE, but Natixis sees scope for the market tightness to result in significant outperformance for lead later this year as the Chinese economy picks up. This leads to a forecast average lead price of US$2,180 per tonne, rising to US$2,460 per tonne in 2013.
In nickel, Natixis also expects volatility as supply increases from low grade mine and new smelting techniques offset by demand issues such as the proposed bans on higher grade Indonesian exports. Assuming the market does tighten up, Natixis expects an average nickel price for this year of US$20,000 per tonne, rising to US$21,940 per tonne in 2013.
With a number of the world's largest mines due to come to the end of their lives over the next five years, the prospect is for a steadily tightening zinc market going forward. As evidence of this Natixis notes the concentrate market is already starting to tighten. Improving fundamentals are reflected in forecasts, as Natixis expects average zinc prices of US$2,125 per tonne this year, rising to US$2,400 per tonne in 2013.
In the precious metals, Natixis suggests the main drivers of gold prices in recent months have been central bank demand, consumer demand from China and India and the prospect of further QE in the US. Uncertainty over the latter in particular has created substantial volatility in prices.
Natixis expects central banks will remain buyers of gold at lower prices and this will moderate price volatility. With further QE not being ruled out given ongoing conomic growth issues, Natixis is forecasting average annual gold prices of US$1,540 per ounce this year and US$1,210 per ounce in 2013.
While silver price performance should mirror developments in the gold market Natixis cautions a decline could be exacerbated by recent weakness in industrial demand. This means a substantial fall in prices may be needed before an expansion in jewellery demand could absorb the additional net supply from the investment sector. Natixis is forecasting average annual silver prices of US$27.30 per ounce this year and US$19.00 per ounce in 2013.
Demand for palladium from developing economies should recover steadily relative to last year as BRIC growth remains weak until policy turns more supportive. A weak economic outlook for the European economy will impact on platinum demand, though for both metals jewellery and investment demand is expected to recover in the view of Natixis. Average prices are forecast to be US$750 per ounce for palladium and US$1,650 per ounce for platinum this year, rising to US$830 per ounce and US$1,750 per ounce in 2013.
Back to the industrial metals, Deutsche Bank notes nickel prices have been weak over the past month, hitting levels near US$17,000 per tonne. At this level the metal is good value in Deutsche's view, as this price is well within the industry cash cost curve given around 16% of the industry estimated to have negative margins at current levels.
On the demand side of the nickel market Deutsche notes conditions remain challenging, especially in Europe where the market is soft and LME inventories have risen since the final quarter of last year. The Chinese market is also oversupplied at present in Deutsche's view.
On the supply side there is some evidence conditions are improving, as Deutsche suggests at current price levels Chinese nickel pig iron producers are likely to curtail output. At the same time the Indonesian government has followed though on banning ore exports if certain conditions are not met, while there remains skepticism as to whether High Pressure Acid Leach (HPAL) production at new projects can meet expectations.
Headwinds such as a challenging near-term economic environment remain in place and there are few short-term catalysts for prices according to Deutsche Bank. But with the US something of a bright spot in the global economy and with US auto producers expected to increase production in coming months, Deutsche sees nickel prices increasing through the course of this year.
In average price terms Deutsche expects prices of US$21,000 per tonne for the June quarter, rising to US$23,000 per tonne in the September quarter and US$24,000 per tonne in the December quarter of this year.
In oil, JP Morgan notes a recent downswing in the crude oil price, which was generated by a seasonal stock build and some economic stresses, has generated a sharp rebound in implied volatility in the crude oil market.
Increased volatility means there is potential for a US$20 per barrel swing around JP Morgan's forecast for Brent crude for the June quarter of US$112 per barrel. While the broker's model has been adjusted to better reflect changing market pressures from moves such as stock releases and additions to strategic storage, price estimates are unchanged.
JP Morgan suggests the recent downward shift in global oil prices is in line with an expected build in seasonal supply pressures at the same time as there has been a mid-cycle economic pause. But factoring in changes to the structure of the market balance leads JP Morgan to suggest the global oil market was actually much tighter at the start of the this year and will likely require OPEC to continue pumping at full capacity for most of the next year.
This reflects the view strategic reserve building by China is an effective increase to demand, while Saudi Arabia's filling of its own strategic storage is a supply cut. This suggests the second quarter is likely to deliver only a very modest stock build.
Given a tighter market than had been implied, JP Morgan continues to expect higher prices through the balance of this year. In quarterly average price terms the broker expects a June quarter price of US$112 per barre for Brent crude, rising to US$120 per barrel in the September quarter and US$125 per barrel in the December quarter.
