Commodities | Sep 14 2012
– Barclays updates metal price forecasts
– Fundamentals suggest little upside for aluminium
– Citi reiterates oil price forecasts
– CBA updates on coal and iron ore
– Standard Bank sees further upside for gold
By Chris Shaw
Metal prices have rallied in recent weeks and Barclays Capital attributes much of the rally to short-covering. This buying could be enough to push prices higher still in the view of Barclays, the suggestion being if it came with improved economic data the gains could be even more significant.
Without such an improvement in fundamentals any gains may be difficult to sustain, the analysts at Barclays suggest. There remains downside risk to the view activity levels will improve later on, but further evidence growth is becoming more of a priority in China mean industrial metal prices in particular may benefit from additional spending.
The precious metals stand to benefit from further quantitative easing measures, but Barclays suggests the fundamentals are weakest for silver. This leaves the metal the most vulnerable in the sector. Updated metals prices forecasts for Barclays are listed below:
Looking more closely at aluminium, Barclays suggests a much needed rationing of supply has yet to emerge, even though prices on both the LME and SHFE are trading well below marginal cost levels.
Record physical premiums in China have been a big reason why the supply response has been constrained. With further surpluses expected in the market the contango underlying financing deals will stay in place according to Barclays, which along with warehousing bottlenecks will offer support for physical premium. This will continue to constrain any supply response to lower prices.
Barclays expects the Chinese aluminium market will remain in a modest surplus in coming years as new capacity continues to ramp-up, meaning China will stay a net exporter of the metal. This suggests an improvement in global growth offers the main hope for aluminium price upside, as current fundamentals offer little to justify higher prices. Barclays' price forecasts for the metal reflect this view.
Turning to oil, Citi cautions while geopolitics and product fundamentals are supportive for now, talk of strategic reserves releases will weigh on prices and supply should increase through the final quarter of this year as new projects start up.
While crude prices have started to weaken for seasonal reasons, Citi suggests a still bullish outlook for distillates should stop the market from falling too far. Macro sentiment also appears supportive but Citi takes the view much of the short-term impact of a third round of quantitative easing in the US may already be priced into the market.
This opens up the possibility of softer crude markets in the December quarter of this year, especially given scope for higher exports from the likes of Saudi Arabia and Russia and higher production from West Africa. US shale oil production should also rise in coming months, as Citi notes production was down in recent months given normal seasonal field and pipeline maintenance.
Factoring this in, Citi is forecasting Brent crude prices of US$105 per barrel for 0-3 months an US$100 per barrel for 6-12 months.
In coal, Commonwealth Bank notes the BHP Mitsubishi Alliance have agreed to supply Nippon Steel premium coking coal for US$170 per tonne (FOB Australia) in the December quarter. While the contract price is the lowest since the March quarter of 2009, the price is in line with CBA's forecasts and well above current spot prices of around US$147 per tonne.
CBA sticks with its forecast of an average iron ore price of US$131 per tonne in 2013. Renewed steel demand in China should drive the gains, with upside being capped by new low cost capacity coming online during the period.
On the precious metals, Standard Bank notes physical demand for gold has remained steady even as prices have risen above US$1,700 per ounce. The Far East continues to be a buyer of the metal, while Indian buying has also returned and remained fairly steady.
Standard Bank's Gold Physical Flow Index (GPFI), tracks the net buying and selling of physical gold. A positive number indicates net buying and a negative number net selling.
When prices started to pick up from mid-August, Standard Bank noted its GFPI moved lower on a daily basis, but through the latest rally the GFPI has remains relatively strong. In Standard Bank's view this can be attributed to buyers adjusting to higher price levels and the need for physical gold as the Indian wedding season approaches.
This supports Standard Bank's view the physical gold market should remain a point of support rather than resistance. Forecasts of gold trading towards US$1,900 per tonne in the final quarter of this year are unchanged.
Technical limitations
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