Commodities | Dec 12 2013
-Tapering impact may be limited
-Nickel, aluminium prices go nowhere
-Gold losing more lustre
-Brent:WTI gap to narrow
-Potential volatility from US shale?
By Eva Brocklehurst
Heading into 2014, National Australia Bank analysts believe metals markets are in flux, as expectations over the future path of US monetary and government debt policies continue to evolve in respect of timing and magnitude. It's a bumpy road on which to pin forecasts. Manufacturing and construction growth in the advanced economies should offset the headwinds as accommodative monetary settings are pared back by governments.
Nevertheless, sentiment is not very positive in some bigger emerging economies, according to the NAB analysts. Particularly weak numbers in the Indian business surveys do not suggest a return to the rapid growth rates seen prior to 2012. In contrast, China's economy has stabilised and is expected to continue growing in excess of 7% per annum, which will provide an ongoing source of significant demand growth. The analysts consider the main issue in the new year will be the impact on emerging economies of the eventual tapering in quantitative easing in the US.
Commonwealth Bank analysts' price forecasts have mostly been tweaked higher for 2014 and 2015, to reflect weaker US dollar forecasts, because of the delay to the tapering of US market support, as well as better global economic growth. Even as a capital flight may follow the start of tighter US policy, CBA analysts do not think it will slow global growth dramatically. Most emerging economies are now less dependent on foreign capital flows and lower domestic currencies will boost their net export contribution to growth. The net impact of the US Fed's tapering is hard to gauge but the analysts consider that, because global commodity prices responded only mildly to suggestions that tapering would start late in 2013, it may end up having minimal impact on industrial commodity prices.
CIBC observes that, depending on the market sector, emerging economies now comprise 50-80% of global industrial commodity demand. Therefore, commodities are likely to track those economies closely. Inventories are high in some base metals but firming global recovery, underpinned by large urbanising markets, sets the scene for a relatively healthy performance in 2014 and 2015. Copper has the greatest potential for price appreciation, given its cyclicality, according to CIBC, while zinc should benefit from relatively limited capacity investment.
Nickel prices, meanwhile, are likely to stay in the doldrums amid ample unused capacity, aggravated by increases in both nickel pig iron and conventional production. Aluminium, although less affected by rising inventory, has been affect by concerns around the start of the Fed's tapering. Rising demand for lightweight metal in vehicle construction is a supportive factor but the metal does face competition in terms of lightweight steel. CIBC expects the global aluminium surplus will widen to 1.5m tonnes next year. Nickel is not on CBA analysts favoured list either. Supply growth may be slowing but so is demand so large stockpiles are unlikely to be reduced quickly. Aluminium and alumina output could rise strongly in China, as the country sets about commissioning substantial new capacity. Hence, the analysts struggle to see aluminium prices rising to any degree over coming years.
Market expectations regarding Fed tapering have reduced gold's appeal to investors as a safe haven asset and inflation hedge. Despite this, NAB analysts note that declining prices have kept physical demand strong in Asia, particularly China, while Indian demand is weighed down by government policies. CBA analysts also think better economic growth will continue to tilt allocations away from safe havens such as gold and silver. To the extent real long US bond yield rally, gold prices will struggle. One supportive factor over the last decade for gold was the belief that the US federal government faced structural insolvency in the long term, which would likely devalue the US dollar. The analysts observe that the most recent budget projections have actually shown a marked improvement in medium to longer-term US federal debt requirements, thanks to a firmer economy and recent austerity measures. Hence, this factor may be not underpinning gold like it used to do.
Average oil prices fell for the second consecutive month in November. Oil prices are more aligned with fundamentals where ample supplies, combined with seasonally weak global demand, served to weigh on prices, according to the NAB analysts. Without an extreme geopolitical event, the analysts expect that Brent and West Texas Intermediate (WTI) pricing will converge in the next month or two. The recent significant falls in WTI suggest to the analysts that the index might have been oversold and any inventory increase is priced in. Furthermore, a pick up in northern hemisphere demand as winter appears will likely to limit inventory accumulation. As such, WTI prices are expected to rise. Meanwhile, Brent is expected to moderate as a surge in non-OPEC supplies becomes more likely, and the recent Iranian deal lays the groundwork for that country to ramp up its oil exports in the medium term. What may weigh on Brent is low levels of output from Libya. All up, the analysts expect the Brent-WTI gap will narrow from around US$19 to below US$10 in the medium term.
JP Morgan's commodities team has softened the view on international oil prices in recent weeks and now forecasts both Brent and WTI prices to ease by US$10/bbl and US$13/bbl, respectively, over the next two years. Oil demand growth is expected to remain on trend over the next two years, supported by the recovery in the global economy. Supplies will likely grow significantly in 2014, propelled largely by surging North American volumes. Production increases in Brazil, South Sudan and Kazakhstan are also expected to make their mark. While OPEC faces a declining call on production over the next two years, crude supply is expected to rise in 2014 as Libyan and Iraqi production increases.
A risk factor that could push Brent oil outside JP Morgan's base forecasts of US$98-110/bbl in 2014-15 is US shale oil production. The review of prices assumes no substantial change in US crude oil export flows to global markets but, the analysts admit, this is a significant assumption. The widening crude differentials in the US versus the international market, amid stronger economic growth will increase the incentives to remove longstanding policy barriers against US free trade in crude. This could change the game, with large potential benefits to the US and the global economy, according to JP Morgan. Shale oil will need to be more widely used by refineries on both the east and west coasts of the US as well as in refineries in eastern Canada, if US domestic crude prices avoid weakening to the point that free cash flow generation is affected and capex plans reduced.
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