Commodities | May 06 2014
-US dollar weaker for longer?
-Crude forecasts revised up
-Uranium pressured by delays
-Gold boost from lower US dollar
-Coal to stay weak
By Eva Brocklehurst
Commonwealth Bank analysts have made key changes to commodity price forecasts, taking into account insights from recent visits to China and South East Asia as well as FX forecasts. They now expect the weakness in the US dollar to extend for a longer period and do not see a significantly stronger US dollar until the real US Fed funds rate turns positive in the first quarter of 2016. The analysts find they're not alone. Currency options markets have changed from expecting a strong rise in the US dollar, when the US Federal Reserve first hinted at tapering quantitative easing last year, to expecting only a small rise in the world's reserve currency a year from now.
The analysts' crude oil price forecasts are revised up for FY14, and significantly so for FY15, reflecting tighter fundamentals and more elevated geopolitical risk, as well as a weaker US dollar. This reflects both firmer demand and supply, with better infrastructure in the US allowing for smoother crude flows from the growing inland producing regions, along with increased risks in the Middle East and Russia/Ukraine. Strong growth in Chinese crude requirements, and a recovering developed market, is expected to provide the demand side of the equation. A narrowing of the UK Brent to US West Texas Intermediate price premium is expected, as new land-based oil transport infrastructure reduces the opportunity to arbitrage infrastructure bottlenecks in the US. The analysts also expect OPEC will exercise market power in the short term to target US$100-110/bbl for Brent.
National Australia Bank analysts note the tensions in Ukraine have offered some support to oil indices in the past month but expect the political tug-of-war will be moderate, although a major disruption in oil and gas supplies to western Europe from Russia via Ukraine pipelines cannot be ruled out. They revise up near-term forecasts for West Texas Intermediate but keep Brent forecasts unchanged. They also expect a gradual convergence in the two indices in the medium term.
Uranium prices are revised materially lower by the CBA analysts, reflecting poor market fundamentals and a delayed re-start of idled Japanese capacity as well as a longer ramp up in Chinese nuclear station construction.
NAB analysts note nickel has been the star performer over the past month on supply concerns resulting from Indonesia's ore ban. More significant price rises may be prevented by stockpiles in the near term but the risk increases as these stockpiles become exhausted. CBA analysts observe, while Russia has been threatened with sanctions for its involvement in Ukraine's unrest, there is still no evidence of potential disruptions to that country's refined nickel supply. Russia accounts for around 12% of the global refined nickel supply, second only to China. Speculation has driven refined nickel prices higher which is expected to persist until tensions in the region ease. Copper's physical market is tight, with a significant volume of stocks tied up in financing deals at Chinese bonded warehouses. The NAB analysts consider there's still a risk that renminbi depreciation might trigger renewed pressure on copper from unwinding of marginal financing deals but this is unlikely to be dramatic.
CBA analysts have revised aluminium prices marginally lower for FY14 and modestly higher for FY15 and FY16. Currently unprofitable output is being curtailed amid demand concerns in China. The analysts believe the market is edging towards tightening, as loss-making smelters outside of China shut down. They also upgrade premiums to reflect the growing uncertainty regarding London Metal Exchange warehouse rules, as queues will likely build if investors participating in financing aluminium inventory remove metal from official warehouses. A key risk to the forecasts is if high-cost Chinese smelters continue to stay in the market, pressuring domestic aluminium prices lower.
A weaker US dollar will boost metals prices, particularly gold, in the CBA analysts' view. They upgrade gold price forecasts out to 2016 to reflect stronger safe-haven demand and believe the historical correlation between rising US 10-year yields and falling gold prices will be maintained. NAB analysts believe developments in the Ukraine will continue to affect gold market sentiment, despite the limited impact on volatility to date. They expert a correction in gold prices is unlikely to gain momentum while geopolitical uncertainty and concerns regarding economic growth remain. Gold demand from emerging markets is expected to stay robust but investor demand as an inflation hedge is likely to be limited as long as inflation expectations are anchored. The NAB analysts expect gold prices near term to remain range bound, before resuming a downward trend.
CBA analysts reduce coking coal (metallurgical) price forecasts, reassessing the supply/demand costs as outweighing a weaker US dollar. Their thermal coal price forecasts are also cut. NAB analysts note spot prices for coking coal stabilised over the last month, but producers have started to respond to weaker prices by closing capacity. Take-or-pay contracts with infrastructure providers could limit the scale of potential cuts, while capacity will be boosted by a range of projects coming on board this year.
The NAB analysts note Chinese imports were weak in the early part of 2014, while steel production rose 4.9% over the first quarter. This could signal a run down in stocks of coking coal and potential for demand to strengthen in coming months. Prices could increase, therefore, from the current unprofitable lows, but the scale of idle production capacity will limit upside price pressure, in their view. They expect prices will trend upwards towards US$148/t by the end of this year and US$160/t by the end of 2015. Thermal coal markets are also well supplied and the case is similar to metallurgical coal, with take-or-pay contracts with infrastructure providers limiting the capacity of some miners to cut production. The NAB analysts expect thermal coal prices to stay range bound.
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