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Material Matters: A Commodity Market Overview, Nickel, Oil and Coal

Commodities | Nov 20 2012

 – Little chance of quick recovery in commodity prices
 – Copper and gold preferred exposures
 – Nickel's fundamentals remain poor
 – Oil and coal markets conditions updated

By Chris Shaw

According to CIMB Bank, recent indicators suggest commodity market conditions are stabilising, though there is still little chance of any quick recovery given high inventories and a slower global growth outlook.

As well, CIMB sees little chance of a repeat of the massive stimulus packages of three years ago. This means there is little scope for price outperformance in the absence of any extraneous factors impacting on the market.

This is especially the case with the US fiscal cliff weighing over sentiment in the shorter-term. Longer-term CIMB suggests commodity markets are likely to be driven by whether government policies can manufacture a recovery in global growth. 

China appears to be doing its part in delivering an improved outlook, as CIMB suggests risks of a hard landing in that economy have eased in recent months. But issues elsewhere, including the fiscal cliff in the US and sovereign debt in Europe, continue to pose risks.

For the US, CIMB estimates the tax increases and spending cuts associated with any fall over the fiscal cliff could cut from 3-4% from GDP growth in 1H13, though a compromise is expected to be reached before such a an issue arises.

A positive for the medium-term in the view of CIMB is producers are now moving away from supply at any cost to more cost effective supply, which is expected to push out anticipated surpluses in many markets that were being factored in as project pipelines surged in recent years.

CIMB also suggests resource nationalism is a growing issue affecting commodity market supply, as the likes of Indonesia look to ban exports. This issue is likely to remain until governments improve funding for necessary public expenditure, something CIMB suggests could help improve the supply-demand balance in many commodity markets. 

With respect to preferred markets given current and expected conditions, CIMB's view is iron ore, aluminium and zinc prices face the strongest supply side headwinds, while copper, platinum and tin face the least. 

Preferred exposures under the current environment are gold and copper, CIMB expecting a rally in the gold price towards US$1.900 per ounce over the next six months and sees copper as a beneficiary of any pick-up in economic activity.

In Deutsche Bank's view the fundamentals of nickel remain poor, with the market likely to be in surplus for the next few years at least. Supply growth in China continues to increase thanks to ongoing nickel pig iron capacity additions, while demand an expected improvement in demand through 2013 is unlikely to be enough to re-balance the market.

A market surplus should keep a cap on prices in the view of Deutsche, especially given ongoing supply side concerns. This stems primarily from Chinese nickel pig iron supply, which continues to grow and at lower costs as technology and scale improvements are implemented.

Chinese nickel pig iron producers remain the marginal producers globally but as Deutsche notes, the industry's marginal costs are now estimated to be in the range of US$15,000-$16,000 per tonne, down from US$18,000-$20,000 two years ago.

Shorter-term Deutsche suggests there is scope for nickel to move off recent lows of around US$16,000 per tonne to closer to US$17.500 per tonne. Such a move would likely be driven by favourable seasonal trends and improved overall physical conditions.

As Deutsche notes, the European stainless market appears to see a regular tightening at the beginning of the calendar year, while this year also offers scope for some improvement in activity levels in China, so boosting metal demand.

Macquarie agrees the supply side of the nickel market is creating issues, as despite some disappointments from new projects overall production of the metal continues to grow faster than demand.

Most non-Chinese greenfield nickel projects currently being commissioned are seeing slower or delayed ramp-ups, while production is also falling at a number of existing projects. Even allowing for this, Macquarie estimates global nickel output should grow by 6.2% year-on-year to 1.72 million tonnes in 2013. 

With supply increasing LME stocks have risen and are up more than 43,000 tonnes year-to-date. Macquarie is forecasting a nickel market surplus of 60,000 tonnes this year and more than 50,000 tonnes in 2013. This is expected to be enough to generate further production cuts both in and outside of China. 

A flare up in Middle East tensions reversed what had been a downward trend in crude oil markets in recent sessions, though Brent crude was a larger beneficiary of the turnaround than was West Texas Intermediate (WTI).

Standard Bank notes the spread between the two is around US$23.50 per barrel, which is close to a 12-month high. Middle East unrest has benefited Brent, while WTI has struggled on oversupply concerns given strong US inventory levels.

An easing of tensions in the Middle East will lead to a narrower spread, but Standard Bank suggests the extent of this narrowing is now more limited than a month ago. This is because the main impetus for any sustained narrowing in the spread will need to come from support for WTI, which Standard Bank suggests is now less likely.

This reflects both potentially weaker product and crude demand following on from Hurricane Sandy, as well as potential demand destruction from the impending US fiscal cliff. The latter in particular should weigh on WTI more than Brent in Standard Bank's view.

In coal, Commonwealth Bank notes US thermal coal exports fell in September by 7.4% in month-on-month terms, while coking coal exports were down 15.5% on the same basis. The decline can be attributed to weaker prices during the period.

Lower volumes are the result of the Chinese economy slowing and CBA suggests there are few obvious catalysts to coal demand. One possibility is a pre-winter re-stock cycle in the Northern Hemisphere as this could offer a cyclical lift, while CBA also notes further closures of unprofitable operations may also boost the market. 

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