Commodities | Apr 03 2008
By Chris Shaw
March was a tough month for commodity prices. The month drove prices down to levels below those of the previous month but according to Danske Bank the correction, while welcome as it reminded investors it is fundamentals and not speculators that set prices in the sector and that commodity prices are traditionally volatile, appears to have basically run its course.
In the bank’s view the two most likely explanations for the March correction are it was either an in-cycle correction within an ongoing bull market or a sign commodity prices were not sustainable at the levels they had reached given the slowing in the US economy, with the truth likely somewhere between the two.
Taking a broad picture view the bank suggests commodity market fundamentals remain quite supportive as emerging market demand is still strong, the European economy continues to generate reasonable growth (which is good for commodities demand) and many commodities continue to deal with supply side issues. As well, investor demand for commodities remains quite strong.
Short-term this should translate into higher prices in April, with agricultural and precious metal markets best poised for further gains in its view given the former has ongoing structural issues and the latter should receive a boost from what is expected to be further weakness in the US dollar.
Danske Bank’s view is it has been profit taking that has driven down the gold price in recent sessions and this should eventually peter out, while it is not so concerned about the weaker demand at higher prices as in its view the greenback remains a more significant influence.
As the bank sees this as likely to weaken further to around 1.60 against the euro it expects a move through US$1,000 per ounce again in coming months, with a peak at around US$1,050 per ounce sometime in the September quarter. This dollar weakness is not seen as having the same impact on oil prices though as the group is forecasting relatively flat prices going forward.
The bank’s view is investors are now becoming more selective among the base metals as each metal has slightly different fundamental outlooks, though it sees copper and aluminium as best placed for ongoing gains while the smaller LME metals are more vulnerable to further price corrections.
RBC Capital Markets is also relatively bullish on the aluminium price outlook given it expects demand growth to remain at above trend levels through 2010 while it also expects China will swing from being a net exporter to a net importer, likely sometime in 2009, which will push the market into deficit. As well, Danske Bank notes higher input prices continue to support aluminium prices.
As a result RBC has upped its price forecasts slightly in coming years, with 2008 now expected to see an average of US$1.15 per pound, 2009 US$1.25 per pound and 2010 US$1.30 per pound, up from US$1.10, US$1.20 and US$1.20 previously. Danske Bank forecasts an average of US$2907.30 per tonne in 2008 and US$2700 per tonne in 2009, which equates to around US$1.32 per pound and around US$1.23 per pound respectively in metric tonne terms.
Copper demand has not suffered much from the US slowdown, Danske Bank attributing this to strong demand from China and ongoing supply side issues, with strikes a feature given the high price of the metal and rising costs for miners.
RBC Capital agrees and expects the current tight market conditions to continue this year, though a modest surplus should develop in coming years and this is expected to constrain prices to some extent. Prices have moved beyond fundamentals in the group’s view, which leaves the market open for a further correction during the course of 2008.
Price forecasts from RBC are for copper to average US$3.20 per pound in 2008, US$3.00 per pound in 2009 and US$2.50 per pound in 2010, compared to the group’s previous estimates of US$3.00, US$2.75 and US$2.50 per pound. Danske Bank expects prices to average US$8,360 per tonne and US$8,700 per tonne in 2008 and 2009, which equates to around US$3.80 per pound and US$3.95 per pound based on metric tonnes.
A rebound in nickel demand is expected by RBC Capital and this should come at the same time as any supply response is limited, at least until new projects begin to come on-stream in 2009. In the group’s view the market overall should remain relatively balanced and as a result it is forecasting prices of US$14.00 per pound this year, US$13.00 per pound in 2009 and US$9.00 per pound in 2010, which are unchanged from its previous estimates.
For zinc the group expects demand growth to increase through to 2010 but it notes the supply side has shifted to a surplus of concentrate, meaning there should be modest market surpluses in both 2008 and 2009. This is expected to push inventories back above the critical 6-weeks supply level, so in price terms it sees scope for further upside short-term but lower prices through 2008 and 2009 than were the case in 2007.
The group is now forecasting an average of US$1.15 per pound in 2008, US$1.10 per pound in 2009 and US$1.40 per pound in 2010, against its previous estimates of US$1.25 in both 2008 and 2009 and US$1.50 per pound in 2010.
