Commodities | Aug 17 2007
By Chris Shaw
As last night’s shakeout in precious metal prices highlights, commodity markets have been unable to avoid any impact from the current chaos in global markets but where there is uncertainty there is also opportunity according to Barclays Capital.
The group suggests once markets settle down fundamentals should again come to dominate the commodity markets and this will present some attractive options to investors.
Barclays makes the assumption that as long as the current financial market crisis doesn’t impact on the outlook for global growth further price downside is actually quite limited in a number of the commodity markets as demand should remain strong.
Highlighting just how strong demand has been the group notes among the base and precious metals and energy commodities only oil has so far experienced lower demand in 2007 than was the case in 2006, largely as a result of the mild northern winter last Christmas.
In contrast, demand for gold has risen 25% year-to-date against a fall of 3.7% last year, aluminium is up 10% against a 5.5% increase in 2006 and copper is up 5.5% against a 2.5% increase last year.
It hardly needs saying China has been the driver of this demand growth, accounting for more than 100% of the increased demand for lead and nickel (consumption elsewhere in the world has fallen), 90% for aluminium and 65-70% for copper, zinc and oil.
Other fundamentals too support a recovery across the commodities sector, with the group seeing scope for crude prices to push higher short-term as there are signs global demand is recovering at the same time as OPEC is focussed on reducing inventory levels, meaning the market should tighten and so limit any price downside.
Similarly in the base metals suite lead, tin and zinc markets continue to tighten and so leave these markets as well placed for a possible bounce, though short-term there is downside risk to copper in the group’s view from rising stock levels.
Aluminium prices should continue to range trade while higher stockpiles from ongoing de-stocking in stainless steel markets suggests nickel prices will move lower in coming months before recovering later in the year.
Fabrication demand for gold is now expected to remain positive throughout the year, with additional support in the group’s view from expected oil price strength and US dollar weakness. Offsetting factors are a likely fall in de-hedging and a smaller than expected shortfall in central bank sales, meaning a new catalyst is needed to push gold prices to new highs.
In terms of price forecasts the group sees the oil price as measured by West Texas Intermediate (WTI) as averaging US$72.10 per barrel this quarter and US$70.00 per barrel in the December quarter, while for gold it expects averages of US$650 per ounce and US$645 per ounce respectively.
Among the base metals the group is forecasting average prices for aluminium of US$2,600 per tonne in the September quarter and US$2,700 in the fourth quarter, for copper US$6,500 per tonne and US$7,500 per tonne and for lead of US$2,800 and US$2,850 per tonne respectively.
Nickel prices are forecast to average US$35,000 per tonne in the September quarter and US$38,000 in the December quarter, while for tin the group’s quarterly per tonne estimates are US$14,500 and US$15,500 and for zinc US$3,800 and US$3,200.
