Commodities | Aug 30 2012
By Greg Peel
Independent operator CRU Group (formally the Commodities Research Unit) regularly analyses the markets of over 75 commodities across the mining, metal and fertiliser sectors. The Group has recently updated its 2016 price forecasts across 24 markets including steel raw materials, base metals and fertilisers. Percentage movements are marked from a base of June quarter average prices.
CRU warns that in the case of forecasts suggesting higher prices by 2016, the implication is not for a steady increase, and vice versa on the downside. Volatility will clearly come into play, so readers should view percentage price movements as representing “at 2016” rather than “up/down to 2016”.
CRU's outlook for commodities in general in the medium term is “warm”. The analysts adopt a temperature gauge analogy, as is illustrated by the table at the bottom of this article. On average, commodity prices are expected to increase by 8% in 2016 over 2Q12 which is a small revision from the analysts' 9.5% forecast provided last quarter. The base has also been lowered given the pullback in prices from the first quarter 2012 to the second.
Of the 24 commodities updated, 13 are expected to be higher in 2016 and 11 lower, which is a significant downgrade from CRU's 2:1 higher ratio set last quarter. The split between the ups and downs represents those commodities expected to be supply constrained and those for which excess capacity is already apparent.
The greatest medium-term supply constraints will occur in tin, zinc, alumina, palladium and uranium, the analysts suggest.
While tin consumption is expected to fall in 2012 the market is increasingly under-supplied and there is a lack of new projects in the pipeline. Those projects set to come online will not provide sufficient production and CRU expects a price response from 2013 with supply remaining tight by 2016.
The London Metals Exchange (LME) traded base metals are expected to regain some of their recent price losses, with the analysts seeing an average 30% upside to 2016 for the six (aluminium, copper, lead, nickel, tin, zinc). This average nevertheless takes into account a forecast lower price for copper. Copper should remain tight through 2014 but thereafter the analysts see a significant bulge in new capacity. The 2016 story for copper is similar to the 2012 story for nickel which is currently suffering from a supply surge just as Chinese demand has wavered.
Russian stock piles of palladium will be depleted by 2014 which will swiftly put the market into deficit thereafter, CRU believes. Palladium will nevertheless be a precious star performer as the analysts see no such upside pressure for all of the group. The “safe haven” metals of gold and silver will not see a collapse in demand in the short term but CRU does not see another gold bull run (unlike many). By 2016 the analysts believe silver, in particular, will lose its lustre.
An excess of new capacity in fertilisers has come on stream recently in low-cost regions. Prices and margins have nevertheless increased for producers recently so CRU does not see its forecast weakness in prices as a disaster for the sector, and the analysts' forecast falls will only bring prices in line with long run averages.
To sum up, CRU sees the “hot” commodities as alumina, aluminium, lead, nickel, tin, zinc, platinum, palladium, uranium and metallurgical coke. The “warm” commodities are vanadium, diammonium phosphate (DAP) and cobalt. Iron ore is “cool”, and manganese, copper, gold and coking coal are “cold”. The “freezing” commodities are silver, sulphur, sulphuric acid, potash, ammonia and urea.
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
