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Barclays Mostly Bullish On Commodities

Commodities | Jun 23 2011

– Diverse fundamentals across base metal markets
– Gold interest expected to remain high, silver needs physical demand support 
– Fundamentals still broadly positive for platinum group metals


By Chris Shaw

On the back of recent volatility in commodity prices Barclays Capital has reviewed the sector, updating both base and precious metal market outlooks to account for current market conditions.

In the base metals, demand side concerns continue to dominate short-term price action thanks to further evidence of a weakening in global growth momentum. But according to Barclays it is the supply side shaping a more diverse fundamental picture across the base metal markets. 

Copper offers one extreme, given the potential for mine supply to contract due to ramp-up issues and lower head grades. When set against a backdrop of thin inventory buffers and tightening scrap availability, Barclays suggests copper supply is tighter than the market perceives.

At the other end of the market is zinc, where mine and refined supply continue to grow and the market's surplus continues to expand. Inventories are also rising quickly, which Barclays expects will see prices struggle.

For aluminium specifically, Barclays sees the market as tightly balanced at present, as while global production has been at record levels demand trends have also been strong. With consumption growth in the second quarter coming in at a double-digit pace in year-on-year terms Barclays expects prices will grind higher in coming months. Prices are forecast to average US$2,620 per tonne [year to date average US$2576/t] for 2011.

Copper prices have languished somewhat of late given macroeconomic uncertainties but with the fundamental picture better than perceived at present prices should move higher. This is especially the case given Barclays sees a growing risk of a contraction in mine output. In forecast terms, Barclays anticipates prices rising to around US$12,000 per tonne in the final quarter of this year and averaging US$10,412 per tonne [9414] for the full year.

Lead has performed the best of the base metals since the correction in May but the state of the market in China offers some food for thought given an increase in environmental inspections causing some closures of battery plants. Barclays sees this as a temporary issue, so demand should remain robust. Forecast is for an average price for 2011 of US$2,826 per tonne [2538].

In nickel, expectations for weaker 2H11 fundamentals have weighed on prices but Barclays suggests the price weakness has gone beyond what would be justified for the magnitude of surplus expected in the period. As nickel is currently trading strongly into the cost curve prices are expected to rebound in coming months. Barclays forecasts an average fourth quarter price of US$27,000 per tonne, while for 2011 as a whole it expects prices will average US$26,849 per tonne [22408].

Tin prices have also fallen heavily in the past month, Barclays pointing out this has been despite no significant deterioration in fundamentals to justify such weakness. While stocks have grown this year due to Chinese smelter de-stocking, Barclays suggests this process has run its course and a relatively tight market balance should see a reversal in LME stock trends in coming months. Forecast is for an average price of US$32,310 per tonne [29607] for 2011.

A growing surplus in the zinc market has not stopped prices from recovering since the May sell-off, but with the market balance expected to continue to deteriorate over the rest of the year Barclays sees further underperformance relative to the other base metals. Price forecast is for an average of US$2,411 per tonne [2338] in 2011.

On the precious metals, rising physical interest has continued to support gold prices even during a seasonally weaker demand period. Longer-term Barclays sees a number of factors that should keep interest in gold high, including concerns over financial support for Greece, weaker macro data and increased speculation with respect to QE3. Barclays sees further upside, forecasting an average gold price for 2011 of US$1,489 per ounce [1444].

In silver, investment demand had been crucial in pushing prices higher, to the extent Barclays suggests there had been a lack of fundamental support during the last leg up prior to a correction in May. In the absence of stronger ETF interest physical demand will need to offer a more solid floor to prices, so Barclays forecasts an average silver price for the year of US$34.30 per ounce [35.23].

In the platinum group metals, Barclays takes the view fears of a demand slowdown are somewhat overdone and the markets should remain relatively tight in fundamental terms. There remain some uncertainties for 2011 such as rising scrap supply and slowing investment demand, but longer-term Barclays continues to see a constructive outlook.

For platinum specifically, Barclays suggests the demand side is being weighed down by concerns of a slowdown in China and a slowdown in that market's re-stocking cycle. Prices are expected to be caught between supply-side and demand-side concerns in the shorter-term according to Barclays, while longer-term the outlook remains constructive. Forecast is for prices to average US$1,825 per ounce this year.

Weakening investor interest has emerged as an issue for palladium in recent weeks, while auto sales also weakened across key regions in May. Barclays expects underlying demand from the auto sector should remain supportive, even if it is at softer levels in year-on-year terms. The forecast is for palladium prices to average US$823 per ounce this year.
 

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