Commodities | Oct 05 2011
– Metals prices forecasts revised lower
– Short-term issues remain, longer-term outlook still constructive
– Mixed views on gold price outlook
– Base metals expected to show gradual price increases next year
By Chris Shaw
With the September quarter complete analysts have revised commodity price forecasts lower for the most part, taking into account heightened market volatility and the impact on prices of the uncertainty being created by a weak growth outlook and ongoing sovereign debt issues.
As Natixis Commodity Markets points out, three months ago the key for commodity markets was how successful policy makers would be in navigating through these issues in a credible and effective manner.
Three months on and the same questions remain, largely because policy makers have failed to deliver coherent and long-term solutions to existing problems. Europe has moved closer to sovereign default, US growth remains weak and developing countries are maintaining excessively tight monetary policies. These issues have translated into a fall in household and business confidence, while labour market conditions have also worsened.
As Natixis notes, while the issues in Europe and the US are unfortunate, most of the demand for base metals comes from the developing world. This implies that as long as conditions remain stagnant at worst in developed economies, base metals prices will continue to be determined by demand from the BRICs and other emerging economies.
The urbanisation and industrialisation models being pursued by a growing number of developing economies suggests a steady increase in base metals demand, even while the shorter-term risk is a more protracted downturn given excessively tight monetary policies at present.
As well, Natixis suggests the fact industry participants and many investors have scaled back their metals holdings prior to the current economic issues taking hold should help reduce the severity of falls in commodity prices. This reflects the potential for restocking demand once prices have fallen to more attractive levels.
This indicates there is still the potential for a significant rebound in commodity prices, though Natixis acknowledges the risk is poor policy decisions mean further falls in prices shorter-term cannot be ruled out.
Danske Bank's quarterly update on commodities makes similar points in that the sell-off in prices has been driven by a massive unwinding of speculative long positions in the sector as sentiment towards the industrial cycle, the US dollar and risk appetite in general has taken a turn for the worse.
There is still room for some further selling in the view of Danske Bank, but from a medium-term perspective the most likely outcome is demand for raw materials strengthens towards the end of the year as current headwinds fade. This implies some upside for prices in 2012 relatively to current levels.
Supporting Danske Bank's view is the expectation the global economy will avoid recession, though the outlook is for low growth in coming years. This is especially the case for developed Western economies.
The offset will be still solid growth in developing economies and as this growth is more commodity intensive, Danske Bank expects the demand side of the commodities equation will stay strong through 2012.
Barclays Capital agrees, taking the view as long as the global economy misses recession and China can engineer a soft landing, commodity prices should recover. But an overall weaker demand outlook will reduce the tightness in some markets such as copper, meaning the upside for prices may not be as pronounced as earlier in the cycle.
Helping offset weaker demand will be the lack of any significant inventory buffer for many metals. This will limit the impact on prices of any de-stocking that may occur in the view of Barclays.
In JP Morgan's view a move to less restrictive fiscal policy in China could provide a boost to the demand side of the commodity equation, which adds weight to the argument this time around is different to what was seen in 2008.
But as with other analysts, JP Morgan sees scope for some further falls shorter-term, largely as a result of forward looking economic indicators continuing to undershoot expectations. This means there is the risk of further downgrades to growth outcomes, though the market appears to be closer to the end of the process than the beginning.
Barclays continues to take the view different metals will deliver different levels of performance, due largely to the supply picture in play in each case. While all metals have some forced constraints, copper is still the standout among the base metals given ongoing technical disruptions, labour issues and falling ore grades.
Copper should actually experience relatively strong supply growth in 2012 at 4.4% compared to just 1.6% in 2011, but Barclays remains cautious given much of this growth is expected from greenfields projects where the risk of slippages and delays is higher.
If the current period of price weakness continues there may also be reduced investment spending and slower development of new projects in the view of Barclays. As prices are already eating into the cost curve for some metals, the risk appears to the downside for supply, a factor Barclays suggests will limit price downside.
Translating all this into revised commodity price forecasts, for aluminium, Natixis notes there have been some important structural changes in the market in recent months. China has switched from alumina imports to bauxite imports but continues to experience a decline in stocks of aluminium, which may necessitate the Chinese again becoming net importers.
When adding in the threat of an increase in energy prices as the global coal market continues to tighten, Natixis sees scope for aluminium prices to remain well supported. Natixis is forecasting an average annual price for aluminium of US$2,650 per tonne, which is above the Danske Bank forecast of US$2,525 per tonne.
Barclays expects the aluminium market will remain relatively balanced in 2012, especially as prices are already eating into the price curve given almost 25% of global capacity is currently unprofitable. This leads Barclays to forecast an annual average price in 2012 of US$2,544 per tonne, while JP Morgan's forecast falls to US$2,500 per tonne from US$2,725 per tonne previously.
In copper, while JP Morgan suggests the cyclical low may not yet have been seen the outlook remains solid given ongoing supply side issues. A more balanced market is expected in 2012 and this should take some steam out of the price, JP Morgan cutting its forecast for 2012 to US$8,750 per tonne from US$9,875 per tonne previously.
Natixis is more positive on the potential for the combination of a strengthening in demand in developing countries and a period of re-stocking to deliver a substantial copper market deficit in 2012. This is enough for the group to forecast an average copper price next year of US$9,850 per tonne, while Barclays is forecasting an average annual price of $10,075 per tonne and Danske Bank US$9,313 per tonne.
For lead, Barclays now expects a bigger market surplus in 2012 than was previously forecast, this due to weaker demand in the US, Europe and China. Prices should move higher through 2012 and Barclays has an average price forecast for next year of US$2,506 per tonne.
Natixis also expects a surplus in 2012 and sees this as enough for lead to underperform the other base metals in the coming year. The group's average price forecast for 2012 is US$2,550 per tonne, while JP Morgan expects an average price of US$2,250 per tonne, down from US$2,575 per tonne previously.
As with aluminium, the nickel market has seen some structural changes as Chinese pig iron production continues to increase even as prices weaken. Supporting prices will be an expected increase in Chinese stainless steel production and higher coal prices, so Natixis expects average prices next year of US$25,500 per tonne, again higher than Danske Bank at US$23,625 per tonne.
Barclays also expects Chinese nickel pig iron production will be a dominant influence on the nickel market, with a bigger surplus now expected in the coming year. This has led to Barclays cutting its price target for 2012 to US$21,125 per tonne from US$23,375 per tonne previously, while JP Morgan is forecasting an average price of US$21,250 per tonne, down from US$22,875 per tonne previously.
Fundamentals have tightened for the tin market thanks to strengthening Chinese import demand, which has helped drive down LME stocks. A ban on exports by Indonesia is also proving a positive for prices by removing some supply, so Barclays is forecasting an average price for tin next year of US$28,000 per tonne.
Natixis also sees scope for the tin market to revert to shortages next year if Chinese re-stocking emerges, an outcome that would lift prices. Natixis is forecasting an average price in 2012 of US$29,250 per tonne.
Zinc has been in surplus for most of the past four years and stockpiles have risen sharply, but as Natixis notes recent months have seen a slowing in Chinese supply and so first signs of a move to a better balance in the market.
In coming years the end of production at a number of major mines will be supportive and in 2012 Natixis is forecasting an average price of US$2,400 per tonne. This is above the Barclays forecast of US$2,300 per tonne, which factors in expectations of a market remaining in surplus next year. JP Morgan has also trimmed its zinc price forecast, to US$2,113 per tonne from US$2,475 per tonne.
In the precious metals JP Morgan's view is the many risk factors for the global economy will remain supportive to prices, especially if the current de-leveraging in the market proves to be a short-lived phenomenon.
Given positives such as negative real interest rates and fears of debt defaults, JP Morgan is forecasting an average gold price in 2012 of US$1,869 per ounce, up from a forecast of US$1,696 per ounce in 2011. Danske Bank expects average gold prices next year of US$1,763 per ounce.
Barclays agrees macro insecurity and low interest rates will continue to support gold once the current period of weakness passes, with physical demand the key in setting a floor for prices. Barclays expects an average price in 2012 of US$2,000 per ounce, while Natixis takes an opposite view and argues the gold price is in a bubble at present and is more likely to weaken in coming years. Natixis expects prices to average US$1,450 per ounce in 2012.
Silver is similarly not expected to hold recent elevated levels as the global economic slowdown is impacting on the metal's industrial demand base, so Natixis is forecasting an average silver price next year of US$27.50 per ounce.
Barclays agrees silver prices lack real fundamental support at current levels but the group is more bullish on the price outlook, expecting an average price in 2012 of US$35 per ounce. JP Morgan's forecast is closer to the view of Barclays, standing at US$34 per ounce next year.
Deutsche Bank has made no changes to its gold price forecast following a review, expecting a 2012 average of US$1,900 per ounce in 2012. Forecasts for silver have been revised lower though, to US$41 per ounce, down 12%.
For the platinum group metals, Barclays notes Chinese demand has provided price support as markets have come under pressure, while longer-term the market fundamentals for platinum in particular remain constructive.
Barclays expects an average platinum price next year of US$1,835 per ounce and for palladium of US$860 per ounce, while Natixis's forecasts stand at US$1,800 per ounce and US$875 per ounce respectively.
JP Morgan is not far away with forecasts of US$1,914 per ounce for platinum and US$850 per ounce for palladium, while Deutsche Bank expects prices to average US$1,875 per ounce for platinum and US$800 per ounce for palladium.
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.
