Commodities | Mar 05 2015
-Copper disruptions continue
-Thermal coal price unsustainable
-Steel conditions deteriorating
-High inventories temper gas
-Low wheat exports help Oz prices
-Cotton vulnerable to synthetic
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By Eva Brocklehurst
Commodity Outlook
Markets have made a choppy start to 2015, in the opinion of analysts at ANZ. Most of the volatility has been in energy and precious metals. Supply side issues remain dominant. The return of Chinese consumers from the Lunar New Year holidays should set the tone for the next few months. The analysts consider the risks are to the downside, as Chinese authorities prioritise structural reforms ahead of government-assisted growth.
Copper
US non-commercial investors hold near-record short positions in copper, a good proxy in the analysts’ view for Chinese demand. Supply disruptions continue to mount and this should allow the market to tighten over coming months. The ANZ analysts are still of a view that non-financial constraints will impact copper supply growth and present a downside risk to supply going forward. Credit Suisse also suspects 2015 will be a big year for disruptions in copper supply, citing the mill failure at Olympic Dam, a scheduled closure of Lumwana in Zambia and drought in major producer, Chile. A third of mined supply is forecast to come from Chile.
Credit Suisse expects copper prices will climb above US$6,000 tonne as Chinese demand picks up. Inventories are rising but are only 32,000t above the level of a year ago. A rise in Shanghai exchange stocks is typical ahead of peak demand, which the broker does not doubt will eventuate. China’s state grid plans to lift expenditure by 24% and activity should pick up as the winter ends.
Bulks
In bulks, supply and stockpiles also remain high, although steel mills appear to be drawing down port stocks. A weakness in demand is setting the bearish tone for bulks and the ANZ analysts doubt the factors supporting the 10% bounce in seaborne thermal coal prices will be sustained. The rebound was partly triggered by a seasonal draw on Australian port stocks ahead of the annual benchmark coal price negotiations.
Macquarie suspects Glencore’s plans to reduce its 2015 Australian coal production by 15m tonnes is likely, in the absence of further details, to be entirely thermal coal. Still, the broker does not believe this will be enough to balance the market. India is the only major importer showing any keen action, while China appears to be moving away as the market of last resort for surplus tonnage.
Macquarie is sceptical that the full 15mt will be out of the market for any sustained period, suspecting the reduction in production is being made to underpin current price negotiations. If the supply cut is more permanent it would reduce global seaborne exports and provide some support to sustain Newcastle spot prices near recent levels.
Iron ore and coking coal are expected to find limited support from a seasonal pick-up in construction activity and steel demand but, with ample supply apparent, this is likely to remain weak without Chinese government intervention, the ANZ analysts contend.
Steel
Macquarie finds the steel market a sombre place. Developed world prices are at levels last seen in 2009 and demand conditions across the globe appear to be deteriorating.
While much of the weakness can be considered seasonal, particularly in China, this has been compounded by European purchasing managers becoming increasingly tentative as macroeconomic risks return. In China, Macquarie observes construction orders are the most negative in the history of the broker’s proprietary steel survey, while machinery orders have been contracting since early 2013. A pick-up is expected in coming months but current conditions are considered a low hurdle to jump.
Energy
A sharp decline in long oil positions has prompted some buying interest but the ANZ analysts suspect this could turn quickly, with seasonal demand easing and rising oil supply continuing. US energy stockpiles are near record highs and the analysts expect the trend to continue, with most producers flagging stronger near-term output.
The weakness in oil and soft demand is also expected to maintain downward pressure on spot and contract LNG prices in the near term. Contract prices are tracking lower because of the lagged impact of falling oil prices and spot prices are also under pressure as utilities switch to cheaper fuels. Chinese demand remains the bright spot in Asia, in the analysts view. The liberalisation of natural gas prices should boost Chinese domestic demand, while price hikes for non-residential consumers should improve margins for utilities and encourage more to use gas. In the near term, the analysts’ contend, Chinese demand could be tempered by relatively high inventories as a consequence of the mild winter.
Softs
Headwinds are easing in wheat. While prices have tested four-year lows twice in the last six months the ANZ analysts suggest this is because of a lack of positive news and is typical of this time of year. With the waning influence of a stronger US dollar and northern hemisphere winter crops about to break dormancy the analysts believe risks are to the upside for wheat in the quarter ahead. Wheat prices also look cheap relative to corn at present while speculative positions appear to have stabilised.
Australian wheat prices have been strong as a weakening currency and lower export availability on the east coast supports producer incomes. The analysts forecast Australian east coast wheat exports to be at the lowest level in seven years in 2015, because of tighter supply.
Cotton markets are being dictated by outside influences, with ANZ analysts noting a resultant fall in synthetic fibre prices from lower oil prices is making physical cotton overvalued. At present, they contend US cotton futures are being supported by early season forecasts of a decline in plantings. Still, lower grade physical cotton appears vulnerable to a downward price correction given its poor relative value to synthetic fibres.
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