Commodities | Feb 08 2007
By Chris Shaw
Yesterday ANZ Banking Group suggested investors buckle up in preparation for increased volatility in commodity markets this year. Today Westpac Bank has followed suit, but with a more negative view on the price outlook in the sector.
Having noted the recent increases in metal inventories the bank’s take is this represents an early sign commodity markets have in fact peaked and prices are headed lower, with the ride down to be anything but smooth after some consolidation in coming months.
Its prediction is for prices to track roughly sideways in the first half of 2007, as support should come from a recent up-tick in global industrial demand. By the second half of the year the story should have changed though, as the bank expects the first evidence of the long mooted supply side response to appear. This will drive up inventories, so pushing down prices.
Its call for a correction in prices is supported by a number of factors, including a reversal of last year when there was the lack of any supply side response thanks to a number of disruptions to operations at major mines and in various distribution networks.
These problems appear well on the way to being resolved, while the strong investment cycle has seen mine employment move higher, which clearly is a positive in terms of the ability of producers to lift output.
As these problems have been addressed inventory levels have moved higher, the bank noting LME base metal stocks are now about 20% above their lows seen last October. Tempering the increase has been stronger than expected demand, as after peaking temporarily in May of last year the OECD leading index staged a recovery in August and continued to push higher in the last few months of last year.
While the bank is forecasting a solid performance in terms of global demand in the first half of this year thanks to its expectation of a soft landing in the US, it doesn’t see the demand side of the equation as being able to match the supply response as miners continue to lift output not only this year but in coming years as well.
In terms of base metal pricing the bank is forecasting a continuation or slight strengthening of copper prices over the next six or so months, but from a level of US$6,000 per tonne in June it sees prices falling to around US$5,700 per tonne by December and US$4,700 per tonne by March next year. It has a similar expectation for aluminium prices, which from around US$2,700 per tonne currently should fall to US$2,500 per tonne in December and US$2,300 by next March.
The zinc price is expected to remain stable and finish the year at around US$3,800 per tonne but then slide to US$3,400 per tonne by the end of 1Q08, while from around US$37,000 per tonne now the nickel price is tipped to fall to US$25,000 per tonne by the end of this year and US$20,000 per tonne by March 2008.
Unlike many in the market the bank sees gold as doing little, as it is calling for a spot price of US$620 per ounce by the end of the year and US$600 per ounce by the end of 2008, while it also sees a steady oil price with a target of US$58 per barrel for December.