Material Matters: Commodity Positioning

Commodities | Oct 05 2021

A glance through the latest expert views and predictions about commodities: commodity positioning; gold equities; copper; and gas/oil.

-A sharp recovery in commodity prices from recent falls is unlikely, UBS asserts
-Gold under pressure; time to buy gold equities?
-Constraints on metal consumption and demand declines make Citi more bearish on copper
-Australia's east coast gas pricing remains disconnected from booming international prices


By Eva Brocklehurst

Commodity Positioning

Very recently the outlook for commodity demand has deteriorated, UBS observes. The financial problems of Evergrande have triggered a slowdown in China's property sales while power shortages and rationing have impacted industrial activity materially since July.

The demand impulse in developed markets has peaked and demand is changing to services from goods. Near-term supply constraints in smelting and refining in China are providing some offset while central banks are edging closer to hiking rates.

Hence, UBS asserts this is not the backdrop for a sharp recovery in commodity prices, which should fall further over the next 12 months. Therefore, it is too early to be a buyer and the broker remains underweight on the mining sector with predominantly Sell or Neutral ratings across its coverage.

UBS prefers thermal coal, nickel, aluminium and lithium at this stage. Thermal coal appears resilient while electric vehicle-related demand remains strong and should support nickel and lithium. The structural outlook for aluminium has also improved, although the broker does not believe spot prices are sustainable.

Meanwhile, the fundamentals for iron ore are considered challenging and UBS envisages further downside in prices. Gold provides a hedge against inflation risks but the broker points to rising yields and policy normalisation that should pressure prices.

UBS maintains a Sell rating on Rio Tinto ((RIO)) while in contrast a Buy rating is held for South32 ((S32)) as it has a more attractive suite of commodity exposures.

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