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Commodities Compendium
2011: A Year of New Highs
Base metals and bulk commodities have risen particularly strongly since our last
Commodities Compendium in October 2010, as strong demand growth and
supply disruptions tighten up the major metals and bulk commodity markets.
Indeed, our views on the direction of most commodity prices are unchanged
since our last Commodities Compendium, notwithstanding the fact that we have
become more bullish on the prospects for the level of coking coal, iron ore and
copper in recent months. Taking a 6-12 month view from current spot prices we
expect nickel, zinc and steel will significantly underperform relative to other
commodities. Meanwhile, our confidence persists that oil scarcity remains on the
horizon, while for agricultural commodities weather-related supply disruptions
are maintaining upward price pressure on corn, wheat and soy beans.
Steady as she goes on the macroeconomic front would see
copper run out by 2012
Global industrial production returned to its previous peak in 1H10, but since then
has grown more slowly. Our initial concern was that leading indicators would
start to taper off as IP lost the impetus from the restocking cycle, end demand
flattened out and there was some weakness in China, particularly in construction.
However key leading indicators like the PMIs have consistently been better than
expected heading into the end of 2010, pointing to rising industrial production, while
Chinese construction activity has also remained strong through the year, putting
2011 on very strong footing. With activity set to reaccelerate in the early stages
of the year, industrial production should grow at 4¾%-5% over the year.
Furthermore, the risks to 2H11 do not appear quite as worrying as in 2010.
With this macroeconomic outlook, copper goes into the year in small deficit
and, with supply growth likely to be limited to the low single digits at best, in
percentage terms, we can’t see anything other than higher prices and forecast
the price to reach $5.50/lb in 2H11, averaging $5/lb in 2012.
Strong momentum for bulks with supply issues to the fore
An assortment of supply disruptions (floods, infrastructure issues, export bans)
have combined to see iron ore and coal markets tighten dramatically over the
past quarter. With Chinese steel production set to rise strongly through 1H11 as
power curbs are lifted and real demand improves, the pressure on already
undersupplied raw material markets is only going to increase. For met coal we
see losses related to Queensland flooding of 10mt (plus 5mt thermal coal), and
see contract prices rising to $290/t FOB Australia in 2Q11. For iron ore we have
raised our already bullish profile, both in the short and medium term, reflecting
our view that supply growth will underperform expectations while Chinese mine
cost inflation underpins the spot price. In thermal coal we now expect that the
JFY11/12 contract will be settled at $145/t FOB Australia, well above consensus.
Major physically backed base metals ETFs to launch in ‘11
While we cannot be certain, it’s more likely than not that by mid-2011 the
Blackrock ($1bn) and JP Morgan ($0.5bn) physically backed copper ETFs will
have been approved and could absorb up to 150,000t of copper. In aluminium the
Glencore / Credit Suisse physical aluminium ETF should launch by mid-2011;
but with the aluminium stockbuild during the downturn still overhanging the
market the take up rate is more uncertain than for copper.
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