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Introduction
Optimism seems to be the key word for commodities in 2011 at least for the
first half. This is because of Eurozone crisis, growth concerns and ample
liquidity. 2010 has been a year of the commodities which beat stocks and
bonds for the second year thanks to fiscal and monetary concerns globally.
The S&P GSCI Index is continuing with last year’s 50 percent advance, which
also beat the 27 percent rise in the MSCI World Index and the 3.7 percent
fall in Treasuries.
• The financial carnage that is ongoing due to subprime crisis has not
impacted the momentum of commodity prices boom. On the contrary
Quantitative Easing 2 has provided a stimulus to commodity markets
that even the fall out of sovereign debt concerns in Eurozone has not
deleted.
• Price gains have since the start of the year stepped on the gas with the
DJUBS index up 22%. Commodity asset under management has
increased by 80% to USD 354 billion in 2010 and another USD 60
billion is likely to be pumped in 2011.
• Prices for oil, coal, copper and gold have hit highs for the year recently
and a strong bull run is occurring in agricultural commodity market.
Impact on stock market
The BSE Oil and gas index has increased by 7% in 2010 while its BSE Metal
index has fetched a return of 12%.
• In 2011, what will be the impact on oil and gas? As per our predictions
oil is likely to remain elevated in H1 2011 which means that the
upstream companies will stand to gain as they get to sell to refining
companies at higher prices linked to international prices.
• The profit of downstream companies hinges on the government’s
polices to pass on diesel and kerosene price hikes. There is a likelihood
that downstream majors Reliance, HPCL and BPCL could see some
upside after a bad year in 2010 while upstream major ONGC could see
some of its gains being erased as it has to shell out cash for bearing one
third of the losses of refining companies.
• In metals, major copper player-Hindustan Copper stand to lose as the
stock is highly overvalued relative to its fair valuations. Aluminium
players like Sterlite and Hindalco are likely to outperform thanks to
their strong fundamentals. In the commodity markets, these metals are
likely to show superior performance in H1 2011. Tata Steel and Jindal
Steel look positive.
Oil
Oil has given 13% returns in 2010. Global oil demand has hit an all-time high in 2010. Last year’s global demand growth of about 2.4m bpd will
be the second strongest in the past 30 years. Furthermore, at a projected 87.1m bpd this year’s total is on target to exceed the record high set in
2007 by 0.7m bpd.
• Over the medium term, we expect further support from an improved US economic outlook, strong EM demand, ample G3 liquidity
and a weaker USD
Base metals
Base metals demand is also growing strongly, with handsome gains in global demand as all-time highs are hit in many markets this year. Copper
is a good instance of the power of metals demand.
• China remains the key driver in terms of sustained demand growth, although the US, Europe and Japan are all in firmly positive
growth area as well.
• Copper prices have increased by 20% in 2010. Copper appears attractive in the base metals basket. Copper fundamentals continue to
tighten with mine supply remaining constrained and global demand coming in above expectations.
• Aluminium is supported by large-scale Chinese smelter cutbacks and robust demand in the OECD and China, contributing to a large
market deficit in Q4 10.
• Steel has given 20% returns in 2010 on the back of strong demand in the emerging markets space and going ahead too Chinese demand
is likely to provide support to the metal prices.
Gold
Gold has given 30% returns in 2010 due to QE 2 and apprehensions about the global economy. However not until H2 2011, a firm footing in the
US is likely to be seen which means gold prices will rise.
• Outlook on gold is positive, as sovereign debt risk, macro uncertainty, currency instability concerns, inflation fears, and geopolitical
tensions continue to build investor appetite against a backdrop of low interest rates. Gold is likely to touch USD1500 an ounce in mid
2011 before falling to USD 1430 an ounce by year end according to Barclays.
Silver
• Silver has given 80% returns in 2010 rising to USD 29 an ounce. The metal’s demand is more dependent on investor interest, as mine
supply continues to hit record highs and shows no sign of slowing down. Silver has gained on the support of gold prices.
• Although industrial demand remains high, silver is likely to trade keeping a tap on the gold prices. Silver is likely to rise by 37%
topping Bloomberg’s top 15 commodities survey among investors, traders and fund managers.
Looking ahead
It’s a long way for the US recovery with subdued consumer spending, credit supply from banks remaining tight and housing recession still
underway. However, things are gradually improving in US with corporate earnings highest since 2006 growing at 26%.
• But, fiscal concerns are there in the US with many analysts skeptical about Obama’s massive stimulus and tax benefits and record high budget
deficit that has shot up to over 10%. In Eurozone also, sovereign debt concerns plague Portugal and Spain after the carnage in Greece and Ireland.
These are positive for commodities.
• However towards H2 2011, with the improving fundamentals in the global economies, commodities rally is likely to lose its steam. Also,
commodity futures are showing a contango scenario which in finance is a scenario when the future price is expected to be below the spot price.
Thus the returns in futures may be lower than spot market.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Introduction
Optimism seems to be the key word for commodities in 2011 at least for the
first half. This is because of Eurozone crisis, growth concerns and ample
liquidity. 2010 has been a year of the commodities which beat stocks and
bonds for the second year thanks to fiscal and monetary concerns globally.
The S&P GSCI Index is continuing with last year’s 50 percent advance, which
also beat the 27 percent rise in the MSCI World Index and the 3.7 percent
fall in Treasuries.
• The financial carnage that is ongoing due to subprime crisis has not
impacted the momentum of commodity prices boom. On the contrary
Quantitative Easing 2 has provided a stimulus to commodity markets
that even the fall out of sovereign debt concerns in Eurozone has not
deleted.
• Price gains have since the start of the year stepped on the gas with the
DJUBS index up 22%. Commodity asset under management has
increased by 80% to USD 354 billion in 2010 and another USD 60
billion is likely to be pumped in 2011.
• Prices for oil, coal, copper and gold have hit highs for the year recently
and a strong bull run is occurring in agricultural commodity market.
Impact on stock market
The BSE Oil and gas index has increased by 7% in 2010 while its BSE Metal
index has fetched a return of 12%.
• In 2011, what will be the impact on oil and gas? As per our predictions
oil is likely to remain elevated in H1 2011 which means that the
upstream companies will stand to gain as they get to sell to refining
companies at higher prices linked to international prices.
• The profit of downstream companies hinges on the government’s
polices to pass on diesel and kerosene price hikes. There is a likelihood
that downstream majors Reliance, HPCL and BPCL could see some
upside after a bad year in 2010 while upstream major ONGC could see
some of its gains being erased as it has to shell out cash for bearing one
third of the losses of refining companies.
• In metals, major copper player-Hindustan Copper stand to lose as the
stock is highly overvalued relative to its fair valuations. Aluminium
players like Sterlite and Hindalco are likely to outperform thanks to
their strong fundamentals. In the commodity markets, these metals are
likely to show superior performance in H1 2011. Tata Steel and Jindal
Steel look positive.
Oil
Oil has given 13% returns in 2010. Global oil demand has hit an all-time high in 2010. Last year’s global demand growth of about 2.4m bpd will
be the second strongest in the past 30 years. Furthermore, at a projected 87.1m bpd this year’s total is on target to exceed the record high set in
2007 by 0.7m bpd.
• Over the medium term, we expect further support from an improved US economic outlook, strong EM demand, ample G3 liquidity
and a weaker USD
Base metals
Base metals demand is also growing strongly, with handsome gains in global demand as all-time highs are hit in many markets this year. Copper
is a good instance of the power of metals demand.
• China remains the key driver in terms of sustained demand growth, although the US, Europe and Japan are all in firmly positive
growth area as well.
• Copper prices have increased by 20% in 2010. Copper appears attractive in the base metals basket. Copper fundamentals continue to
tighten with mine supply remaining constrained and global demand coming in above expectations.
• Aluminium is supported by large-scale Chinese smelter cutbacks and robust demand in the OECD and China, contributing to a large
market deficit in Q4 10.
• Steel has given 20% returns in 2010 on the back of strong demand in the emerging markets space and going ahead too Chinese demand
is likely to provide support to the metal prices.
Gold
Gold has given 30% returns in 2010 due to QE 2 and apprehensions about the global economy. However not until H2 2011, a firm footing in the
US is likely to be seen which means gold prices will rise.
• Outlook on gold is positive, as sovereign debt risk, macro uncertainty, currency instability concerns, inflation fears, and geopolitical
tensions continue to build investor appetite against a backdrop of low interest rates. Gold is likely to touch USD1500 an ounce in mid
2011 before falling to USD 1430 an ounce by year end according to Barclays.
Silver
• Silver has given 80% returns in 2010 rising to USD 29 an ounce. The metal’s demand is more dependent on investor interest, as mine
supply continues to hit record highs and shows no sign of slowing down. Silver has gained on the support of gold prices.
• Although industrial demand remains high, silver is likely to trade keeping a tap on the gold prices. Silver is likely to rise by 37%
topping Bloomberg’s top 15 commodities survey among investors, traders and fund managers.
Looking ahead
It’s a long way for the US recovery with subdued consumer spending, credit supply from banks remaining tight and housing recession still
underway. However, things are gradually improving in US with corporate earnings highest since 2006 growing at 26%.
• But, fiscal concerns are there in the US with many analysts skeptical about Obama’s massive stimulus and tax benefits and record high budget
deficit that has shot up to over 10%. In Eurozone also, sovereign debt concerns plague Portugal and Spain after the carnage in Greece and Ireland.
These are positive for commodities.
• However towards H2 2011, with the improving fundamentals in the global economies, commodities rally is likely to lose its steam. Also,
commodity futures are showing a contango scenario which in finance is a scenario when the future price is expected to be below the spot price.
Thus the returns in futures may be lower than spot market.
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