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India Equity Research Reports, IPO and Stock News
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Spring shower, summer sizzle
Traded commodity prices have sold off particularly sharply in May 2011, with
some of the non-traded commodities, such as coking coal, also down over the
same period. For the remainder of 2011 and into 2012 we have selected copper
and zinc as the two most oversold base metals with the best prospects for
improving fundamentals, and iron ore as the bulk commodity with the best
prospects to surprise to the upside (i.e. we are neutral on the price outlook from
recent record high price levels but this is substantially above consensus). We
continue to recommend exposure to platinum and palladium in the precious
metals space. In soft commodities, our preference is strongly towards corn and
wheat, given weather risks for the 2011/12 crops and underlying tightness.
Chinese tightening appears overplayed, and is almost done
Most commodity end use indicators grew by 10%+ in 1Q11, with the strongest
growth coming from floor space under construction – up 26% YoY – and
consumer appliance output – up over 30% YoY. Other indicators that point to
healthy growth in commodity end use demand in China so far in 2011 include
strong power generation growth and the fact that steel inventories have been
falling even in the face of higher than expected levels of crude steel production.
Our China Economist Paul Cavey believes that the current tightness in credit
availability and weakness in key leading indicators is enough to ensure that
significant further tightening of policy is not needed, particularly as headline
activity indicators and more importantly inflation start to roll over in 3Q11. Cavey
expects policy will remain focused on squeezing lending in the remainder of 2Q,
with slower growth promoting looser policy into 2H. Overall the recently released
Chinese industrial output, inflation and new loans data for April showed that
growth was a little softer, and price inflation at least wasn’t accelerating, and that
new loans were 5% lower YoY.
End to QE2 and European debt issues not expected to
significantly disrupt commodity consumption
We would note that while a generally declining US dollar has been supportive of
rising commodity prices in recent years, it is not a necessary condition for
commodity price strength (indeed there are numerous periods historically where
the US dollar has appreciated and commodities have gone up). However, the
dramatic drop in exchange trade commodities in the past few weeks highlights
the vulnerability of prices to changes in sentiment towards the macroeconomic
situation in the US/Europe.
The unpredictable nature of weather and tighter supply
chains means that the risks around our price forecasts are
skewed to the upside
While we aim to have evenly balanced risks in our modelling of commodity
demand and supply, the apparently increasingly unpredictable nature of weather
conditions and tighter supply chains (the latter in the face of lower credit
availability from banks and high commodity and input prices) mean that risks are
actually likely to be skewed to the upside for our supply-demand balances and
thus price forecasts over the medium to long term. While such weather risks are
clear for the softs, copper, coking coal and iron ore seem the most vulnerable
hard commodities in this regard.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Spring shower, summer sizzle
Traded commodity prices have sold off particularly sharply in May 2011, with
some of the non-traded commodities, such as coking coal, also down over the
same period. For the remainder of 2011 and into 2012 we have selected copper
and zinc as the two most oversold base metals with the best prospects for
improving fundamentals, and iron ore as the bulk commodity with the best
prospects to surprise to the upside (i.e. we are neutral on the price outlook from
recent record high price levels but this is substantially above consensus). We
continue to recommend exposure to platinum and palladium in the precious
metals space. In soft commodities, our preference is strongly towards corn and
wheat, given weather risks for the 2011/12 crops and underlying tightness.
Chinese tightening appears overplayed, and is almost done
Most commodity end use indicators grew by 10%+ in 1Q11, with the strongest
growth coming from floor space under construction – up 26% YoY – and
consumer appliance output – up over 30% YoY. Other indicators that point to
healthy growth in commodity end use demand in China so far in 2011 include
strong power generation growth and the fact that steel inventories have been
falling even in the face of higher than expected levels of crude steel production.
Our China Economist Paul Cavey believes that the current tightness in credit
availability and weakness in key leading indicators is enough to ensure that
significant further tightening of policy is not needed, particularly as headline
activity indicators and more importantly inflation start to roll over in 3Q11. Cavey
expects policy will remain focused on squeezing lending in the remainder of 2Q,
with slower growth promoting looser policy into 2H. Overall the recently released
Chinese industrial output, inflation and new loans data for April showed that
growth was a little softer, and price inflation at least wasn’t accelerating, and that
new loans were 5% lower YoY.
End to QE2 and European debt issues not expected to
significantly disrupt commodity consumption
We would note that while a generally declining US dollar has been supportive of
rising commodity prices in recent years, it is not a necessary condition for
commodity price strength (indeed there are numerous periods historically where
the US dollar has appreciated and commodities have gone up). However, the
dramatic drop in exchange trade commodities in the past few weeks highlights
the vulnerability of prices to changes in sentiment towards the macroeconomic
situation in the US/Europe.
The unpredictable nature of weather and tighter supply
chains means that the risks around our price forecasts are
skewed to the upside
While we aim to have evenly balanced risks in our modelling of commodity
demand and supply, the apparently increasingly unpredictable nature of weather
conditions and tighter supply chains (the latter in the face of lower credit
availability from banks and high commodity and input prices) mean that risks are
actually likely to be skewed to the upside for our supply-demand balances and
thus price forecasts over the medium to long term. While such weather risks are
clear for the softs, copper, coking coal and iron ore seem the most vulnerable
hard commodities in this regard.
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