The ball moves back into China’s court In a world awash with financial market risk, continued Eurozone turmoil and slowing global growth commodity market prices have in the main held up much better than might have been expected in recent months. While macroeconomic concern will inevitably create sentiment-driven risk, we would highlight that the continuation of above trend global commodity demand (even at a slower pace) means fundamentals for commodity markets are set to remain tight. As such, the pressures on supply bottlenecks are likely to continue, keeping prices elevated from historical norms. We continue to recommend exposure to platinum and palladium given growing market deficits, while we have increased confidence in the strength of thermal coal and iron ore prices. In the base metals space, copper fundamentals remain compelling; however cost support and lack of access to inventory for aluminium and zinc at current levels gives better relative safety. In agricultural commodities, our short term key preferences remain corn and sugar. Near-term risks, yes, but China is the great stabiliser of commodity markets While Europe dominates news flow, for metals and bulk commodities its direct effect on global demand is extremely muted. For these sectors and energy commodities, China dominates both in terms of existing consumption and more importantly, growth. As such, China is more important in the outlook than ever before. In the coming months, we are actually more concerned about the growing risk that Chinese policy makers will over-tighten, harming growth in their attempts to knock inflation out the system. However, the government’s ability to turn things round quickly should never be underestimated given the commitment to economic growth and the availability of powerful policy tools. We would reiterate our view that China and ex-China commodity demand is classically countercyclical, and as such China performs a stabilising role. Furthermore, for the most part, Chinese apparent demand has been weaker than growth in commodity end use markets. As such a rate of destocking cannot be maintained, it seems likely for some commodities that import demand will still rise into 2012 to slow the draw down. We feel comfortable that China’s call on commodity markets will support our price forecasts on a 12-month view, and for metals and bulk commodities will trade at a level where Chinese buyers are prepared to supplement their positions. As such, the degree of China exposure makes metals and bulk commodities defensive plays in an OECD slowdown, while the availability of supply and cost inflation pressures remain key issues. Tight agricultural markets will continue to support prices The agricultural commodities have weathered the global economic uncertainties very well - influences such as weather and tight inventories having had much more of an impact. With stock-to-use ratios still tight for most markets, we had needed perfect weather on top of the higher planted area to boost output by enough to solve the supply/demand imbalances. However, adverse weather has impacted yields this year, and markets such as corn, sugar, wheat and coffee will remain vulnerable to further upside until improvements in the next harvests are seen. While risk-averse speculators may not be willing to bid prices too much higher from current levels, the threat of another La Niña heightens the supplyside risks. Given the difficulty in rationing demand, prices will remain well supported into 2012/13. ::Macquarie Research,

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The ball moves back into China’s court
In a world awash with financial market risk, continued Eurozone turmoil and
slowing global growth commodity market prices have in the main held up much
better than might have been expected in recent months. While macroeconomic
concern will inevitably create sentiment-driven risk, we would highlight that the
continuation of above trend global commodity demand (even at a slower pace)
means fundamentals for commodity markets are set to remain tight. As such,
the pressures on supply bottlenecks are likely to continue, keeping prices
elevated from historical norms.
We continue to recommend exposure to platinum and palladium given growing
market deficits, while we have increased confidence in the strength of thermal
coal and iron ore prices. In the base metals space, copper fundamentals remain
compelling; however cost support and lack of access to inventory for aluminium
and zinc at current levels gives better relative safety. In agricultural
commodities, our short term key preferences remain corn and sugar.
Near-term risks, yes, but China is the great stabiliser of
commodity markets
While Europe dominates news flow, for metals and bulk commodities its direct
effect on global demand is extremely muted. For these sectors and energy
commodities, China dominates both in terms of existing consumption and more
importantly, growth. As such, China is more important in the outlook than ever
before. In the coming months, we are actually more concerned about the
growing risk that Chinese policy makers will over-tighten, harming growth in their
attempts to knock inflation out the system. However, the government’s ability to
turn things round quickly should never be underestimated given the commitment
to economic growth and the availability of powerful policy tools. We would
reiterate our view that China and ex-China commodity demand is classically
countercyclical, and as such China performs a stabilising role.
Furthermore, for the most part, Chinese apparent demand has been weaker than
growth in commodity end use markets. As such a rate of destocking cannot be
maintained, it seems likely for some commodities that import demand will still
rise into 2012 to slow the draw down. We feel comfortable that China’s call on
commodity markets will support our price forecasts on a 12-month view, and for
metals and bulk commodities will trade at a level where Chinese buyers are
prepared to supplement their positions. As such, the degree of China exposure
makes metals and bulk commodities defensive plays in an OECD slowdown,
while the availability of supply and cost inflation pressures remain key issues.
Tight agricultural markets will continue to support prices
The agricultural commodities have weathered the global economic uncertainties
very well - influences such as weather and tight inventories having had much
more of an impact. With stock-to-use ratios still tight for most markets, we had
needed perfect weather on top of the higher planted area to boost output by
enough to solve the supply/demand imbalances. However, adverse weather has
impacted yields this year, and markets such as corn, sugar, wheat and coffee
will remain vulnerable to further upside until improvements in the next harvests
are seen. While risk-averse speculators may not be willing to bid prices too much
higher from current levels, the threat of another La Niña heightens the supplyside
risks. Given the difficulty in rationing demand, prices will remain well
supported into 2012/13.