Commodity prices fell under pressure in 2013; the CRB index lost almost 5%. This was a modest decline given the sharp drops experienced in precious metals (-10 to -36%, excluding palladium), base metals (-7 to -18%), grains (-7 to -40%), coffee (-23%) and sugar (-16%). Precious metals fell on the prospect of higher interest rates in the US and investor liquidation. Base metals decreased on weaker economic data (especially in China and Europe) and weak fundamentals. Grains, coffee and sugar were hurt badly by oversupply and large short positions by funds. Neutral to higher energy prices were mainly responsible for the CRB declining by only a modest 5%. What caught investors by surprise was the strong rally in US equities driven by an improvement in the US and global economies, while commodities moved lower.
Spill-over risks also lingered for longer than expected. As a result, and combined with the delayed appreciation of the US dollar that we expected, we decided to raise our forecast for Brent oil to an average of USD 100/bbl in 2014. Nevertheless, we expect that the declining trend will continue in the following years. Mainly due to US inventory building, the Brent/WTI spread widened. Since an unwinding of the risk premium will have a bigger impact on Brent, we expect the Brent/WTI spread too narrow to USD 5/bbl in the course of the year. US natural gas prices are expected to continue their rally, after an initial correction lower in Q1. As a result, the price difference between Europe and the US should narrow further.
We continue to expect lower gold prices in 2014 and 2015, driven by more attractive investment opportunities elsewhere, in an environment of rising US interest rates, a higher US dollar, a strong US economy and positive investor appetite. For 2016, we expect the balance between supply and demand to tighten and for gold prices to recover. We expect that the continuation of gold position liquidation will drag down other precious metals in the first half of 2014, mainly because there are large positions that investors can liquidate. Once this liquidation has taken place, silver, platinum and palladium will become more cyclical again and start to recover. And it is a recovery that we expect to continue.
Short-term volatility in base metal prices will continue. It will be dominated by on-going uncertainty over a range of issues, such as the Fed’s tapering (pace and timing), the strength of the Chinese economy, base metal oversupply and the vitality of the eurozone economy. Demand for base metals will, however, remain solid. We expect stronger prices in Q1, due to improving economic conditions and the sound market outlook for base-metal end-using sectors, (such as construction, electronics automotive and machinery). In the long term, we think that demand prospects will keep prices afloat, despite lingering oversupply.
In the US and Europe, conditions in the steel sector are turning for the better. In China, general sentiment is expected to stay relatively weak, and for the next three months, China will continue to see steel supply pressures. Overcapacity and weak seasonal demand will soften prices. Steel raw-material supply (iron ore and coking coal) will remain sufficient to meet any increase in demand. This will limit any significant price gains. Indeed, we believe that the supply of raw materials will outpace demand and this will add downward pressure on prices until 2016. We therefore expect prices to gradually soften during this period.
Agricultural commodities were hurt badly in 2013. In particular, corn (-40%) and wheat (-30%) prices declined. The main reason for this price pressure was the ample supply of most crops. Some stabilization can be expected, though. With farmers switching from corn to wheat production, substitution risk will reduce in the course of the year. An oversupply in sugar is looming, but Brazilian policy and Indian elections could protect the downside in prices. Only for soybeans can more downside be expected, as an oversupply will exceed the increase in Chinese demand. For cocoa, more upside is possible, due to an expected deficit.