Economic growth as lubricant for cyclical commodities demand

by: Georgette Boele , Hans van Cleef , Frank Rijkers , Casper Burgering , Nick Kounis

Quarterly Commodity Outlook Q1-2015.pdf ()
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In our view, the slide in oil prices is fantastic news for the global economy and will provide a considerable tailwind to economic growth in the coming months. Net importers will benefit from a large windfall (see chart). This includes the US, eurozone member states and Asia’s largest economies. Lower oil prices will also push up economic growth, which is supportive for commodity demand. We expect fundamentals for cyclical commodities to improve, leading to a recovery in oil as well as most base and precious metal prices (excluding gold). However, an important condition is that investors have cleared a substantial part of their positions. Meanwhile, grain prices will likely remain under pressure in the coming months due to high supply. Meanwhile, coffee and sugar prices will probably continue to receive support in light of the drought in Brazil.

overview QCO Q1 2015 engEnergy: Oil prices fell off a cliff

Oil prices more than halved in just a few months’ time. The main reason was a lingering oversupply of oil. We believe that oil prices dropped too far, too fast. The lower price will have an effect on oil production. At the same time, it will give an extra boost to economic growth. The combination will result in a rebalancing of the market, both from a supply/demand as well as a price perspective. Natural gas prices will remain low as high inventories can comfortably meet a possible rise in demand. In fact, oversupply and a decoupling with oil prices will keep European gas prices in a downtrend. US gas prices may see a slight recovery, but the upside is capped.

Precious metals: Weak First half followed by recovery (excl. gold)

Most precious metal prices had a good start of the year. However, for the coming six months, we anticipate price weakness in precious metals. This is mainly because we expect a higher US dollar and higher US interest rate expectations to lead to further investor position liquidation. We also remain negative on gold in 2016 for the same reasons. However, it is likely that fundamentals for the other precious metals will improve in 2015 and 2016. In general, we are less negative on the global economy than current market consensus. This overall positive outlook will support jewellery, car sales and industrial demand for platinum, palladium and silver in 2015 and 2016.

Base metals: Fundamentals support stronger prices

Going forward, base metals price trends will highly depend on economic developments in emerging Asia, especially China. Our base scenario is that the Chinese economy will grow by 7.0% in 2015. We think that China will take supportive measures in the course of the year if economic data disappoints. In addition, the outlook for the main metal consuming sectors in emerging Asia is positive until 2016. However, our view on base metal price developments remains challenged by headwinds, such as a stronger-than-expected slowdown of the Chinese economy, further strengthening of the US dollar, oil price depreciation and a stronger-than-foreseen supply growth.

Ferrous metals: Prices to stay soft in general

In the current challenging conditions, the steel producers’ strategy is twofold. They will try to persuade customers to buy more volume, with the prospect of discounts. Meanwhile, other steel mills cut production (or are forced to do so) and/or announce early maintenance programmes to restore balance to the market. Still, abundant supply will push steel and iron ore prices lower in the short term, while coking coal prices are expected to remain somewhat stable on an annual basis. The further softening of prices will not result in an acceleration of defaults among steel mills and in the mining sector because relatively lower oil prices will keep producers competitive.

Agriculturals: The same direction

Agricultural commodities are showing a mixed picture. For grains, the market is dominated by a high level of ending stocks. These high stock levels have lead the drop in prices in recent months. At this stage, the market seems to be repositioning with prices stabilising at their current levels. The firm dollar is having a negative effect on grain export markets, which is leading to lower USD prices versus EUR traded grains. For cocoa, the market focus is changing into a global supply deficit from last years’ surpluses. Coffee is in the grips of Brazilian weather forecasts. Another dry period could cause a repeat of last year’s lower production, which will mean higher coffee prices. Sugar is dominated by high world stocks, a devaluation of Brazil’s currency and low energy prices.