Commodity price gains ahead on strength in end user demand

by: Casper Burgering , Nadia Menkveld , Hans van Cleef , Georgette Boele

Price trends differ in the various commodity classes. Energy prices (oil and TTF gas) have risen considerably, while prices for some soft commodities (soybean, corn & wheat) have gained mildly since October. Prices for most industrials (except zinc) softened, and precious metals prices such as silver and platinum lost significantly. Cyclical commodities were mostly hurt by an increase in uncertainty over the Chinese economy.

The key question is whether commodity demand and activity amongst end users will remain sustainable next year. Next week, we will release an End Year Commodity Special with our views on commodity price trends in 2018 specifically.

We think that metals buying activity in sectors such as construction, automotive and manufacturing will remain robust. We also foresee improved industrial demand for precious metals. Oil demand from especially India and China will increase and soft commodity demand will remain robust. Also, our positive outlook for the global economy will be a driving force for a strengthening in commodity prices.

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Oil: OPEC delivered in line with expectations

The OPEC/non-OPEC coalition decided to extend their 1.8 mb/d production cut agreement until the end of 2018. Since the markets had expected this, the price effect on oil remained limited. The focus will shift back towards the compliance data in the coming months, as well as the weekly US inventory data.

The OPEC decision was in line with our expectations. Therefore, we still expect a further appreciation of oil prices in the course of 2018. Since the market is strongly positioned for further price gains, some profit taking could be seen ahead of the year-end. Also the upcoming Russian elections (March) may trigger doubts on Russia’s willingness to comply with this agreement.

Natural gas prices (TTF, LNG) rallied strongly based on increased seasonal demand. Prices will likely normalise again in a few weeks’ time.

Precious Metals: More downward pressure in 2018

Gold prices have rallied by 8% year-to-date

Some dollar recovery over the recent weeks have pushed gold prices below USD 1,250 per ounce.

Gold prices will likely face headwinds in 2018 as we expect a recovery of the US dollar and higher US Treasury yields.

A short wave of position liquidation could push prices towards USD 1,200 per ounce.

This will be an opportunity to position for strength in 2019.

We expect silver prices to follow gold’s lead.

All the stars were aligned for palladium prices in 2017.

We expect 2018 to be less positive for palladium and the sentiment for platinum prices to be less negative

Base Metals: Fundamental base will remain robust

So far this year, base metals prices have appreciated by 16% on average. During November and early December, however, base metals prices lost 9% on average. Over the last couple of weeks the base metals have become more vulnerable and concerns about slowing economic growth in China has taken the upper hand. We remain, however, generally positive on price performance in Q1 2018 and for the longer term. The fundamental base will be robust and we think base metal prices are well positioned for renewed buying activity.

In aluminium, smelting capacity in China is expected to decrease and this should help to strengthen prices. However, a ramp-up of capacity in China after the winter is still on the cards. In copper, long term demand will remain sound and this should support prices. For 2018, many base metals markets appear to be heading towards deficits. We think this will drive up prices.

Ferrous Metals: Steel supply side uncertainties dictate ferrous markets

Global steel demand has been relatively strong over the last couple of weeks, also given the worldwide recovery in construction sectors. Steel prices managed to increase.

Due to higher steel prices and steel margins, appetite for buying steel raw materials has increased over the last couple of weeks. Demand for iron ore especially from both steel mills and traders proved to be relatively strong. This lifted iron ore prices late November and into early December. However, inventories in Chinese ports still remain elevated and this will eventually soften prices again. Next to that, from a fundamental base, iron ore supply is still sufficient and this also points towards a softening of prices on the short term. Coking coal demand has fallen in China, while demand in other regions is stronger. Stocks at mills remain high. We expect coking coal prices to soften into 2018.

Agri Commodities: It’s all about the weather

The chance of another record-breaking season for cocoa in 2018 is small as the weather conditions were ideal last season. Moreover, a growing number of trees are becoming relatively old and therefore bearing less fruit. In addition, Ivory Coast is currently reining in illegal cocoa production in its protected forest areas in order to prevent further deforestation.

Next year is an off-year for coffee. This means that the harvest will be lower, while demand is expected to continue growing. Prices will rise as a result, but only to a limited extent as all the signs are pointing into the direction of a record harvest in Brazil in 2019.

Sugar prices remain under pressure since we’re heading to a supply surplus in sugar in 2018.

The grains remain under pressure due to high supplies.