Commodity price gains become smaller

by: Casper Burgering , Georgette Boele , Hans van Cleef

  • Optimism over a possible US-China trade deal have continued to be supportive for commodity prices such as oil and base metal prices.
  • Over the past three months, a handful of commodity markets bucked the upward price trend. Most of which are agriculturals, but also coking coal, aluminium and gas prices lost ground. The common denominator for price pressure in most of these commodity markets was abundant supply.
  • We think that in the months ahead, commodity prices will be influenced by the trade deal narrative. Positive news from the talks will lift commodity prices further (such as industrial metals, oil and grains). However, until an actual agreement is reached, we think the pace of commodity price increases will likely be limited. This is because already a significant part of a positive outcome is priced in.
  • We expect an upside for commodity prices in the long run, based on sound fundamental drivers. However, since we lowered our economic growth expectations, the upside potential will be lower.
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ENERGY: TTF gas price revised – downside risks for oil prices have increased

We lowered our TTF gas price forecast (see table). Still we see some upside potential – but not as much as before – based on higher gas demand due to the phasing out of coal and nuclear, higher oil prices, lower Groningen gas production and a higher ETS price.

Oil prices trade roughly in the middle of our forecasted trading range. However, downside risks have increased, which may lead to a test of the lower band. The optimism of a positive outcome of the US/China trade deal is largely priced in, and therefore disappointment is possible.

PRECIOUS: Higher gold, silver and platinum prices

We remain positive on gold prices because of our expectations of a weaker US dollar, less hawkish central banks and more constructive outlook on the Chinese yuan and a positive technical picture.

The outlook for silver mostly resembles that of gold prices, as both precious metals tend to move in tandem. We think that in the near-term there is less upside potential in silver prices given the less favourable cyclical outlook. However, we continue to expect higher silver prices later in the year.

We think that platinum remains the cheap and attractive precious metal and palladium the high risk expensive one.

BASE METALS: Price support from trade talks, but gains become smaller

As long as trade negotiations continue, base metal prices remain volatile. Our base case scenario is that the US-China trade talks will result in a deal. However, the chance that trade talks falter still exists and in this event base metals prices will be dragged significantly lower.

From the moment that an agreement is reached, fundamental trends will become more important for base metal price direction. We think that deficits in all base metal markets in 2019 will lift base metal prices further. But due to increased uncertainty on global economic activity, the pace will remain low. The Chinese economy will cool down, which is accompanied by a lower pace of metal demand growth. However, the projected weakening trend in the US dollar by ABN AMRO (EUR/USD 1.16 eop 2019) will provide some support in base metal prices.

FERROUS METALS: Elevated steel prices due to high steel raw material prices

Iron ore prices remained at elevated levels in the past weeks, mainly because of supply disruptions in Brazil and Australia. We think iron ore price will soften in the weeks ahead. Shipments of iron ore increased again globally and steel mills are not eager to purchase high volumes with current price level. Availability remains plentiful during 2019 and this will pressure prices.

Coking coal prices remained high over the last couple of weeks because of supply disruptions and logistical issues. Demand is expected to stay robust. We hold our view that coking coal prices will remain elevated on restocking activity by mills, supply disruptions and a reduction in coal mine capacity in China.

AGRICULTURALS: Ample agricultural supplies will keep prices capped

Wheat price dropped by almost 20% in February -March because of ample world supplies. Price recovered after mid-March by 7% on short covering. On balance, we foresee global deficits this season. Prices will strengthen, but at a low pace.

Higher ethanol demand will support demand for corn. Growth in demand for corn will outpace supply this season and deficits are expected. Demand growth in EU and China remain strong. All-in-all, we foresee higher prices.

We think that soybean prices will rise as soon as a US-China trade deal is reached. But on balance, availability will remain high and this will pressure price again towards the end of 2019.

Sugar prices have recovered since 8 March by 2% on fresh physical buying and stronger oil prices. Output will stay sufficient globally, while demand growth will remain low. Sugar price is expected to remain weak during 2019.

Downside cocoa price risks emerge in case of a no-deal Brexit due to exchange rate effects. Given the high cocoa grind numbers globally, we think prices will drift higher. However, the pace will be low due to sufficient supplies.

The growth potential of coffee demand remains high at current relatively low prices. A stronger Brazilian real going forward is expected to underpin prices. However, current excess supply will cap this upward trend in prices.