Market Strategy - Global Commodities Strategy - FEB 2017


  • Commodities: We remain positive towards commodity prices over a 12-month horizon, but do not expect a repeat of the rally recorded in 2016. Improving supply and demand fundamentals (oil and grains) and currently extreme bearish speculative sentiment (grains) will support oil and grain prices in 2017. Industrial metals will remain on a medium-term uptrend and average higher on a y-o-y basis, but the pace of gains will be more muted than in 2016. Global economic risks are significant, especially in China, and they may derail the ongoing recovery in commodity prices. Although our core view remains for a gradual slowdown in Chinese economic growth in the coming quarters, we believe that the potential for a more serious growth crisis is significant. In the event of a growth crisis in China over 2017, commodity price prospects for the medium-term (2-3 years) would deteriorate given the likelihood of painful economic reforms over this period. We highlight in the chart below three potential scenarios ( see ' China Crisis: Potential Scenarios For Commodity Prices ' , January 4).

  • Oil: The OPEC decision to cut its collective output to 32.5mn b/d in January has driven a c.18.0% rise in Brent thus far in December. A decision by non-OPEC members to add to the cut will likely see prices take another leg higher next week. However, we maintain a relatively neutral outlook on Brent over the medium term, forecasting an annual average price of USD55.0/bbl for 2017 compared to a December 8 price of USD53.0/bbl. A large inventory overhang, a return to growth for US shale and a risk of slippage on the OPEC, non-OPEC deal will all limit price gains in 2017 as a whole.

  • Industrial Metals: The sharp H216 rally in prices overshot fundamentals in most cases, warranting the temporary selloff in December. We believe fundamentals will remain supportive for prices in 2017, namely continued public support to the economy in China. High frequency indicators including manufacturing PMI readings suggest that heavy industry and construction sector growth will continue to benefit from 2016 stimulus measures over the coming months. However, price gains will be more muted than in 2016. We are especially positive on zinc, lead and tin prices and expect copper to be relatively weaker in 2017. Iron ore and steel prices should lose ground by the end of the year.

  • Precious Metals: Although a surge global bond yields has dragged gold prices significantly lower since Donald Trump's US election victory in early November, we expect gold to recover later in 2017. Supportive factors will be two-fold. First, a continued rise in inflation expectations will cap real rates in the US, even as nominal rates grind higher. Second, regular use of political brinkmanship by the Trump administration, for instance with regard to bilateral trade policy, will likely see risks to the global economy remain elevated and demand for safe haven assets including gold supported. We forecast gold prices to average USD1,300/oz in 2017 compared to a January 5 spot price of USD1,178/oz.

  • Grains: Elevated overhang stocks from several years of bumper crops in the Americas will keep grain prices anchored in early 2017. However, we expect prices to be stronger later on in the year and overall we forecast higher y-o-y average prices in 2017. Most of the risks to prices are to the upside and mainly stem from adverse weather in the Americas, following years of close-to-ideal weather conditions. Consequently, the reduced supply growth we forecast for 2017 could be exacerbated by the impact of unusual weather on production. A fast return of long speculation in the market - especially in the case of grains - would accelerate this.

  • Softs: Soft prices will have a more mixed performance in 2017 after performing strongly in 2016. We remain positive on cotton and dairy (in the US and New Zealand) prices in 2017, but believe sugar and palm oil prices will prove weaker than in 2016.

China Crisis: Potential Outcomes For Commodities
Note: For more detailed description, see 'China Crisis: Potential Scenarios For Commodity Prices', January 4. Source: BMI
SELECT COMMODITIES - PERFORMANCE & BMI FORECASTS
Commodity Unit Current Price YTD (% Chg) 1 Year (% Chg) 2016 (ave) YTD (ave) 2017f (ave) 2018f (ave)
Notes: All metal prices except steel and iron ore refer to generic third-month contracts; all energy and agricultural prices refer to generic front-month unless otherwise stated. Source: Bloomberg, BMI. Last updated: January 5, 2016.
Agriculture
Class III Milk (Third-Month) USD/cwt 16.97 0.1 24.2 15.15 16.91 15.00 15.25
Cocoa (London) GBP/tonne 1,806 4.3 -18.2 2,195 1,765 2,220 2,240
Coffee USc/lb 142 3.5 14.4 136 140 135 140
Corn USc/bushel 360 2.2 1.9 358 358 380 390
Cotton USc/lb 74 4.7 18.0 65.7 73.3 69.5 73.0
Feeder Cattle USc/lb 129 -1.5 -23.3 142.9 na na na
Lean Hogs USc/lb 65 -2.3 8.7 66 na na na
Live Cattle USc/lb 116 -2.8 -15.2 119 na na na
Palm Oil (Third-Month) MYR/tonne 3,144 1.1 28.1 2,631 3,149 2,350 2,420
Rough Rice USD/cwt 9 1.5 -17.5 10.3 9.4 11.0 10.8
Soybean USc/bushel 1,004 0.8 15.7 989 999 1,000 1,035
Sugar #11 USc/lb 21 7.1 39.5 18.2 20.70 18.0 18.2
Wheat USc/bushel 419 2.7 -9.2 436 415 495 500
Energy
Coal, Thermal (Newcastle) USD/tonne 88.6 0.2 77.6 65.7 91.3 65.0 63.0
Brent Crude USD/bbl 56.3 -0.9 54.6 209.4 56.3 53.0 62.0
OPEC Basket, Oil USD/bbl 53.1 -0.3 69.9 40.8 na 50.0 59.0
WTI Crude USD/bbl 53.2 -1.1 47.8 43.5 52.9 53.0 62.5
Natural Gas (HH) USD/mnBtu 3.3 -12.6 40.0 2.55 3.28 2.30 2.80
Natural Gas (NBP) USD/mnBtu 6.3 -7.8 28.0 4.74 6.29 na na
JKM LNG USD/mnBtu na na 28.3 5.50 na na na
Metals
Aluminium USD/tonne 1,685 -0.5 14.4 1,611 1,686 1,625 1,650
Copper USD/tonne 5,644 2.0 22.4 5,167 5,572 5,150 5,200
Gold USD/oz 1,177 2.6 9.2 1,249 1,167 1,300 1,400
Iron Ore (62% CFR, Qingdao) USD/tonne 77 -2.1 74.1 58.4 na 55.0 46.0
Lead USD/tonne 2,079 3.1 19.1 1,875 2,047 2,000 2,050
Nickel USD/tonne 10,220 2.0 20.2 9,648 10,065 10,500 11,500
Palladium USD/oz 748 9.5 39.6 616 732 na na
Platinum USD/oz 953 5.7 7.2 991 945 na na
Silver USD/oz 17 4.3 19.4 17.1 17 na na
China Domestic Hot Rolled Steel Average CNY/tonne 3,725 -0.3 83.5 2,763 3,730 na na
Tin USD/tonne 21,145 0.1 46.8 17,896 21,060 19,500 20,500
Zinc USD/tonne 2,621 1.7 67.2 2,101 2,571 2,300 2,400