Market Strategy - Global Commodities Strategy - Monthly Roundup - AUG 2017


We remain broadly neutral towards commodities prices over the rest of 2017 compared with spot levels. However, this will still see most commodities average higher in 2017 than in 2016. We are positive on grains and oil from spot levels in H217; but the outlook for gold, industrial metals and softs agricultural commodities is lacklustre.

Looking at 2018, the outlook for prices is mixed. We recently turned more cautious on oil prices for next year. Industrial metals will start diverging, with ferrous metals heading lower amidst weaker Chinese growth and non-ferrous metals slowly heading higher on a multi-year horizon, buoyed by tighter supply and demand fundamentals. The outlook for softs is more positive following weak performance in 2017, with cocoa and cotton presenting the most bullish profile at this point.

Only Gradual Gains Ahead
BMI Commodities Price Indices
e/f = BMI estimate/forecast. Source: Bloomberg, BMI

Major View Changes In The Past Month

  • Oil Downgrade. We have revised down our price forecasts for 2017 and 2018 for Brent and WTI, as OPEC cuts have been slower to take effect than we had anticipated and demand has disappointed in the YTD. Although we remain bullish on prices in H217, we expect limited further gains in 2018 and see little room for y-o-y price growth. A key factor capping prices will be the gradual return of cut OPEC and non-OPEC barrels to market, likely from Q218 ( see 'Brent: Surplus Shifting To 2018 Blunts Price Growth', July 3).

  • Short- Term Bullish On Sugar. We have turned more positive on sugar prices in the coming weeks following a sharp decline in prices and unwind of bullish sentiment. However, any near-term recovery will be fleeting, as fundamentally the picture is still bearish for prices over the coming few quarters.

Net Specs Painting A Bullish Picture For Oil, Gold, Softs And Grains
Select Commodities - Ratio Of Long To Short Speculative Positioning
Note: long/short ratio of speculative positioning is a simple average of the individual ratios for gold, silver (precious metals); Brent, WTI, gasoline (oil); rice, corn, wheat, soybean (grains); sugar, cotton, coffee, cotton (softs).Source: Bloomberg, BMI

Driving factors for commodity prices remain mixed. The ongoing weakness in the US dollar, which we see continuing over the coming weeks will continue to provide only modest support to commodity prices over H217 ( see ' Monthly Market Strategy: Dollar Losing Support, EM To Outperform ' , July 20). A weak dollar is a net positive for commodity prices, but we believe it will not outweigh other factors that are currently keeping a lid on the complex. As a sign of this trend, the correlation between the dollar and commodities has broken down so far this year ( see chart below).

Inverse Correlation Has Broken Down In 2017
Bloomberg Commodities Index & US Trade Weighted Dollar Index (LHC) & Correlation Between The Two (RHC)
Source: Bloomberg, BMI

Meanwhile, Chinese growth has again surprised to the upside in Q217 - which warrants an upgrade of our 2017 and 2018 real GDP growth forecasts to 6.6% and 6.3% - supporting metal prices over recent months. We maintain our neutral-to-bearish outlook for industrial metals in H217 as in the short term, long-term infrastructure projects started in 2016 and 2017 will provide some support to metals demand and prices for now. We continue to believe industrial metals will ease later on in the year and into 2018, in particular ferrous metals, as the Chinese economy will be slowed by tighter monetary and macro-prudential policies, a moderation of an expansionary fiscal policy, and an overhang from elevated debt, all of which will eventually drag on metals demand ( see our Country Risk coverage ' Economy To Lose Steam Despite Strong H117 Figure ' , July 17). If anything, we are more bearish on iron ore prices now than a month ago following the robust price rally in H217 thus far.

Further Upside Ahead For Grains
Front-Month CBOT Corn (LHC) & Front-Month CBOT Soybean (RHC), USc/bushel
Source: Bloomberg, BMI

Our bullish view on grain prices continues to play out as prices are gaining momentum with speculative positioning picking up from extreme lows. We believe prices are likely to continue heading higher as most risks to crops remain to the upside.

Bullish Cocoa and Cotton On A 12-Month Horizon
LHC: Front-Month LIFFE Cocoa (GBP/tonne); RHC: Front-Month ICE Cotton (USc/lb)
Source: Bloomberg, BMI
BMI Commodities Views
Commodity Sub-Group 3-6 Month Outlook 12-24 Month Outlook Comment Recent Analysis
Source: BMI
Grains Neutral/bullish Bullish After a significant rally in the days following the USDA June 30 Stocks and Plantings report, grain prices have stabilised as the July WASDE reiterated that markets were well-supplied. 2015 and 2016 saw similar prices rallies around this time of year, with prices ultimately collapsing under the weight of record harvests. However, we believe that the 2017 rally will be more sustainable due to our below-consensus production forecasts, a view we think is reflected by both the futures curve and options markets. Beyond the next few months, tightening markets underpin our view that's prices will average slightly higher than spot levels. Soybean: Forecasts Revised Lower But Uptrend Maintained, June 21
Softs Generally bearish Mixed Performance In contrast to grains, softs prices will see more lacklustre performance over the rest of 2017 and we are mostly neutral/bearish on softs (palm oil, cotton, coffee, sugar). Although sugar prices are ripe for a temporary rally in the coming weeks, we remain bearish on a multi-month horizon, the outlook for dairy is more positive in H217. Looking in 2018, we are positive on cotton, cocoa and somewhat on coffee and negative on palm oil, milk and sugar. Asia Pacific Dairy Prices To Remain Supported In Coming Quarters', July 17; 'Sugar: Ample Supply Will Keep Prices On A Downtrend In 2018', July 12; 'Contrarian Thoughts: Growing Upside Risks For Coffee?', July 14
Non-Ferrous Metals Neutral/Bearish Bullish Base metal prices will come under pressure as Chinese fiscal spending growth winds down towards the end of 2017 and remains stagnant in 2018. However, non-ferrous metals markets will be tighter than ferrous metals in the longer term, which will keep prices on a gradual uptrend. A notable exception to this trend will be nickel prices, which we forecast to grind down in the coming years as the market increasingly moves into surplus. 'Nickel: Prices On A Downtrend As Market Moves Towards Surplus', June 2; 'Copper: Near-Term Weakness To Give Way To Steady Uptrend', June 8
Ferrous Metals Neutral/Bearish Bearish Following a pickup in China's industrial metals demand since early 2016 driven by the economic uptick in the domestic economy, Chinese demand growth for industrial metals will slow in the coming quarters as fiscal support to the infrastructure and construction industries will cool off. However, infrastructure projects initiated in 2016 and so far in 2017 are long-term projects in nature and will therefore prevent any sharp drop in demand growth for industrial metals in 2017. As a result, although general concern over slowing economic growth will put downside pressure on industrial metal prices - as it did in March and April - we believe part of this has already been priced in and we do not expect a collapse of metals over the remainder of 2017. 'Steel: Prices To Head Lower But Not Collapse In H217', June 7; 'Iron Ore: Downward Revision On Cooling Chinese Demand', May 24
Precious Metals Neutral Bullish While we expect that the US Fed will not hike rates again in 2017 and only twice in 2018, there is a growing risk that the central bank pursues a more hawkish hiking trajectory than this in the coming months. Should this occur, real rates would rise significantly and place major downside pressure on precious metal prices. Therefore, despite our bullish long-term gold view and sharp losses for gold in H217 thus far, we are holding off a bullish 3-6 month view and remain neutral. Should a steep hiking cycle drive gold prices lower in the coming months, we believe the Fed would be forced to backtrack in 2018 as economic growth declined sharply, boosting gold prices. 'Gold To Be Pressured By Rising Real Yields', July 5
Oil (Brent) Bullish Neutral/Bullish We maintain our bullish outlook on prices over H217. Global demand is rising seasonally, whilst rapid growth in US shale and the recovery of production in Libya and Nigeria are showing increasing signs of fatigue. Our forecast also assumes continued strong compliance with the OPEC, non-OPEC production cut deal, although we acknowledge rising risks to this view stemming from Ecuador's decision to end its participation in the deal, rising summer demand in core GCC markets and recent signs of compliance slippage. For 2018, we believe prices will remain relatively flat y-o-y due to a large addition of barrels ex-OPEC and the gradual return of cut OPEC barrels to market. Brent: Surplus Shifting To 2018 Blunts Price Growth, July 3
Select Commodities - Performance & BMI Forecasts
Commodity Unit Current Price YTD (% Chg) 1 Year (% Chg) 2016 (ave) YTD (ave) 2017f (ave) 2018f (ave)
Note: All metals 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, July 20 2017.
Agriculture
Class III Milk (Third-Month) USD/cwt 16.79 -0.9 1.9 15.15 16.51 16.50 15.50
Cocoa (London) GBP/tonne 1,533 -11.5 -37.1 2,195 1,597 1,550 1,700
Coffee USc/lb 136 -0.9 -6.1 136 137 135 140
Corn USc/bushel 381 8.3 13.0 358 367 380 390
Cotton USc/lb 69 -2.7 -5.8 65.7 75.6 73.0 74.0
Feeder Cattle USc/lb 155 18.4 10.4 142.9 na na na
Lean Hogs USc/lb 83 24.8 6.8 66 na na na
Live Cattle USc/lb 117 -1.4 6.2 119 na na na
Palm Oil (Third-Month) MYR/tonne 2,540 -18.3 8.2 2,631 2,724 2,600 2,580
Rough Rice USD/cwt 12 25.9 8.9 10.3 10.2 11.0 11.2
Soybean USc/bushel 996 -0.1 -3.1 989 982 985 1,020
Sugar #11 USc/lb 15 -25.7 -25.1 18.2 17.0 18.0 17.6
Wheat USc/bushel 497 21.8 20.3 436 440 475 500
Energy
Coal, Thermal (Newcastle) USD/tonne 85.9 -2.9 40.9 65.7 81.1 70.0 67.0
Brent Crude USD/bbl 49.7 -12.6 5.3 45.1 52.3 54.0 55.0
OPEC Basket, Oil USD/bbl 46.5 -12.9 7.1 40.8 na 51.0 52.0
WTI Crude USD/bbl 47.1 -12.3 4.8 43.5 49.6 51.0 52.0
Natural Gas (HH) USD/mnBtu 3.1 -17.4 15.7 2.55 3.09 3.22 3.08
Natural Gas (NBP) USD/mnBtu 4.5 -33.3 -2.6 4.69 5.31 5.37 5.44
LNG (Singapore SLING) USD/mnBtu 5.2 -42.4 -4.5 5.60 5.95 5.65 5.15
Metals
Aluminium USD/tonne 1,920 13.4 16.6 1,611 1,888 1,750 1,750
Copper USD/tonne 5,967 7.8 19.7 5,167 5,788 5,500 5,500
Gold USD/oz 1,238 7.9 -5.9 1,249 1,238 1,250 1,350
Iron Ore (62% CFR, Qingdao) USD/tonne 70 -10.9 25.4 58.4 na 65.0 50.0
Lead USD/tonne 2,217 9.9 19.1 1,875 2,232 2,150 2,200
Nickel USD/tonne 9,650 -3.7 -8.6 9,648 9,755 10,250 10,000
Palladium USD/oz 855 25.1 26.5 616 799 na na
Platinum USD/oz 922 2.2 -15.8 991 957 na na
Silver USD/oz 16 1.2 -17.4 17.1 17 na na
China Domestic Hot Rolled Steel Average CNY/tonne 3,803 1.8 46.4 2,763 3,505 na na
Tin USD/tonne 20,095 -4.9 13.5 17,896 19,913 19,500 20,500
Zinc USD/tonne 2,747 6.6 22.5 2,101 2,708 2,700 2,700