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


We remain positive towards commodity prices over 2017, as the combination of improving supply and demand fundamentals and rising global inflation expectations will support prices. Commodities look particularly attractive relative to bonds and equities - especially US stocks - and we maintain our long-held view that real assets will outperform ( see ' Weekly Market Views: Real Asset Revival In Play ' , January 23). Extreme valuations in bonds and equities, at a time when commodity prices are still low despite the rally recorded in 2016 - hovering around their 2015 levels -, will support this view.

Commodities Outperformance To Gain Momentum In 2017
Bloomberg Commodities Index, weekly and versus the S&P 500 Index.
Note: An increase in the ratio represents S&P 500 outperformance. Source: Bloomberg, BMI

Oil and grains, along with precious metals, remain our favourite picks in terms of outperformers in 2017. Improving supply and demand fundamentals (oil and grains) and currently extreme bearish speculative sentiment (grains and precious metals , see chart below) will support prices this year. Gold prices have picked up in January after weakening sharply in Q416 and we expect this trend to continue in 2017, driven by disappointing US economic growth and rising inflation, which will keep a lid on real US yields and keep gold attractive. We hold above consensus price forecasts for these three commodities sub-segments.

Reversal In Sentiment Will Buoy Grains And Precious Metals
Select Commodities - Ratio of Long To Short Speculative Positions
Note: simple average of individual commodities : precious metals = silver and gold; oil = Brent, WTI; grains = wheat, corn, soybean; softs - sugar, coffee, cotton, cocoa. Source: Bloomberg, CFTC, BMI

We have turned more cautious towards industrial metals, and expect prices to undershoot market expectations this year. Prices will remain supported in H117, especially in the case of ferrous metals, copper and aluminium, but the outlook for the rest of the year is less rosy, amidst growing risks to Chinese economic activity ( see our Country Risk coverage on China ' Weekly Recap: Steady GDP Growth Worsens Structural Weaknesses ' , January 25). We believe most of the positive developments on the demand side - namely, China's ongoing aggressive fiscal spending - have already been priced in. Policies in China in 2017 will be aimed at 'supporting' growth rather than replicating the significant growth boost of 2016, and we believe GDP growth will be constrained by an eventual downturn in the housing market and pressure on exports from a more protectionist US. As a result of these factors, we expect all metals to average lower than currently elevated spot prices in 2017. Meanwhile, we are bearish on coal and LNG prices over 2017 as stronger Chinese coal supply and robust global LNG production loosed these markets.

BMI COMMODITIES VIEWS
Commodity Sub-Group 3-6 Month Outlook 12-24 Month Outlook Comment Recent Analysis
Source: BMI
Grains Bullish Bullish Weather concerns in South America will support grain prices over the coming weeks leading up to harvests 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 other adverse weather in the Americas. However, unfavourable US political developments such as US protectionism against China and resulting Chinese retaliation against US grain exports, could lead to domestic US gluts and lower benchmark prices. 'Wheat: Bullish Outlook Maintained In 2017', January 25
Softs Neutral/Bearish Mixed Performance Soft prices will have a more mixed performance in 2017 after performing strongly in 2016. We remain positive on dairy (in the US and New Zealand) and cotton prices in 2017, but we are bearish on sugar and palm oil prices from spot prices in 2017 and see cocoa range-trading over most of the year.. 'Another Positive Year For Asia Pacific Dairy Prices In 2017', Jan 24; 'Sugar: Bearish From Spot As Fundamentals Loosen', January 12
Non-Ferrous Metals Neutral Bullish We have turned more cautious towards industrial metals, and expect prices to undershoot market expectations over 2017. Prices will remain supported in H117 but we forecast renewed price weakness on a 6-12 month horizon. 'Nickel: Slide In Prices Will Be Temporary', January 5; 'Ban Moderation To Boost Bauxite, Nickel Ore Production', January 16
Ferrous Metals Neutral Bearish Iron ore prices will be elevated in the coming weeks due to positive investor sentiment on China's infrastructure plans. Prices will retreat by the end of 2017 as China's cooling property market outweighs demand from infrastructure investment and additional mine supply from projects coming online flood the seaborne market. 'Iron Ore: Prices To Retreat By H217', January 12
Precious Metals Bullish Bullish The January rebound in gold prices aligns with our bullish forecast for the year as a whole. We expect the medium-term uptrend in gold prices to persist and we forecast an average of USD1,300/oz in 2017. Underpinning this view is an expectation that a combination of disappointing US economic growth and rising inflation will keep a lid on real US yields and prevent the opportunity cost of holding gold from rising significantly further. 'Gold: Optimism Unwound, Uptrend Resuming', January 19.
Oil (Brent) Neutral Bullish A high level of compliance with OPEC/non-OPEC production cuts will hold Brent in the mid-50s range in the near term, though we note downside risk from market disappointing production data and its impact on bullish speculative positioning. We expect production cuts to be more effective on prices once northern hemisphere demand strengthens from March, with crude and fuel stock draws providing price supportive data. 'OPEC Compliance Remains A Risk To Brent', January 23
Natural Gas (LNG) Bearish Bearish Weaker end user demand in Asia has softened Asian LNG prices in January, after strong Chinese demand and production outages had propped up the JKM over late 2016. As the northern hemisphere moves out of the heating season LNG demand in Asia will moderate. Simultaneously, growing supply from trains 3 & 4 of Sabine Pass, full capacity at Gorgon, and first cargos from Wheatstone and Prelude, will add heavy supply-side pressure to prices from Q217. 'LNG Market To Remain Tight In Q117', December 21 2016
Thermal Coal Bearish Bearish Thermal coal prices have continued to weaken off their 2016 highs in January and we expect further declines over the coming months. After provoking a policy supply shock in the coal sector in 2016 which sent prices rallying, Chinese authorities are now aiming at keeping coal prices more stable in 2017. We expect prices to settle in a USD60-70/tonne range over most of 2017 and forecast an average price of USD65.0/tonne over the year as a whole 'China To Stir Coal Market Again In 2017', Jan 25; 'Thermal Coal Slide To Continue In 2017', December 7 2016.
Select Commodities - Performance & BMI Forecasts
Commodity Unit Current Price YTD (% Chg) 1 Year (% Chg) 2016 (ave) YTD (ave) 2017f (ave) 2018f (ave)
Note: 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 26 2016.
Agriculture
Class III Milk (Third-Month) USD/cwt 16.94 -0.1 24.0 15.15 17.23 15.00 15.25
Cocoa (London) GBP/tonne 1,747 0.9 -14.7 2,195 1,781 1,900 2,100
Coffee USc/lb 153 11.6 31.3 136 148 135 140
Corn USc/bushel 365 3.8 -1.1 358 362 380 390
Cotton USc/lb 74 4.6 20.3 65.7 73.2 69.5 73.0
Feeder Cattle USc/lb 132 1.5 -17.4 142.9 na na na
Lean Hogs USc/lb 68 2.1 6.3 66 na na na
Live Cattle USc/lb 120 0.7 -8.8 119 na na na
Palm Oil (Third-Month) MYR/tonne 3,094 -0.5 25.0 2,631 3,120 2,600 2,580
Rough Rice USD/cwt 10 5.0 -11.3 10.3 9.7 11.0 10.8
Soybean USc/bushel 1,053 5.7 20.1 989 1033 1,000 1,035
Sugar #11 USc/lb 20 4.3 44.3 18.2 20.6 19.3 19.3
Wheat USc/bushel 425 4.0 -12.4 436 425 495 500
Energy
Coal, Thermal (Newcastle) USD/tonne 83.7 -5.3 71.0 65.7 84.8 65.0 63.0
Brent Crude USD/bbl 55.5 -2.3 74.6 45.1 55.5 57.0 60.0
OPEC Basket, Oil USD/bbl 52.5 -1.5 105.9 40.8 na 54.0 57.0
WTI Crude USD/bbl 53.1 -1.1 68.9 43.5 52.5 55.5 58.0
Natural Gas (HH) USD/mnBtu 3.4 -9.5 54.7 2.55 3.30 2.30 2.80
Natural Gas (NBP) USD/mnBtu 6.6 -3.0 51.5 4.74 6.57 na na
JKM LNG USD/mnBtu #N/A N/A #N/A N/A 56.3 5.50 na na na
Metals
Aluminium USD/tonne 1,834 8.3 24.2 1,611 1,780 1,700 1,750
Copper USD/tonne 5,942 7.3 34.5 5,167 5,746 5,150 5,200
Gold USD/oz 1,197 4.3 6.9 1,249 1,194 1,300 1,400
Iron Ore (62% CFR, Qingdao) USD/tonne 82 4.6 98.4 58.4 na 55.0 46.0
Lead USD/tonne 2,390 18.5 47.3 1,875 2,220 2,000 2,050
Nickel USD/tonne 9,700 -3.2 13.5 9,648 10,118 10,500 11,500
Palladium USD/oz 740 8.2 50.1 616 754 na na
Platinum USD/oz 993 10.1 13.5 991 973 na na
Silver USD/oz 17 5.8 16.1 17.1 17 na na
China Domestic Hot Rolled Steel Average CNY/tonne 3,774 1.0 88.2 2,763 3,758 na na
Tin USD/tonne 20,425 -3.3 49.4 17,896 20,881 19,500 20,500
Zinc USD/tonne 2,801 8.7 84.9 2,101 2,716 2,300 2,400