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
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
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