Market Strategy - Monthly Commodities Strategy: Metals Outlook Firming, Grains Wilting - OCT 2017


We expect only modest gains in commodity prices over the remainder of the year and performance across sub-categories will be mixed. For instance, we have turned more positive towards industrial metals and coal over the past month and have revised up our price forecasts for aluminium, iron ore and thermal coal. In contrast, we now have a less bullish view on grain prices and have significantly revised down our forecast for wheat prices.

China Resilience For Now

The main driver of our more positive view on industrial commodities such as metals and coal is a less negative near-term outlook on China's economic growth. While we still expect real GDP growth in the country to slow from the robust 6.9% y-o-y expansion in H117, this downturn will take longer than we anticipated several months ago. With more specific relevance for industrial metals, the spike in infrastructure projects initiated over Q116-Q117 has continued to boost demand for building materials in subsequent months. We expect it will be late-2017 or early 2018 before a thinner project pipeline starts to drag significantly on metal prices.

China Steel Demand Roaring Ahead
China - Apparent Crude Steel Consumption, % Chg y-o-y
Source: World Steel Association, China Bureau Of National Statistics, BMI

Looking into 2018, we are less positive on industrial commodity prices for two main reasons. First, we expect that China's stimulus-led growth acceleration over 2016-2017 will fade. Following the completion of the Communist Party Congress in Q417, we expect that economic policy will pivot away from short-term stimulus and towards more aggressive economic reform. As this reform will include closure of industrial overcapacity and a reorientation of the economy away from construction-driven growth, we expect a concomitant slowdown in demand for industrial commodities in the country. Second and with specific regard to the energy market, we expect a gradual return of crude oil supply that has up to now been curtailed by the OPEC, non-OPEC oil agreement over 2017. This slippage will pause the tightening of global oil inventories that is currently underway and create a ceiling for Brent prices around USD60.0/bbl.

Near-Term Prospects Wilting
S&P GSCI Grains Price Index (daily chart)
Source: BMI, Bloomberg

Commodities To Outperform Equities

Although we do not expect explosive gains for commodity markets, we expect a modest performance will be enough to ensure relative outperformance compared to equity markets. For instance, we expect the ratio between the Continuous Commodities Index and the MSCI All-Countries World Equity Index (ACWI) to rebound in the coming months in favour of commodities. The ratio has plumbed multi-decade lows, and has now started turning higher. The rebound potential for the ratio between the industrial metals index and the MSCI ACWI is even more striking, as pictured below. Admittedly, a rebound in these ratios will likely be more to do with equity market weakness than substantial commodity price strength. We see a growing likelihood of a run-of-the-mill bear market in US stocks beginning over the coming months, and an increasingly plausible case for a much more destabilising market crash, and market decline of the order of 50% ( see ' Monthly Market Strategy: All Factors Aligned For US Equity Top ', August 18).

Stars Aligning For A Rebound
Ratio Of Bloomberg Commodities Industrial Metals Sub-Index To MSCI All Countries World Equity Index
Source: BMI, Bloomberg

Major Forecast Changes This Month:

  • Wheat: We have revised down our price forecasts due to stronger-than-expected European production in 2017/18. Prices will peak in 2018 at an average of USc465/bushel (previous forecast of USc500/bushel) as global market surpluses decline, before averaging slightly lower in the longer term as market surpluses expand slightly.

  • Iron Ore: We have increased our iron ore price forecast to an average of USD70/tonne in 2017 compared to USD65/tonne previously as Chinese imports of the ore will be stronger than we had expected due to steady steel production.

  • Aluminium: We have increased our aluminium forecast for 2017 to USD1,850/tonne from USD1,750/tonne as stronger-than-expected Chinese demand in the first half of the year has accelerated the tightening of the global market.

  • Thermal Coal: We have revised up our thermal coal price forecast for 2017 to USD75/tonne compared to USD70/tonne on the back of strong Chinese demand following weather disruptions at hydropower stations. Prices will ease towards the end of 2017 and beyond as Chinese hydropower capacity is restored due to better weather and the global market is better supplied by increases in output from major producers.

Momentum Looking Strong For Remainder Of 2017
S&P GSCI Industrial Metals Index (monthly chart)
Source: Bloomberg, BMI
BMI Commodity Price Views
Commodity Sub-Group 3-6 Month Outlook 12-24 Month Outlook Comment Recent Analysis
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, August 25, 2017.
Grains Neutral Bullish We have revised our long-term wheat price forecasts lower and will be making similar revisions to soybean. Strong plantings has combined with better than expected weather to cause us to revise our production forecasts higher for 2017/18 wheat production in the Northern hemisphere, leading to a global market surplus and flagging prices. For corn and soybean, weather conditions especially in the US have been ideal leading up to the 2017/18 harvests in September, and we will be marginally revising up our production forecasts. Beyond the current season, we anticipate smaller surpluses as yields will likely return towards trend-line averages, underpinning our view for slight price appreciation from spot levels. 'Wheat: Downward Revisions To Long-term Price Trajectory', August 15
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. 'Palm Oil: Significant Downside Ahead In 2017 And 2018', August 1;
Non-Ferrous Metals Neutral Bullish The base metal price rally will fade over the coming weeks following a few notable breaks into higher trading ranges. The copper price rally in particular looks overdone, as elevated stocks suggest a well-supplied market. While we expect easing Chinese demand to weigh on prices towards the end of 2017, improving fundamentals will keep a floor under metal prices. 'Industrial Metals: A Higher Trading Range Is Within Touching Distance', July 31; 'Tin: Market Deficit To Support Uptrend', August 3
Ferrous Metals Neutral/Bullish Bearish Iron ore prices will remain elevated in Q317 due to strong Chinese imports on the back of steady steel production. This price strength will weaken slightly by the end of Q417 as the 19th National Party Congress in November 2017 will refocus economic growth away from heavy industries to services, cooling fiscal stimulus and capping new demand for ore. Similarly, steel prices will remain buoyed in Q317 at least, as demand remains solid until new infrastructure project pipelines start thinning towards the end of 2017. 'Resilience Of Mining Equities & Industrial Metals To Continue', August 18; 'Iron Ore: Upward Revision On Strong Chinese Imports', August 10
Precious Metals Neutral Bullish Disappointing US economic growth and persistently elevated political risk in the US and abroad will keep a lid on real interest rates and drive gold prices marginally higher in 2018. There are early signs that members of the US Fed's FOMC are already starting to waver in their conviction on the required pace of rate hikes over the coming months. We will be watching the Jackson Hole conference for additional indications of this trend. We expect that the Fed will not hike rates again in 2017 and only twice in 2018, which is less hawkish than the Central Banks's own forecasts. However, the market has already priced in significant scepticism over the Fed's stated hiking path and thus we are only modestly bullish toward gold prices. We forecast an average of USD1,350/oz in 2018 compared to an August 24 price of USD1,290/oz. 'Gold To Outshine Oil In 2018', August 23; 'Gold: Gains Will Take Time', August 11
Oil (Brent) Bullish Neutral/Bullish We maintain our bullish outlook on prices over H217, while acknowledging rising risks to the downside. Our fundamental views are playing out, with slowing output additions and firmer demand growth driving sustained draws in OECD inventories. However, this has failed to translate into a sustainable uptrend in prices, with sentiment weighed down by continued growth in US shale and concerns of a return to the global glut in 2018. In our view, continued price weakness over the coming three to six months would materially derail the growth in shale, signalling sharper-than-anticipated price gains next year. 'Brent: Firming Fundamentals To Lead H217 Price Growth', August 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, August 25, 2017.
Agriculture
Class III Milk (Third-Month) USD/cwt 16.53 -2.5 -4.3 15.15 16.58 16.50 15.50
Cocoa (London) GBP/tonne 1,503 -13.2 -38.0 2,195 1,586 1,550 1,700
Coffee USc/lb 127 -7.4 -11.5 136 136 135 140
Corn USc/bushel 341 -3.2 5.3 358 366 380 390
Cotton USc/lb 70 -0.6 3.7 65.7 74.6 73.0 74.0
Feeder Cattle USc/lb 142 8.5 -3.4 142.9 na na na
Lean Hogs USc/lb 64 -3.6 5.7 66 na na na
Live Cattle USc/lb 106 -11.0 -6.0 119 na na na
Palm Oil (Third-Month) MYR/tonne 2,751 -11.5 7.4 2,631 2,713 2,600 2,580
Rough Rice USD/cwt 12 32.3 26.5 10.3 10.6 11.0 11.2
Soybean USc/bushel 939 -5.8 -5.9 989 978 985 1,020
Sugar #11 USc/lb 14 -27.9 -31.5 18.2 16.5 15.3 14.7
Wheat USc/bushel 411 0.7 2.4 436 441 440 465
Energy
Coal, Thermal (Newcastle) USD/tonne 98.4 11.3 46.9 65.7 83.0 75.0 67.0
Brent Crude USD/bbl 52.4 -7.8 5.5 45.1 52.2 54.0 55.0
OPEC Basket, Oil USD/bbl 49.8 -6.6 10.0 40.8 na 51.0 52.0
WTI Crude USD/bbl 47.8 -11.1 0.9 43.5 49.4 51.0 52.0
Natural Gas (HH) USD/mnBtu 2.9 -21.2 3.1 2.55 3.06 3.22 3.08
Natural Gas (NBP) USD/mnBtu 5.7 -15.5 49.1 4.69 5.32 5.37 5.44
Metals
Aluminium USD/tonne 2,099 24.0 27.6 1,611 1,906 1,850 1,900
Copper USD/tonne 6,724 21.5 45.4 5,167 5,887 5,500 5,500
Gold USD/oz 1,288 12.2 -2.6 1,249 1,244 1,250 1,350
Iron Ore (62% CFR, Qingdao) USD/tonne 77 -2.2 25.1 58.4 na 70.0 50.0
Lead USD/tonne 2,363 17.2 26.9 1,875 2,251 2,150 2,200
Nickel USD/tonne 11,660 16.4 18.4 9,648 9,887 10,250 10,000
Palladium USD/oz 941 37.7 37.3 616 814 na na
Platinum USD/oz 983 9.1 -8.7 991 958 na na
Silver USD/oz 17 6.6 -7.8 17.1 17 na na
China Domestic Hot Rolled Steel Average CNY/tonne 4,085 9.4 41.5 2,763 3,581 na na
Tin USD/tonne 20,450 -3.2 9.1 17,896 19,988 19,500 20,500
Zinc USD/tonne 3,127 21.4 36.1 2,101 2,742 2,700 2,700