Wednesday, February 9, 2011

Are commodity prices set to rise further on increasing global demand?

by Chris Shaw

For Goldman Sachs, aluminium is the least preferred of the base metals on a 12-month view. But even allowing for this, the broker suggests there are some emerging signs the longer-term outlook for the metal is beginning to improve.

Global aluminium consumption was better than Goldman Sachs had forecast in 2010, which has positive implications for the demand side of its model in coming years. Some producer constraint is needed, but the broker is now forecasting market deficits from 2013 onwards.

Also supportive is China's growing focus on energy efficiency, which could mean domestic aluminium production in that country lags the expected increase in demand. Goldman Sachs is forecasting Chinese demand growth of 8.2% through 2015, a figure it suggests may prove conservative.

The release of substantial inventories may hold back the rate of price appreciation in Goldman Sachs's view, so for that reason the broker suggests it remains too early for all but long-term investors to look for direct exposure to aluminium.

Goldman Sachs is forecasting average annual aluminium prices of US103c per pound this year, US106c per pound in 2012 and US110c per pound in 2013.

Over in copper, Credit Suisse suggests for prices to commence a further leg up LME stocks need to fall. A key indicator behind this dynamic, according to the broker, is the SHFE-LME spread. The current Shanghai discount relative to LME prices suggests China is not experiencing the copper squeeze that many have expected.

One explanation is China is currently de-stocking, but Credit Suisse argues current price activity could also be explained by an acceleration in substitution for the metal. Either way, the broker's view is China is unlikely to be able to support exports for long, so there should be an acceleration of the tightening of the Shanghai market in coming weeks and months.

To reflect this the broker has revised up its estimates, Credit Suisse now forecasting average annual copper prices of US$4.70 per pound this year, US$4.50 per pound in 2012 and US$3.80 per pound in 2013. This compares to previous forecasts of US$3.95 per pound this year and US$3.90 per pound in 2012.

Citi has updated on the bulk commodities sector, noting the recent floods in Queensland are likely to keep Australian coal exports constrained for several months given waterlogged mines, low inventories and some damage to infrastructure.

On Citi's best case estimates the coking coal market will see a shortfall of 18 million tonnes, something that has already pushed prices higher given gains of nearly 50% to US$324 per tonne since the flooding began around the start of the year.

Given monsoon season is still some way from being over and with inventories at critical lows, Citi's view is coal prices have yet to peak.

In steel, industry consultant MEPS is forecasting global crude stainless steel output for 2010 will have hit an all-time high of 30.45 million tonnes. If the group's forecast is correct this would be 7.4% above the previous record recorded in 2006 and 24% above 2009 levels.

The record is unlikely to last long, as MEPS is forecasting total output of more than 31 million tonnes in 2011. Most regions will contribute to this, with Japanese production likely to be up 27% from 2009 levels, while Chinese production is forecast to have more than doubled since 2006.

EU activity also picked up in the final quarter of 2010, while MEPS notes US production has also risen strongly from 2009 levels.

In steel generally, MEPS expects total global output for 2010 of just over 1.4 billion tonnes, an increase of 16% or 190 million tonnes from 2009's output. Accounting for about 50% of the increase will be stronger production in China, the US and Japan, while German and South Korean output has also improved.

MEPS sees the economic outlook for 2011 as cautiously optimistic, with certain sections of Western economies performing well but construction markets still experiencing depressed activity levels. This will keep a lid on steel output in the coming years, with MEPS forecasting total global steel production in 2011 of 1,485 million tonnes.

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