Group Economics
[email protected]
Quarterly Commodity Outlook ABN AMRO Price Outlook Q1-2013 long term view (until 2015)
3-months view WTI Brent
Natural gas
24 January 2013
Energy: Brent oil prices will continue to hover around USD 105 as the modest pick-up in demand will be outweighed by a rise in oil production. WTI may find some support based on the US economic recovery in combination with more US oil flooding towards the Gulf of Mexico. Although the number of rigs was lowered, natural gas production still leads to rising inventories. This will outweigh the rise of seasonal demand and therefore keep the lid on natural gas prices in the US. Nevertheless, some price appreciation can be expected due to normalizing of the market dynamics, but natural gas prices will remain below their historical average.
Precious metals:
Gold
Silver
Platinum
Palladium
The combination of a modest increase in supply and slightly lower demand for gold, mainly driven by lower investment demand, should result in lower gold prices. Silver prospects are better because silver has a larger industrial demand base. Therefore we see upside potential for silver prices but no new upward trend is in the making in the coming years. The prospects for platinum have improved on a less negative outlook for the car sector in Europe and higher jewellery demand from China. Palladium fundamentals are improving but the market has already discounted these. Investor positions are large and pose a risk to palladium prices in the short run.
Base metals: Aluminium
Copper Nickel
Zinc
In aluminium, conditions in the US have improved, while in Europe circumstances are still challenging. Long term prices are expected to remain strong, but oversupply is the key issue in the global aluminium market. In the copper market, a positive PMI and trade data from China and the political compromise on the US fiscal cliff improved sentiment. Long-term copper demand will remain robust. Regarding nickel we expect that demand will increase steadily until 2015, which is tied to gradually improving economies. This is also the case for zinc, were stakeholders remain confident.
Ferrous metals: Steel (HRC)
Iron ore
Coking coal
Wheat
Corn
Soybeans
Sugar
Coffee
Cocoa Cotton
We have witnessed a revival in steel prices in Europe, China and the US during Q4 2012. However, short term conditions for the steel sector in Europe remain weak, while markets in China and the US will further recover. Although demand by steel end users is set to improve, supply-side issues continue to hamper the market and this softens prices. Coking coal prices could strengthen by 2-4% from current levels in the next three months. However, future capacity should be sufficient to meet demand from the steel sector. ABN AMRO expects that iron ore prices stay at a relative high level in the next 3 months. In the long term we expect an oversupply in iron ore and this will weaken prices.
Agriculture: Prices of wheat, corn and soy have eased somewhat during the last quarter of 2012, but remained elevated. In the near future, ABN AMRO expects prices for wheat and corn to remain strong. From 2014 on though, we expect prices to ease due to a production recovery. Soy prices will most likely start to ease this year already, on promising harvest forecasts from South America. Sugar prices are expected to remain largely unchanged, just like those of cocoa. Coffee will not see much movement in the short term either. There is little potential for a downward price movement, because Arabica stocks are increasing. decrease by 10% or more
decrease bet w een 5% and 9%
- Short term: our three month outlook versus
price movement bet w een -4% and + 4%
spot rate on January 22 . - Long term: 2015 average forecast price versus 2013 forecast price.
increase betw een 5% and 9%
increase by 10% or more
nd
2 | Quarterly Commodity Outlook 24 January 2013
FORECASTS Q1-2013
ABN AMRO Group Economics
(1)
Spot rate 22nd Jan
Average price Q4-2012
3-months
2013
2014
2015
- Brent (USD/barrel)
112.73
110.13
105
105
100
90
- WTI (USD/barrel)
96.09
88.00
90
95
90
85
3.63
3.40
3.50
3.50
4.50
5.00
- Gold (USD/oz)
1,693
1,718
1,600
1,500
1,400
1,300
- Silver (USD/oz)
31.94
32.61
32
35
35
35
- Platinum (USD/oz)
1,687
1,598
1,600
1,600
1,650
1,700
- Palladium (USD/oz)
717
652
650
700
725
750
Energy:
- Natural gas (USD/mmBtu)
Precious metals:
Base metals: - Aluminium (USD/t)
2,039
Aluminium (USD/lb)
- Copper (USD/t)
8,103 Copper (USD/lb)
- Nickel (USD/t) Nickel (USD/lb)
7,909
2,036
8,375
16,974
8,450
18,100
1,950
2,075
8,550
18,750 2,100
1.04
8,700 3.88
20,750
8.50
0.94
2,300 1.02
3.83
8.21
0.88
2,250 0.99
3.80
7.70
0.82
2,175 0.96
3.59
7.39
Zinc (USD/lb)
2,120 0.91
3.55
17,313
- Zinc (USD/t)
2,000
0.87
3.95
22,000
9.41
2,250 0.95
9.98
2,300 1.02
1.04
Ferrous metals: - Steel (global, HRC; USD/t)
605
568
600
590
560
540
- Iron ore (fines, USD/t)
147
121
139
136
119
115
165
151
166
173
165
160
- Wheat (USDc/bu)
823
840
780
770
-
-
- Corn (USDc/bu)
733
736
740
720
-
-
- Soybean (USDc/bu)
1,461
1,472
1,440
1,390
-
-
- Sugar (USDc/lb)
18.58
19.65
18.50
19.00
-
-
- Hard coking coal (USD/t)
(2)
Agricultural:
- Coffee (USDc/lb) - Cocoa (USD/t) - Cotton (USDc/lb)
150
139
150
140
-
-
2,323
2,450
2,300
2,500
-
-
86
82
80
65
-
-
(1) The 3-months forecasts is a Q1 2013 exit price. Forecasts for 2013, 2014 and 2015 are average year prices. (2) Prime coking coal Australia,CIF
3 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics
CONTENTS Macro economic developments • •
Macro ------------------------------------------------------------------------------------------------------------------------------------- 4 Commodity Top Down -------------------------------------------------------------------------------------------------------------- 5
Energy • • •
Brent ------------------------------------------------------------------------------------------------------------------------------------WTI --------------------------------------------------------------------------------------------------------------------------------------Natural Gas ----------------------------------------------------------------------------------------------------------------------------
6 7 8
Precious metals • • • •
Gold -------------------------------------------------------------------------------------------------------------------------------------Silver ------------------------------------------------------------------------------------------------------------------------------------Platinum --------------------------------------------------------------------------------------------------------------------------------Palladium --------------------------------------------------------------------------------------------------------------------------------
9 10 11 12
Base metals • • • •
Aluminium ----------------------------------------------------------------------------------------------------------------------------Copper ---------------------------------------------------------------------------------------------------------------------------------Nickel ----------------------------------------------------------------------------------------------------------------------------------Zinc --------------------------------------------------------------------------------------------------------------------------------------
13 14 15 16
Ferrous metals • • •
Steel (HRC) --------------------------------------------------------------------------------------------------------------------------Iron ore --------------------------------------------------------------------------------------------------------------------------------Coking coal ---------------------------------------------------------------------------------------------------------------------------
17 18 19
Agriculturals • • • • • • •
Wheat ----------------------------------------------------------------------------------------------------------------------------------Corn ------------------------------------------------------------------------------------------------------------------------------------Soybeans -----------------------------------------------------------------------------------------------------------------------------Sugar -----------------------------------------------------------------------------------------------------------------------------------Coffee ----------------------------------------------------------------------------------------------------------------------------------Cocoa ----------------------------------------------------------------------------------------------------------------------------------Cotton -----------------------------------------------------------------------------------------------------------------------------------
20 21 22 23 24 25 26
Macro-economic indicators •
Facts & Figures -----------------------------------------------------------------------------------------------------------------------
27
Contributors • •
Analysts and economists ---------------------------------------------------------------------------------------------------------Disclaimer -----------------------------------------------------------------------------------------------------------------------------
28 29
4 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Nick Kounis (+31 20 343 56 16)
Macro Global economy looks to have turned the corner, with US and emerging Asia in the lead Central bank actions have sown the seeds for recovery but budget cuts will be a drag We expect a moderate recovery this year, that gains strength in 2014
• • •
Turning the corner
Manufacturing PMI-headlines 65 60 55 50 45 40 35 30 08
09 Eurozone
10
11 US
12 China
There are increasing signs that the world economy has passed the trough, led by the US and emerging Asia. The global manufacturing PMI rose to 50.2 in December from 49.6 in November. It was the fourth successive rise and took the indicator to its highest level since May of last year. Admittedly, the indicator remains at low levels, but the direction is clear. These signs are confirmed by freight indicators. For instance, the growth rate of air freight out of Frankfurt airport has been on a clear upward trend over recent months. In the US, the consumer has shown signs of strength, and the labour market is gradually improving. Meanwhile, in China, there is a broad body of evidence that policymakers have achieved a soft landing for the economy, with economic growth firming recently. While the eurozone economy is still shrinking, there have been signs that the pace of decline is easing.
Source: Thomson Reuters Datastream
Seeds sown for recovery We expect the global economy to recovery gradually this year before picking up speed next year. A number of factors point to an improvement. First of all, the decline in the risk of tail events surrounding the euro crisis after the ECB put in place a safety net for governments is leading to an easing of financial conditions and uncertainty. Second, we have seen monetary policy stimulus in many big economies around the world, which should also work to underpin demand. Third, the US housing market has convincingly turned, and should increasing help to shore up economic growth, through construction activity, but also indirectly, by further improving private sector balance sheets. Finally, the ‘normal’ catalysts that tend to sustain demand will increasingly come to the fore. The inventory cycle is likely to turn, while the decline in uncertainty and more stable environment should see a release of pent-up demand.
US housing starts 2,400 2,000 1,600 1,200 800 400 59 64 69 74 79 84 89 94 99 04 09 Source: Thomson Reuters Datastream
Macro Research GDP forecasts 2011
2012e
2013e
2014e
China
9.3%
7.8%
8.0%
8.0%
US
1.8%
2.3%
2.0%
3.0%
Eurozone
1.5%
-0.5%
-0.2%
1.0%
World
3.8%
2.9%
3.2%
3.8%
Source: ABN AMRO Macro Research
Moderate growth this year, gains strength in 2014 On the other hand, fiscal policy should remain a significant restraint on demand in the advanced economies, though it will become less restrictive next year. Tax hikes will be a drag on US consumer spending in the first half of this year. A second negative is that the authorities in emerging markets have taken a cautious approach to stimulus. The Chinese authorities are targeting more moderate growth in the 7-8% region as well as more balanced growth, which is less dependent on investment and exports and more driven by consumption. Concerns about inflation have meant that central banks in India and Russia have taken a conservative stance. Only in Brazil have we seen aggressive monetary and fiscal stimulus. Overall, we expect the global economy to accelerate from 2.9% last year to 3.2% this year, before a more significant advance to 3.8% in 2014. The upswing will be led by the US and emerging Asia, but the eurozone should also eventually get a lift from improving world trade growth and reduced uncertainty.
Upside to the forecast:
Downside to the forecast:
- Stronger return of confidence following decisive policy action
- Bigger than assumed impact of budget cuts
- Pent-up demand stronger than expected
- Sovereign debt worries return to markets in eurozone
- Budget cuts pushed back
- US debt ceiling struggles hit confidence
5 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Georgette Boele (+31 20 629 77 89)
Commodity top-down A small negative performance in 2012 Stable commodity prices expected for this year We favour cyclical commodities with a tight balance between supply and demand
• • •
Commodities followed growth expectations
Historical price CRB Index 500 400 300 200 100 0 05
06
07
08
09
10
11
12
13
TR/Jefferies CRB Index
In our Quarterly Outlook Q1 2012 (dated 26 January) we upgraded commodities to neutral. After a positive start of 2012, driven by the ECB’s liquidity injection (i.e. LTRO), sentiment started to turn in the course of the first quarter. In our Q2 Outlook in May 2012, we attached a negative bias to our neutral rating, because of the negative economic momentum and sentiments that were building. The commodity index dropped by 12% in the period from May until the low set in June. The subsequent recovery was driven by expectations of more monetary easing by the Fed and an improved outlook for China. In our Q3 Outlook, released on 26 July, we dropped the negative bias and stayed overall neutral. Since October, the CRB index moved in a small range between 291 and 301. Over the full year, the CRB moved 3.2% lower.
Source: Thomson Reuters Datastream
Stable commodity prices
Chinese growth
Despite our expected recovery of the global economy, we do not expect to see a return of the commodity ‘super cycle’. The upswing in demand is likely to be rather moderate, with both global GDP and trade growth remaining below historical averages. In addition, China’s switch to more consumerdriven growth obviously means a less commodity-intensive growth. This suggests that the pace of Chinese commodity demand growth will be somewhat slower than in the past. Finally, the supply situation is much more unfavourable to price gains than in the past, not the least in oil and ferrous metals. Overall, growth in commodity prices is likely to be rather flat in the short term. Regarding oil prices, we see a price convergence between WTI and Brent, given that the Middle East risk premium in Brent is easing.
15 13 11 9 7 5 2005
2007
2009
GDP QoQ
2011
2013
Forecast ABN AMRO
Source: Thomson Reuters Datastream
Base metals (index 2003=100) 600 500 400 300 200 100 0 2008
2009 2010 Aluminium Nickel
2011 2012 Copper Zinc
Source: Thomson Reuters Datastream
We prefer cyclical commodities with a tight balance While we expect a limited performance of commodities as an asset class, we do expect directional moves in underlying commodities. We expect cyclical commodities to outperform if the supply and demand balance turns towards a lower supply surplus or a supply shortage (tighter). Of the precious metals, palladium is the most cyclical, followed by platinum and silver. Platinum has a small supply surplus, but an improvement in demand will lead to a more even balance in 2014. The supply shortage in palladium will likely continue. Silver is cyclical, but the supply and demand balance is not tight. Base metals and ferrous metals are also very cyclical. For base metals we expect physical availability to remain tight while for ferrous metals we expect supply to remain ample, especially in China. There is some talk about capacity cuts in ferrous industries but we expect this will not happen very soon, partly because of (local) political resistance in China. By nature, oil prices are also strongly cyclical, but supply is ample and the risk premium is expected to decrease (in the case of Brent oil). Moreover, WTI is more sensitive to the US economy, while Brent oil is sensitive to the eurozone and Asian economies, but the link is less pronounced and blurred by the risk premium. Agriculturals have a relatively low cyclical character. All in all, we prefer base metals and palladium and platinum.
Upside to the forecast:
Downside to the forecast:
- Large supply disruptions
- Ample commodity supply
- Stronger-than-expected global growth, including in China
- Weaker than expected economic growth
- USD depreciation
- Change in structural demand
6 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Hans van Cleef (+31 20 343 46 79)
Energy | Brent Brent oil traded within small ranges as demand remained weak and there was ample supply No change in drivers leads to a neutral outlook, but with political risks lingering A bigger Saudi reserve capacity and moderate demand growth keeps the lid on Brent oil prices
• • •
Historical price Brent
Brent price stable as Saudi Arabia controls output During the final quarter of 2012, Brent oil traded within a neutral range. As geopolitical drivers were somewhat out of scope, there was ample supply, and demand picked up only modestly. Although hope for the economic recovery resulted in support for oil prices, the impact was limited. This was the result of some, mainly non-OPEC, oil producers reporting higher production. To keep the oil price stable or slightly above USD 100, Saudi Arabia decided to lower its production. The 2012 average price for Brent oil was USD 111.69.
160 140 120 100 80 60 40 20 0 03
05
07
09
11
13
Balanced outlook in Q1; political risks ahead
Crude Oil-Brent Dated FOB U$/BBL Source: Thomson Reuters Datastream
Global oil supply and demand (x 1mln bbl) 95 90 85 80 75 02 03 04 05 06 07 08 09 10 11 12 Supply
Demand
2013 should mark lower oil prices
Source: Energy Intelligence
Commodity Research price forecast (USD/barrel) 3-month Brent
105
2013
2014
2015
105
100
90
Source: ABN AMRO
During the first months of 2013, several factors are important for the Brent oil price. With our economic base-case scenario implying only a modest economic recovery, demand would increase only at a moderate pace. This will not trigger strong price appreciation unless supply worries increase significantly. However, supply worries are not likely, as production is reported to be increasing in several non-OPEC countries, such as the US, Canada and Norway, as well as in OPEC-member Iraq. Saudi Arabia increased its fiscal year 2013 budget by almost 20% compared to 2012. Saudi Arabia would not allow the oil price to drop below its budget calculation level of approximately USD 75, but this leaves enough room to lower its output in order to stabilise oil price fluctuations. This drop in production would also increase its important reserve capacity. Another important event to watch is the diplomatic talks between Iran and the West regarding Iran’s nuclear programme. With elections coming up in Iran, the pressure is building to come to a mutually agreeable solution. If this takes too long, geopolitical tensions could start to rise again – increasing the risk of eventual escalation – which would automatically lead to a higher risk premium. This is a risk, but not our base-case scenario.
Looking ahead, we expect a similar price pattern in 2013 as seen in 2012. That would mean a neutral outlook, but with increased volatility which would be triggered by shifts in market focus from time to time. Supply worries and positive supply-related news will continue to trade off in line with hope and disappointment regarding the global economic recovery. In the course of the year, ABN AMRO expects economic growth to gradually pick up, especially in Asia and the US. Furthermore, we expect supplies to grow and the reserve capacity to increase, as stated above. Finally, we do not expect the situation in the Middle East to escalate. Therefore the risk premium should start to decline during the second half of the year. All in all, Brent oil prices should continue to ease from 2012 year-end levels over the next few years.
Upside to the forecast:
Downside to the forecast:
- Escalation of the Iranian and/or Syrian conflict
- Tensions in the Middle-East ease earlier than forecasted
- A larger-than-expected pick-up of economic growth/risk appetite
- Even higher oil production or disappointing data hurting demand
- Supply disruptions which cannot be balanced by extra Saudi output
7 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Hans van Cleef (+31 20 343 46 79)
Energy | WTI (West Texas Intermediate) WTI found support after the US fiscal cliff deal A rise of ‘seasonal demand’ will be outpaced by a rise in oil production US politics and a lower Brent oil price will lead to a lower Brent/WTI spread
• • •
WTI found some support after fiscal cliff deal
Historical price WTI
Like Brent oil, WTI traded within small ranges during the last few months. US government and central bank stimuli proved no longer supportive for commodities, and thus not for oil either. Furthermore, the positive impact of US data was limited. News about further stock building and the continuing rise of US oil production countered all positive effects on the WTI oil price which, in the end, resulted in this neutral pattern. At the end of the year, WTI found some support after the US politicians agreed on a tax-deal that should prevent the economy from falling off the fiscal cliff. WTI gained roughly USD 7, which resulted in a lower Brent/WTI spread.
160 140 120 100 80 60 40 20 0 03 05 07 09 11 13 Crude Oil-WTI Spot Cushing U$/BBL - DS MID PRICE Source: Thomson Reuters Datastream
Oil price spread Brent-WTI 30 25 20 15 10 5 0 -5 -10 -15
Q1: higher production to outpace rising demand Traditionally, WTI prices appreciate during the first quarter of the year, mainly on the back of seasonal demand as a result of colder weather. Nevertheless, this time, prices could remain within neutral ranges or may even face increased pressure, especially if weather conditions remain above the normal averages. Price supportive news could have less of an impact as a result of the huge supplies which are more than enough to cover the increase in seasonal demand. In fact, even more supply building is expected to be seen. The result of more pipelines transporting natural gas from Cushing, Oklahoma towards the Gulf of Mexico could prove somewhat supportive to WTI prices. We have set our forecast somewhat higher for the second half of the year compared with the first six months. This is a result of our expectation that US economic growth will pick up during the second half of the year.
2013: policy changes versus a rise in demand 08
09
10
11
12
13
Oil price spread Brent-WTI US$/BBL Source: Thomson Reuters Datastream
Commodity Research price forecast (USD/barrel) 3-month WTI
90
2013
2014
2015
95
90
85
Source: ABN AMRO
The question is what the impact will be if the Fed may stop stimulating the economy. Normally, this stimulation of the economy is supportive for oil prices. If the Fed ends its stimulation packages, it could be an extra downside risk for commodity prices, including oil. If, on top of that, more unconventional oil (tar sands, oil shale et cetera) will enter the US market, supplies will continue to grow. However, our expectation of a pickup in economic activity could lead to a moderate rise in demand, which will balance the negative effects on the oil price and therefore lead towards a neutral outlook. Another important factor to watch in the course of the year is the decision of President Obama regarding the approval of the Keystone XL pipeline. This pipeline would transport oil from Canada, North Dakota and Montana towards the refineries in the Gulf of Mexico. It could mean another boost for the US energy industry and a step closer to US energy independency. The Brent-WTI spread will remain wider than USD 10 during 2013 as a result of the risk premium on top of the ‘normal’ Brent oil price, as well as the extra pressure on WTI due to the large oil supplies in the US. ABN AMRO expects an average WTI price of USD 95 in 2013.
Upside to the forecast:
Downside to the forecast:
- Confirmation of stronger global/US economic growth
- Increased production of ‘unconventional oil’ in the US/Canada
- Possible escalation of the geopolitical conflicts (Middle East)
- US budget problems
- More pipelines announced which transport oil to the Gulf Coast
- Disappointing economic growth US
8 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Hans van Cleef (+31 20 343 46 79)
Energy | Natural gas Neutral gas prices mainly driven by weather dynamics Seasonal demand to have less impact while inventories grow at a slower pace Both demand and supply to grow in the coming years
• • •
Weather as main driver, but inventories weigh
Historical price natural gas
Current newswires provide us with almost daily headlines, such as ‘US natural gas prices down as mild weather weighs’ or ‘US natural gas prices rise on cold weather.’ This tells us two things: 1) short-term US natural gas prices are for a large part driven by weather forecasts and 2) the overall direction is neutral. Prices eventually eased during the past quarter, basically because natural gas inventories continued to expand. As a result, the US Henry Hub average spot price hit a 13-year low in 2012.
16 14 12 10 8 6 4 2 0
Seasonal demand balanced by large inventories in Q1 03
05
07
09
11
Due to the low natural gas prices, many rigs in the US have been closed as it was unprofitable to keep them in production. As a result, inventories are rising at a slower pace. Net inventories are still growing though, as some other rigs continue to produce – they look at the longer term price averages – and natural gas is produced as a by-product of (shale) oil. However, with economic growth picking-up speed only at a modest pace and inventories large enough to cover the rise in seasonal demand, natural gas prices will remain low for a longer period. The rise in seasonal demand, which normally tends to support natural gas prices during the first quarter, may have less of an impact this year due to the high inventories. In fact, this is the fourth year in a row that inventories have entered the heating season at an all-time peak (Reuters). Only if the temperatures drop significantly below the normal averages for the time of the year, natural gas prices will possibly find some support. However, we think that the downside risks of natural gas prices are limited, and prices may have started bottoming out in 2012. Overall, volatility will remain, but prices in Q1 seem to be rather neutral within the USD 3.253.75 per mmBtu range, far below historical average levels.
13
Natural Gas-Henry Hub $/MMBTU Source: Thomson Reuters Datastream
Natural gas prices 50 40 30 20 10 0 08
09
10
11
APX TTF NL
12
13
Henry Hub NatGas
Source: Thomson Reuters Datastream
Commodity Research price forecast (USD/mmBtu) 3-month Natural gas
3.50
2013
2014
2015
3.50
4.50
5.00
Source: ABN AMRO
Normalisation of the gas market dynamics Since many investors and energy companies want to benefit from the US shale boom, more investments are hitting the market. Most likely more rigs will be built in the coming years, which will result in a further rise of production capacity. Demand is expected to increase in the coming years as more and more US industries are switching from expensive fuel types, such as oil and coal, to the cheaper natural gas. As a result, we expect natural gas prices to increase in the coming years, based on this rise in demand. This is despite the fact that production – both rigs and (shale-) gas output – will grow as well. Overall, we expect some normalisation of the natural gas market dynamics which could lead to less volatility. Our forecast for the Henry Hub natural gas price is set at USD 3.50 in 2013 and USD 4.50 in 2014. In both Europe and the UK, the main focus is on politics. In Britain, the government lifted the ban on shale gas exploration, but did impose tighter rules. In Europe, gas prices are for a large part linked to oil prices. However, renegotiations with Russia (the main supplier) result in slowly easing gas prices.
Upside to the forecast:
Downside to the forecast:
- Switching to additional gas-fired power generation
- Continued and accelerating unconventional gas output
- Extreme weather conditions (longer periods of cold or heat)
- Disappointing economic recovery
9 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Georgette Boele (+31 20 629 77 89)
Precious metals | Gold Gold losing shine Mining output to rise by at least 1.5% in the coming years Demand to hurt because of lower investment demand
• • •
2012 performance
Spot gold performance (in %) 35 30 25 20 15 10 5 0 2007
2008
2009
2010
2011
2012
Source: Bloomberg
Gold jewellery consumption 4,000
Mining output to rise by at least 1.5% in coming years
3,000 2,000 1,000 0 1992 1996 GREATERCHINA MIDDLE EAST Rest
2000 2004 INDIA TURKEY
2008 USA RUSSIA
Source: Thomson Reuters Datastream
(USD/oz) 3-month
2013
2014
2015
1,600
1,500
1,400
1,300
Source: ABN AMRO
We expect gold mine output to rise by at least 1.5% (in line with historical average) in the coming years as new production comes available which will more than offset the decline in current mine supply. The relatively high gold price and the large margin for gold producers (difference between gold price and total costs of the operation) will support exploration and result in bringing on stream less profitable operations (low ore grade (=concentration of gold in ore) or high production costs). The mining conditions remain challenging though with uncertain political developments in a number of countries, uncertain energy costs, availability of water, possible labour disputes, higher costs for hiring experts and lower ore grade. For the coming years we expect mine supply dynamics to have a limited impact on gold as gold remains more driven by demand dynamics.
Demand to be hurt because of lower investment
Commodity Research price forecast
Gold
The performance of gold prices during 2012 has been meagre due to offsetting drivers being: 1) central banks stepping up monetary easing especially the Fed, 2) the internal fight of gold being a safe haven financial asset and a risky financial asset, 3) lower gold demand from India and China due to downbeat economy prospects and 4) increased demand from the official sector with the aim of reserve diversification. Gold lost more shine of being a safe haven asset and this has disappointed many investors. There are several reasons for this. The accessibility of gold as an investment for the greater public has changed its character in an important way. Investment related demand has surged on anticipation of the certain worst case scenarios and inflation fears. These speculative flows have changed gold’s character of being a safe haven financial asset to being a risk asset. 2012 was a year with lots of uncertainty but gold prices failed to profit from this due to its change in character. The speculative positions in the futures market have had an important impact on gold prices in 2012: they showed a strong positive relationship and liquidation of the short-term speculative positions was an important driver of weakness in gold prices since October.
We expect global structural jewellery demand decline to come to an end as jewellery demand from China, India, Russia and other emerging markets will more than offset the decline in major developing markets. Furthermore we expect demand from the official sector to continue at roughly the same pace. But we expect investment demand to fall in the coming years for several reasons. First, investors will become disappointed by the limited prospects of higher gold prices. Second, investors did not appreciate gold’s change in character from being a safe-haven asset to a risk asset. Moreover, the large stock of existing investor positions hangs over the market. We expect gold prices to fall under pressure because of investment liquidation in 2013-2015 also driven by a stronger US dollar.
Upside to the forecast:
Downside to the forecast:
- Longer ease monetary policy
- More optimistic global growth outlook triggering central bank action
- US dollar debasement
- Strong global growth make equities & base metals more attractive
- Distrust in paper money
- Investors liquidating positions
10 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Georgette Boele (+31 20 629 77 89)
Precious metals | Silver Silver performance lacked clear character in 2012 Silver supply to increase in 2013-2015 by an average of 2.5% per year Industrial demand to more than offset demand weakness from other segments
• • •
2012 performance and start of 2013
Spot silver performance (in %)
Silver lacked a strong individual character in 2012. At times it moved in line with gold, behaving like a proxy financial asset and driven by expectations of global monetary easing. At other times, it showed its cyclical character when economic data came in above expectations. So far this year, silver prices have been bouncing higher again from their 2012 year-end level of USD 30 per ounce, driven by an improvement in overall sentiment.
100 80 60 40 20 0
Silver supply to increase in 2013-2015
-20 -40 2007
2008 2009 2010
2011 2012
Source: Bloomberg
Main sources of silver demand in Moz 100%
Since 1999, silver ore supply has been growing by an average of 2.5%, with an average of 3.5% in the last five years. In 2011, however, growth amounted to only 1.5%. Production is well spread over numerous countries and miners, making the production climate stable. For 2013-2014, we expect silver mine production to increase by 2 to 3%. Silver is often mined as a by-product of gold or base metals. Silver, like other precious metals, has an important other source of supply: scrap. Recycling silver counts for around one-third of total mine supply. As long as silver prices do not implode, recycling will remain attractive and therefore likely to further increase.
80%
Industrial demand to more than offset weakness in other demand
60% 40% 20% 0% 98
00
02
04
Industrial fabricatio n P ho to graphic fabricatio n Silverware fabricatio n
06
08
10
Jewellery fabricatio n Implied net investment Co in & medal fabricatio n
Source: Thomson Reuters Datastream
Commodity Research price forecast (USD/oz) Gold
3-month
2013
2014
2015
32
35
35
35
Source: ABN AMRO
Silver, like gold, has a wide variety of demand purposes, including, for example, industrial, jewellery, photographic, investment, silverware, coins and medal fabrication. However, unlike gold, industrial demand makes up the largest part of total silver demand. Industrial demand for silver is the strongest in the US, followed by China, Japan and India. Together these countries account for 70% of industrial silver demand. For 2013 and 2014, we expect stable growth in China and Japan, and growth to pick up in the US and India. The prospects for industrial silver demand are thus positive. Jewellery demand has been on a structural decline since 2003. We expect jewellery demand from China to dampen the downside in the negative trend but not to cause a turnaround. Photographic demand is also in a structural decline. Lower demand for silverware, coin and medal fabrication will also negatively affect silver prices. Silver prospects are brighter than those of gold, because silver has a larger industrial demand base that will more than compensate for the declines in the other demand segments. We therefore see upside potential for silver prices, albeit not a new upward trend in the making in the coming years. We have kept our forecasts (average) at 35 USD per ounce to reflect this view.
Upside to the forecast:
Downside to the forecast:
- More optimistic global growth outlook
- Long-term investors abandoning positions
- USD debasement
- Global recession
11 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Georgette Boele (+31 20 629 77 89)
Precious metals | Platinum Platinum is making up for mediocre performance in 2012 Supply to recover as labour unrest recedes Platinum prospects have improved
• • •
2012 performance and start 2013
Spot platinum performance (in %) 80 60 40 20 0 -20 -40 -60 2007
2008
2009
2010
2011
2012
Source: Bloomberg
Supply to recover as labour unrest recedes
Platinum supply per country 100% 80% 60% 40% 20% 0% 1999 2002 South Africa Canada
2005 2008 2011 Zimbabw e Rest of the w orld
Commodity Research price forecast (USD/oz) 3-month
2013
2014
2015
1,600
1,600
1,650
1,700
Source: ABN AMRO
We expect global platinum production to recover this year from the losses caused by the strikes in South Africa in 2012 and expect a return to 2011 levels of just below 6,500,000 ounces. For 2014 and 2015, we expect platinum mine supply to further increase from this level. This increase will be modest, however, as platinum miners generally face the same challenges as gold and silver miners: decreasing ore quality and higher production costs. We expect the increase of global platinum supply mainly to come from an increase in mine supply. Being mostly concentrated in South Africa, global platinum supply remains vulnerable to safety stoppages and labour unrest in this country. As a result, total mining costs for an ounce of platinum have risen sharply. The margins on an ounce of platinum are much smaller than on an ounce of gold.
Platinum prospects have improved
Source: Thomson Reuters Datastream
Gold
The weak outlook for the eurozone suppressed platinum prices in 2012, because of lacklustre growth in eurozone car sales. Platinum is used in diesel catalysts, for which the eurozone is the largest market. Reduced platinum mine supply resulting from labour unrest in South Africa offset the impact on platinum prices of lower car sales in the eurozone. Market sentiment improved notably following the ECB meeting on 10 January, when the ECB closed the door on rate cuts. The improvement in eurozone sentiment boosted platinum prices. Moreover, on the supply side, the situation has become far more uncertain. Anglo American Platinum (Amplats), the world’s largest producer, announced plans to close and sell off several mines in South Africa as part of a long-awaited review of its operations. This news further supported platinum prices. Since the start of the year, platinum prices have rallied more than 9%. In our latest precious metals monthly, we had already turned more positive on platinum, but the recent rally has surprised us positively.
We continue to expect a modest growth recovery in the eurozone and ongoing modest growth in Japan in 2013. The market consensus for 2014 is modest growth in both regions, with car sales most likely trailing not far behind. We expect car sales in the eurozone to decline at a lower pace in 2013 compared to 2012 and a modest pick-up in 2014 and 2015. Jewellery platinum demand is mainly driven by Chinese consumers. The Chinese middle class will have sharply grown by 2020 and this will result in increasing demand for luxury goods, including jewellery. Platinum jewellery has been popular in the past as a substitute for white gold. The volatile character of platinum compared to gold has hurt sentiment towards platinum, but we expect it to return to Chinese consumers’ favour, also because platinum is still cheaper than gold. All in all, we see upside potential in platinum jewellery demand in 2013-2015.
Upside to the forecast:
Downside to the forecast:
- Stronger-than-expected economic recovery in the eurozone
- Global recession
- Supply disruptions
- Investors liquidating positions
- Greater risk appetite and/or USD debasement
- Chinese consumers preferring white gold to platinum
12 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Georgette Boele (+31 20 629 77 89)
Precious metals | Palladium Palladium reached our USD 700/ounce target Total supply to remain flat in the coming years Investors already positioned for strong demand
• • •
2012 performance and start 2013
Spot palladium performance (in %) 125 100 75 50 25 0 -25 -50 2007
2008
2009 2010
2011
2012
The start of 2012, due to uncertainty about the global economy, especially regarding China and the eurozone, saw a fall in palladium prices. As the year went on, however, labour unrest in South Africa at major platinum miners (often also palladium miners) supported prices, as did the improved outlook in important demand countries. In the US and, to a lesser degree, in China, car sales jumped, to the benefit of palladium prices. Palladium is used in catalysts for gasoline cars. Improvement in sentiment resulted in stronger demand from investors. Palladium hit our target of USD 700 per ounce. Even if palladium did not have as good a start to the new year as platinum, probably because of the large position overhang, the improved outlook for the eurozone and the improvement in global sentiment certainly supported palladium prices.
Total palladium supply to remain flat
Source: Bloomberg
In recent years, palladium supply has barely been able to meet total demand. The resulting supply shortfall led to very tight market conditions. In the coming years, we expect mine supply in South Africa to modestly increase, but as Russian stock sales will decrease, we will have a neutral supply trend at best. Another source of palladium supply is from scrap auto catalysts and scrap jewellery. Both sources are set to increase modestly, as palladium prices continue to move higher.
Palladium demand by category 100% 80%
Investors are already positioned for strong demand
60%
For 2013, demand prospects are expected to further improve, but as investor sentiment already sharply improved in 2012, these better prospects may already have been anticipated. Demand for auto catalysts is set to increase further, in turn driving demand for palladium from the US, China, Russia and other emerging markets. The eurozone car market is also set to improve modestly, making the overall picture for palladium catalyst demand promising. There is the risk, however, that further uncertainty in the US about the federal government’s debt limit and possible automatic spending cuts in the first quarter of 2013, may hurt overall consumer sentiment and therefore the outlook for car sales. This, in turn, could hurt palladium prices. Emerging markets will most likely continue to focus on palladium as a cheaper alternative to platinum. All in all, we are optimistic about demand for palladium catalysts. Demand from electronics producers has increased since 2001, and we expect this trend to continue. Demand from this side depends on the overall state of the global economy. Our outlook is one of moderate recovery, so we expect palladium demand from electronics to grow slightly. Investment demand is a rather small component of overall demand, total positions in the futures market not taken into account. The latter are quite large. Any less-than-upbeat news on the global economy could trigger a sharp liquidation of these positions and result in a drop to below USD 650 per ounce. We would not consider this a new trend, but rather an opportunity to buy again to profit from palladium’s cyclical character.
40% 20% 0% 99 01 03 Autocatalysts Dental Jew ellery Other industrial
05 07 09 11 Chemical Electronics Retail investment
Source: Thomson Reuters Datastream
Commodity Research price forecast (USD/oz) Gold
3-month
2013
2014
2015
650
700
725
750
Source: ABN AMRO
Upside to the forecast:
Downside to the forecast:
- Stronger global economy
- Global recession
- Supply disruptions
- Larger-than-expected Russian stock sales
- Risk seeking environment and/or USD debasement
- Larger-than-expected supply
13 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Casper Burgering (+31 20 383 26 93)
Base metals | Aluminium • • •
Conditions in the US have improved; circumstances in Europe are challenging ABN AMRO believes that prices can gain 4-5% from current spot levels in the coming three months Long-term prices expected to remain strong, but oversupply is key issue in global aluminium market
Challenging market conditions in 2012
Historical price Aluminium
In early January, Alcoa, the world's largest aluminium producer, announced
3,500
an increase in its profits over the last quarter of 2012, partly due to company-wide cost savings. Revenues of the US based company, however,
3,000
declined slightly, as a result of relatively low aluminium prices. During 2012,
2,500
there were not many reasons to be cheerful, and market sentiment was generally weak on the global economic turmoil. Last year’s market
2,000
conditions were very challenging: prices increased by only 2.3%, while 1,500
production increased by 3.0% and inventory volume rose by 4.6%. Demand for aluminium was relatively weak in 2012. High energy costs made many
1,000 03
05
07
09
11
plants less profitable, and the market struggled with oversupply. On 11
13
January, the amount of LME inventories in Vlissingen outpaced the
LME-Aluminium 99.7% Cash U$/MT
inventory volume in Detroit for the second time. Since the start of 2013, Vlissingen has an inflow of material, while Detroit inventories are
Source: Thomson Reuters Datastream
decreasing. This indicates that conditions in the US are improving further and circumstances in Europe continue to be challenging.
Supply, demand & stocks
Confidence improves in North America
55,000
14 12 10
45,000
8 6 35,000
4 2 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
25,000
Since our previous Quarterly Commodity Outlook on 25 October 2012, the market started to gain confidence: aluminium prices increased by almost 8%, while total LME inventories declined since the peak on 20 December. In particular, sentiment in the US and China looks promising, while conditions in Europe are not expected to improve very soon. Therefore, ABN AMRO believes that aluminium prices can increase by 4-5% from current spot levels in the coming three months. Despite the decline in inventories, the aluminium market will remain oversupplied. Physical availability of aluminium is expected to remain tight (due to the fact that large stocks are tied up in financing deals), premiums are expected to stay firm during Q1
Stocks (w eeks of consumption), r.axis World production (' 000 tonnes) World consumption (' 000 tonnes)
2013. In the first quarter, the market is expected to be oversupplied close to 800,000 tonnes, which represents almost 7% of consumption.
Long term prices expected to remain strong
Source: Metal Bulletin
Alcoa’s outlook for 2013 was buoyant. The company announced a positive outlook for the North American automotive and commercial building and construction markets. It raised its global aluminium demand growth outlook to 7%, on further improvements in end-using sectors, such as aerospace,
Commodity Research price forecast
car manufacturing and commercial building and construction. The role of
3-month
2013
2014
2015
Aluminium (USD/t)
2,120
2,175
2,250
2,300
Aluminium (USD/lb)
0.96
0.99
1.02
1.04
China in the international aluminium market will remain strong. Aluminium consumption is also expected to remain buoyant. China, however, is expected to expand its capacity further during the forecast period. Hence,
Source: ABN AMRO
we do not expect significant price increases until 2015. Energy costs are expected to stay comparatively high, though. Therefore, high-cost producers will remain at risk in the forecast period because of high energy prices.
Upside to the forecast:
Downside to the forecast:
- Sentiment towards the eurozone improves, resulting in risk appetite
- Further deterioration of Chinese construction
- Significant Chinese smelter output cutbacks
- Further escalation of EU crisis and China economic slowdown
- Increased demand as substitution (for copper and steel)
- New capacity entering the market (India, Middle East)
14 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Casper Burgering (+31 20 383 26 93)
Base metals | Copper • • •
Positive PMI and trade data from China and the aversion of the US fiscal cliff improved sentiment Short term prices are expected to remain strong, led by developments in the US and emerging Asia Long-term demand for copper will remain robust, especially in the US and China
Sentiment improved during Q4-2012
Historical price Copper
The copper price hovered around the USD 7,900/t mark since our previous Quarterly Commodity Outlook, written as of 25 October 2012. In early January 2013, copper reached its peak of USD 8,184/t, which was mainly driven by release of positive PMI and trade data from China in December and political decisions in the US to avert the fiscal cliff. Fundamentally there were also some changes, but they had a relatively small impact on copper price development. First of all, copper inventories increased significantly since our previous Quarterly Commodity Outlook. There was a strong gain in LME inventories (+50%), while stocks at the Shanghai Futures Exchange increased by 6.3%. Global inventories, however, are still relatively low and represent only two weeks of consumption. Also, imported material into China improved. China is the biggest consumer of copper worldwide and remains the key market to monitor. Import demand from China for copper concentrates increased strongly again in November, by more than 15% mom. Including this increase, total copper concentrate imports into China until November were up by almost 18% yoy.
12,000 10,000 8,000 6,000 4,000 2,000 0 03
05
07
09
11
13
LME-Copper, Grade A Cash U$/MT Source: Thomson Reuters Datastream
Supply, demand & stocks
Confident on short-term future
24,000
7 6
22,000
5
20,000
4
18,000
3 2
16,000
1 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
14,000
Stocks (w eeks of consumption), r.axis World production (' 000 tonnes) World consumption (' 000 tonnes)
Macroeconomic expectations for China and the US turned positive during Q4 2012. Market sentiment also improved. In Europe, however, economic expectations are relatively low. During Q1 2013 macroeconomic developments will continue to affect copper prices. ABN AMRO thinks that the global economy is turning up, although the eurozone continues to struggle. A global recovery is led by the US and emerging Asia, on the back of stronger world trade, easing financial conditions and decreasing uncertainty. In most emerging markets, ABN AMRO foresees an acceleration of growth in H1 2013. In addition, the copper market is expected to be in deficit during H1 2013. Volatility in copper prices is expected to remain high, which is partly due to financial markets. Because of the active futures market in copper, prices can easily be affected (positively or negatively) in the short term, regardless of any fundamental developments.
Source: Metal Bulletin
Long term conditions improve further Commodity Research price forecast Copper (USD/t) Copper (USD/lb)
3-month
2013
2014
2015
8,375
8,450
8,550
8,700
3.80
3.83
3.88
3.95
Source: ABN AMRO
In the second half of 2013, the copper market is expected to show a little surplus. The Asian market is well supplied, and this should have an impact on imported volumes. In general, however, the copper market will remain tight until 2015. Inventory levels will remain relatively low, whereas demand will outpace supply. Especially conditions in the US and China (with a respective share of 8% and 41% in world copper consumption) are expected to stay robust, while Europe (18% share in world consumption) will continue to struggle. Long-term demand for copper will remain strong, with an expected recovery in construction demand in the US and China, but also demand from new-end user growth areas (such as the healthcare sector, aquaculture and transportation). Therefore, ABN AMRO expects copper prices to increase until 2015.
Upside to the forecast:
Downside to the forecast:
- Recovery in construction (US, EU, China)
- Risk aversion / need for liquidity increases
- Stronger-than-forecasted Chinese economic performance
- Further escalation of EU crisis and/or ‘cooling off’ Chinese economy
- Rising Chinese copper import requirements
- Funds scaling back their interest in copper as an asset class
15 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Casper Burgering (+31 20 383 26 93)
Base metals | Nickel • • •
Nickel price increased by 7% since our previous Quarterly Commodity Outlook In the short term, sentiment in the US and China will do better and buying activity will pick up Until 2015, demand is expected to increase steadily, which is tied to gradually improving economies
China import demand was sluggish
Historical price Nickel 60,000 50,000 40,000 30,000 20,000 10,000 0 03
05
07
09
11
13
LME-Nickel Cash U$/MT Source: Thomson Reuters Datastream
Normally, during the first months of the new year, the nickel price rallies. The average price increase (since 1993) during January is approximately 6%. From February until May, the price increase softens, and the price stabilises or decreases somewhat from June until December. In recent years, the rally was triggered by buoyant import demand from China ahead of the holiday season. But Chinese import-demand growth was significantly lower in 2012 compared with 2011, which is partly the reason behind the nickel price decrease during 2012. In 2012, nickel production rose by 4.8%. Especially in the Americas, the output increased strongly (more than 18% yoy). However, production in Europe decreased by 5.6%. Yearly production from China gained by almost 10%, which is relatively low from a historic perspective. With world nickel consumption rising by a meagre 2.6% yoy in 2012, the nickel market was in oversupply during 2012. Inventories increased further and represented 10.6 weeks of consumption in 2012.
Buying activity in US and China will increase Supply, demand & stocks 1,900
14 12
1,700
10 1,500
8
1,300
6 4
1,100
2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
900
Stocks (w eeks of consumption), r.axis World production (' 000 tonnes) World consumption (' 000 tonnes) Source: Metal Bulletin
Commodity Research price forecast Nickel (USD/t) Nickel (USD/lb)
3-month
2013
2014
2015
18,100
18,750
20,750
22,000
8.21
8.50
9.41
9.98
Source: ABN AMRO
Upside to the forecast:
Nickel has been added non-stop to LME warehouses during 2012, and inventories increased by 55% from January until December. Due to weak demand, the market was oversupplied. Since the start of 2013, inventories increased further: stock volumes have already gained 5.3%. Due to poor fundamentals and uncertain global economic developments, the nickel price declined by 9% from January until December 2012. However, since 25 October, the release date of our previous Quarterly Commodity Outlook, the nickel price increased by 7% until now and currently drifts between USD 17,000-USD 17,500/t. Market participants in Europe are still cautious and not eager to buy too much material at these volatile prices. Physical demand in Europe will remain relatively poor in Q1 2013, and inventories will rise further in this region. In other regions (US and China), however, sentiment is better and buying activity from car manufacturing, the home appliance sector and the construction sector is doing fairly well.
Strong S/D-developments but oversupply looms Long-term fundamental projections regarding supply and demand are favourable for the nickel price until 2015. Refined nickel consumption is expected to increase by 17% in the period 2012-2015, while nickel production will increase by 15%. The gap between supply and demand will slowly become smaller until 2015, which will result in price support. Global stainless steel output is expected to rise steadily during 2013-2015. This is tied to gradually improving economic conditions in China and the US, but slow economic improvement in Europe. Despite the fact that demand growth outpaces supply growth, oversupply is still looming. The list of new nickel projects remains long. This will result in new capacity becoming operational, but it is difficult to estimate when these projects will deliver output. Downside to the forecast:
- Stainless steel output increases on strong demand
- Funds scale back their interest in nickel
- Supply disruptions and delays in pipeline projects
- Further escalation of EU crisis and/or slowdown Chinese economy
- Increase in Chinese imports due to ETF demand
- Substitution by stainless steel with lower nickel content
16 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Casper Burgering (+31 20 383 26 93)
Base metals | Zinc • • •
Stocks at LME are at record high, standing only at 1.2% below its historic peak level of October 1994 In the US and China, strengthening data from major end using sectors will support market further We expect sentiment to remain good in the forecast period and stakeholders remain confident
Zinc outperformed other base metals in 2012
Historical price Zinc
In 2012, zinc price was an out performer compared to price developments in aluminium, copper and nickel. From January 1st until December 31st 2012, zinc price managed to increase by 12.2%, while price evolution for aluminium, copper and nickel was respectively 2.3%, 4.2% and -9.2% in the same period. Zinc mine output increased by 9.3% y-o-y in the first 11 months of 2012, while refined zinc supply was down by 3.4% and demand decreased by 3%. Both Chinese demand and demand from Europe contracted by respectively 3.2% and 7.8% in the same period. Stocks at LME warehouses are at record high, standing currently only at 1.2% below its historic peak level of October 1994. In the last quarter of 2012 production is expected to outpace consumption further and LME inventories will increase more. Most of this refined material at LME warehouses is tied up in financial deals (which is also the case in other base metals), making physical metal availability limited and thus making prices relatively strong. As we noticed in our previous Quarterly Commodity Outlook, aluminium and zinc prices have been following practically the same path since June 2012.
5,000 4,000 3,000 2,000 1,000 0 03
05
07
09
11
13
LME-SHG Zinc 99.995% Cash U$/MT Source: Thomson Reuters Datastream
Supply, demand & stocks
Fundamental concerns, but demand improves 14
14,000
12
13,000
10
12,000
8
11,000
6
10,000
4
9,000
2
8,000
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
15,000
Stocks (w eeks of consumption), r.axis World production (' 000 tonnes) World consumption (' 000 tonnes) Source: Metal Bulletin
Confidence on long term
Commodity Research price forecast Zinc (USD/t) Zinc (USD/lb)
In 2012, demand for zinc has been weak in most parts of the world. The two major end using sectors (car manufacturing and construction) showed weak activity, especially the construction sector. The weakness in demand was caused by the slowdown in activity in the EU, the US and China. Demand for zinc is still subdued, and fundamentally there seems to be little reason for optimism. Oversupply is a structural concern. However, we think zinc demand will improve during the first quarter of 2013, especially in the US and China. In these countries we have already witnessed strengthening economic data from major end using sectors. In the US, General Motors and Toyota announced their plans for further investments for the expansion of manufacturing capability. Also US housing starts increased strongly in December 2012 and reached the highest level since June. Car sales in China increased strongest in the last quarter of 2012, resulting in a total sales increase of 4.2% y-o-y during 2012. Although industrial production growth in China slowed during 2012 compared to 2011, the trend in industrial output is up since August 2012. We expect this trend to continue in the next three months.
3-month
2013
2014
2015
2,075
2,100
2,250
2,350
0.94
0.95
1.02
1.04
Source: ABN AMRO
According to the International Lead & Zinc Study Group (ILZSG) demand for zinc will recover in 2013 and consumed volumes is expected to increase by 3.8%. Mine production and metal supply will increase respectively by 2.7% and 4.8% y-o-y. Physical availability of zinc will remain low and this keeps prices elevated. We expect sentiment to remain good in the forecast period and buyers and other stakeholders are confident about business prospects going forward. Until 2015 the macroeconomic outlook will improve and this will provide a solid base for zinc market conditions.
Upside to the forecast:
Downside to the forecast:
- Demand recovery in major zinc-consuming countries
- Sharper weakening of Chinese housing/construction sector
- Rising galvanised sheet use in China
- Substitution of zinc with aluminium in e.g. automotive die-casting
- Increasing raw materials prices and labour costs
- Severe position liquidation
17 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Casper Burgering (+31 20 383 26 93)
Ferrous metals | Steel (global HRC) • • •
Rebound in steel prices in Europe, China and the US in the fourth quarter of 2012 Short-term conditions in Europe remain weak; China and the US continue recovery Demand by end users is set to improve, but supply-side issues continue to hamper the market
Slight improvement in the fourth quarter
Historical price steel (USD/t) 1,000
800
600
400 2010 China Europe
2011 2012 Lat. Am US
2013 CIS GLOBAL
Source: Thomson Reuters Datastream
The year 2012 is best characterised by weak steel demand, low input prices and overcapacity across the globe. Liquidity in general was also a constraining factor for the industry, because buyers and other stakeholders had relatively limited access to credit facilities during 2012. Nevertheless, world steel production in 2012 increased by 1.3% y-o-y. The pace of steel output growth was limited, however, mainly because of the strong decrease in output across Europe. In other parts of the world (such as the US, China, India and Russia), output increased strongly, especially in India (6.2% in 2012 y-o-y). Conditions in the US steel market conditions improved somewhat during 2012, resulting in output growth in 2012 of 2.7% y-o-y. On 19 November, the global HRC steel price reached its 2012 trough of USD 559/t. To date it managed to recover 5%. This recovery was mainly driven by a rebound of prices in Europe and the US, and an uptick in China. Stronger raw materials prices in general were the main reason for the steel price increases. In other major regions steel prices remained mostly flat.
Promising first quarter outlook Steel production & world trade (y-o-y % change) 40% 30% 20% 10% 0% -10% 2010
2011 2012 China steel production World (ex. China) steel production World trade
In December 2012, most major manufacturing PMIs were generally positive, with readings above the neutral 50-mark. The European and Japanese PMIs, however, deteriorated further to below 50, due to a decline in both output and new orders. For the coming three months we expect market conditions to remain weak, especially in Europe, because of uncertainty about economic developments. In this situation, European steel end users are reluctant to buy steel products and prefer to avoid high stock positions. Especially the construction sector across Europe continues to disappoint. Mills focusing on construction steel feel the pressure of lower margins. Due to the limited demand, steel mills are forced to cut costs and capacity further. In other regions market circumstances for steel are relatively better. In China, passenger car sales in 2012 increased by 4.2% y-o-y, whereas in the US they increased by 18.8% y-o-y in the same period. Construction in both countries is also showing signs of further improvements.
Overcapacity remains problem in the long term Source: IISI, Thomson Reuters Datastream
Commodity Research price forecast (USD/t) Steel (HRC, global)
3-month
2013
2014
2015
600
590
560
540
Source: ABN AMRO
Conditions in Europe will definitely remain uncertain in 2013, due to the debt crisis. Economic growth is relatively slow in Europe and steel mills must prepare themselves for more headwind. Hence, further production cuts and increased merger activity are likely. Conditions in Europe should eventually (from 2014 onward) improve on world trade growth and reduced uncertainty. Market participants in other parts of the world are more optimistic. Demand by steel end users is set to grow, but conditions on the supply-side continue to hamper the market. Without significant structural capacity cutbacks (especially in China) or very strict producer discipline, overcapacity is expected to have a downward effect on steel prices in the long term. ABN AMRO therefore expects steel prices to decrease further in the forecast period, even if they will remain high in a historic perspective.
Upside to the forecast:
Downside to the forecast:
- Meaningful stimulus packages by governments worldwide
- Strong decline steel demand activity in China
- Strong pick-up in steel demand from key sectors in EU
- Escalation of EU crisis and/or strong cooling off Chinese economy
- Permanent shut-down of Chinese capacity (small mills)
- Continued oversupply of steel and limited producer discipline
18 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Casper Burgering (+31 20 383 26 93)
Ferrous metals | Iron ore (fines) Since November 2012, more than 60% rebound in iron ore prices ABN AMRO expects prices to stay at a relatively high level in the next 3 months Oversupply in iron ore will have a softening effect on prices in the long term
• • •
Strong price rally since November 2012
Historical price iron ore (fines) 210 190 170 150 130 110 90 70 50 2008
2009
2010
2011
2012
2013
Steel China Iron Ore Fines U$/MT Source: Thomson Reuters Datastream
The downturn in the iron ore market started mid 2011. Miners were forced to cut costs and scale back their investment initiatives. Prices fell on the economic downturn and weak steel consumption. Some high-cost iron ore operations were closed down and development projects (both green- and brownfield) were mothballed in some instances. On 19 November, iron ore prices reached their 2012 trough of USD 96/t. Since then, they have rallied again and increased by 60.4% already. The strong gain was triggered by a revival in demand from large steel mills in China, mostly for restocking purposes. Total Chinese imports reached 743.55 million tonnes in 2012, an increase of 8.4% compared to 2011. The price increase is also the result of supply issues. Normally, China sources most of its iron ore from Australia, Brazil and India. But since the Indian government has banned the export of iron ore fines (for the purpose of domestic use), Chinese imports from South Africa, Iran and Ukraine have increased significantly.
Prices may soften, but are likely to stay elevated Iron ore trade (y-o-y % change) 250% 150% 50% -50% 2010
2011
2012
Australia export China import
2013
Brazil export
Source: Thomson Reuters Datastream, Clarksons SIN
Commodity Research price forecast (USD/t) Iron ore (fines)
3-month
2013
2014
2015
139
136
119
115
Source: ABN AMRO
Year-end rallies in iron ore prices are quite common in a historic perspective. This is partly caused by stronger Chinese demand (mostly for stock building purposes), ahead of the Chinese New Year in February. Usually, this increase is short-lived and soon after the rally, prices soften again. Even though this is also likely to happen this year, we expect that prices will remain relatively high, as a result of supply side problems. Supply disruptions are quite common during the first quarter, as tropical cyclones hit West Australia (flooding in Queensland) and heavy rains batter Brazil. In such conditions mine production will be interrupted and shipments delayed. Apart from that, the current ban on iron ore exports from India will result in limited availability of iron ore for seaborne exports. This will limit any potential increase in dry bulk shipping in the short term, and thus keep iron ore prices elevated. Traders therefore hold on to their current supplies, hoping that prices will rise even further. ABN AMRO expects that iron ore prices will soften in the next 3 months, but remain elevated.
Oversupply will hurt iron ore prices in the long run Despite concerns about the economic environment, iron ore demand will increase further during the forecast period, but the pace of growth will be much lower. China will remain an important consumer of iron ore and is expected to continue buying high volumes of steel making raw materials. The strong gain in prices since November 2012 is not sustainable, however. Although many iron ore projects have been delayed or postponed during the macro-economic downturn, supply will remain abundant until 2015, given the number of new sources coming to the market. Moreover, steel capacity is expected to be cut further, so oversupply in iron ore should also be taken into account. This mismatch between supply and demand will persist in the forecast period and will have a softening effect on prices.
Upside to the forecast:
Downside to the forecast:
- Infrastructural problems, unfavourable weather conditions
- Shut-down of steel capacity (small mills in China)
- Expansion of government policies limiting total exports
- Escalation of EU crisis and/or strong slowdown Chinese economy
- Government coal stockpiling strategies
- New mining capacity entering the market
19 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Casper Burgering (+31 20 383 26 93)
Ferrous metals | Coking coal Price reached 2012 trough on 27 November, but managed to gain strength again Price may increase by 2-4% from current levels in the next three months Future capacity in the forecast period should be sufficient to meet demand from the steel sector
• • •
Nose dive from February until November
Historical price coking coal 500 400 300 200 100 0 2008
2009
2010
2011
2012
2013
Aus. Hard Coking spot price (USD/t; fob)
Source: Metal Bulletin, Thomson Reuters Datastream
The price of coking coal dropped non-stop from February 2012 until November 2012, declining more than 35%. In the first few months of 2012, imports from China increased strongly. During this period, prices softened somewhat (on the back of abundant supply and weakening demand), but remained relatively high (> USD 200/t). In July 2012, conditions turned: demand started to decrease more strongly and so did prices. Prices reached their 2012 trough on 27 November, but gained strength since then: prices increased by 14.3% due to an uptick in demand from China. In 2012, imports of coking coal into Japan dropped by almost 4%. China, on the other hand, increased its import volumes of coking coal by more than 20% y-o-y in the same period. And because Australia, the world’s biggest coal exporter, saw its export volume increase by almost 9% (until November), this indicates that China is shifting away from its overseas sources (seaborne route) and increasingly turns to suppliers closer to home (land borne route from Mongolia).
Price impulse through uptick in demand Coking coal international trade (y-o-y % change) 150% 100% 50% 0% -50% 2010
2011
2012
China import
2013
Japan import
Australia export Source: Thomson Reuters Datastream, Clarksons SIN
For their high quality coking coal, high volume steel producing countries will stay dependent on imports from resource-rich countries such as Australia, North America and Mongolia. In 2012, global coking coal trade was driven by strong import growth, mostly from China and India. Going forward, the Asian region will remain the key driver of this market, mainly because of the many planned infrastructural and construction projects. China, in particular, is the relevant country that should be followed closely. A further boost of urbanisation initiatives in the near future by the Chinese government seems most likely. India is currently also stimulating domestic consumption of steel raw materials, as high volumes of steel are needed for the upcoming infrastructural and construction projects. Imports from the EU are likely to decline further in the coming months. In response to the current uncertainty about macro-economic economic developments, steel mills in the EU market will likely give more attention to cost reduction and capacity cutbacks. All in all, ABN AMRO expects that coking coal prices could increase by 2-4% from current levels in the next three months.
Long-term prices will maintain at relative high level Commodity Research price forecast (USD/t) Hard coking coal
3-month
2013
2014
2015
166
173
165
160
Source: ABN AMRO
The global coking coal trade will increase further during 2013 and prices are expected to stay firm. Australia’s Bureau of Resources and Energy Economics) expects that trade will increase by 5% y-o-y, demand from China and India growing the strongest. Exports from Australia will increase by 11%, while exports from the US are forecasted to decrease by 5%. ABN AMRO expects that existing and future capacity in the forecast period should be sufficient to meet demand from the steel sector. Prices are likely to ease until 2015, but will remain relatively high in a historic perspective.
Upside to the forecast:
Downside to the forecast:
- Supply problems (weather-related) in major supplying countries
- Stronger decrease in steel demand
- Other coal supply difficulties (strikes, export limits, regulations, etc.)
- Escalation EU crisis and/or stronger ‘cooling off’ Chinese economy
- Government coal stockpiling strategies
- Steel mills switching to (cheaper) alternatives (PCI)
20 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Mathijs Deguelle (+31 20 344 21 79)
Agriculturals | Wheat Rising demand will keep exporter stock levels under pressure in the coming years Feed usage will decline in 2012/2013, but grow in future seasons In the short term, prices will remain high; after 2013 they are likely to decline
• • •
Historical price wheat
Wheat prices eased somewhat in Q4 2012
1,000
In the last quarter of 2012, wheat prices eased somewhat, coming down from a high in July. Better-than-expected harvests began easing prices in August and September, but the real depreciation did not start until November, when US projected supplies rose and, more importantly, Ukraine’s expected export ban was avoided. Prices declined from 883cts a bushel, as of 1 November, to 766cts a bushel at the start of this year. The USDA projects global wheat production to reach 654.3 million tonnes in the 2012/2013 season, down by 0.8m tonnes from December’s forecast and 40.3 million tonnes lower than the record production seen in 2011/2012. The lowered production forecasts were mostly caused by heavy rainfall in Argentina, reducing yields by 0.5m tonnes, and lower-than-expected yields in Russia. Despite an increase in world plantings, adverse weather has caused a reduction in harvested area and yields in 2012, with 2013 off to a poor start in winter wheat as well. There is still time, however, for the crops to recover. Projected US wheat ending stocks for 2012/2013 were lowered by 38 million bushels this month, to 716 million bushels. This is a decrease of 27 million bushels compared with the 2011/2012 season. The International Grains Council (IGC) projects world ending stocks for the 2012/2013 season at 174m tonnes, a decrease of 22m tonnes compared to the 2011/2012 season and the lowest level in five years.
900 800 700 600 500 jan
mrt
mei
jul
sep
nov
jan
Wheat, No.2 Hard (Kansas) Cts/Bu Source: Thomson Reuters Datastream
Wheat production and consumption 800
x 1 million tonnes
700 600
Prices to remain relatively high on short term 500 400 2004/05
2008/09
Production
2012/13
Consumption
Source: IGC
Commodity Research price forecast (Cts/bu) Wheat
3-month
2013
780
770
2014
2015
-
-
Source: ABN AMRO
Global wheat usage is projected to contract in the short term. According to the Economists Intelligence Unit (EIU), global consumption for the 2012/2013 season will amount to 677 million tonnes, down by 2.1% compared with 2011/2012’s 691 million tonnes. A significant drop is expected in feed wheat consumption. Smaller EU and Ukraine crops will result in a drop in demand to 129m tonnes, which, while sharply below 2011/2012 record of 147m tonnes, is still above the five-year average of 115m tonnes. Due to lower feed usage, EU wheat demand is projected to reach a five-year low, making China the world’s largest consumer. The world’s developing countries, however, will spur demand for wheat in the coming years, as population growth and rising sales of flour-based convenience foods continue to underpin world food wheat consumption. Strong growth in consumption, not only in 2012/2013, but also in the following seasons, is expected, especially in India, which is the world's second-largest user of food wheat. All in all, ABN AMRO expects global demand to rise slightly in the coming years, keeping pressure on stock levels. Production will rise to meet demand, with a projected 4% increase yoy in 2013/2014, enabling stocks to recover from 2014 onward. Increasing demand, however, will keep export stocks under pressure. In the short term, market fundamentals seem price supportive. ABN AMRO expects prices to ease slightly over the course of 2013, before a larger drop in 2014, caused mainly by early 2013’s high comparison base.
Upside to the forecast:
Downside to the forecast:
- Slow recovery of the world economy boosts demand
- Russian’s output rising due to more favourable weather conditions
- Current ratings of US 2013/2014 winter wheat are historically low,
- Cheaper supplies from India becoming more readily available
which may impact yields.
21 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Mathijs Deguelle (+31 20 344 21 79)
Agriculturals | Corn End-of-year stocks for the 2012/2013 season will be historically tight Demand under pressure due to high prices World production expected to make a rebound in the coming year
• • •
Global production forecasts revised upwards
Historical price Corn 800 700 600 500 400 300 200 100 03
05
07
09
11
13
Corn No.2 Yellow Cents/Bushel Source: Thomson Reuters Datastream
After reaching a high in August last year, corn prices started declining in September. They were pressured by waning demand, due to high prices and positive news about soybean harvests. Expectations for a strong rebound in production in 2013 led to a sharp price drop in December. Upward revisions for China and the US, coupled with brighter prospects for Argentina, led to global production for the 2012/2013 season being currently forecast at 845 million tonnes. On a yearly basis this is a decline of 4%, but compared to the previous forecast it represents an increase of 2%. An upward revision of world consumption to 863m tonnes means that ending stocks will be especially tight at an expected 112m tonnes. This is 20m tonnes less than the 2011/2012 ending stocks. Nevertheless, this would still mean that for the first time since 1995/1996 season, global demand would fall year on year.
Tight balance between supply and demand Corn production and consumption (x million metric tons)
1,000 800 600 400 200 0 06/07
09/10
Production
12/13 Consumption
Source: IGC
Commodity Research price forecast (USDcts/bushel) 3-month
2013
740
720
Corn
Source: ABN AMRO
2014
2015
-
-
In the short to medium term, we expect prices to remain strong, due to the very tight balance between supply and demand. Disappointing harvests in the northern hemisphere will ensure that US exportable supplies will be much lower than average. While Brazil, Argentina and Ukraine are expected to be able to meet most of the global demand, this depends heavily on a favourable outcome in the southern hemisphere. While weather conditions led to a poor start, especially in South America, there is time yet for crops to recover. China, on the other hand, had higher-than-expected yields, helped by an increase in acreage. With prices developing in line with our expectations, i.e. staying high in the short to medium term, this would mean that an increase in domestic supplies should suppress the need for more imports in the short term. ABN AMRO expects demand to decline in the 2012/2013 season, mostly driven by lower demand for feed, due to current price levels. Especially in the US and the EU, reduced livestock will see feed use decrease sharply, compared with last year. Industrial use, mostly for the production of fuel ethanol, will also decline compared to last season. This will be led by the US, where after years of rapid growth, fuel ethanol output appears to be declining. World industrial demand for corn will dampen as well. ABN AMRO expects world production to rebound sharply next year, as farmers respond to current high prices, with average yields returning to more trend-like levels. While we expect to see a return to crop rotation in the US, which could negatively impact total corn acreage, current prices will most likely ensure that farmers maintain high concentrations of corn. This would mean that in the longer term, prices will ease again, even though the larger crop that is forecasted for the 2013/2014 season, will also push up demand. All in all, we expect the market to regain a more stable equilibrium from 2014 onwards, with current pressure on prices easing.
Upside to the forecast:
Downside to the forecast:
- EU & Canadian ethanol production rising more than anticipated
- Growth in industrial demand in China losing momentum
- Argentinean Biofuels Programme planning more new plants
- Brazil forecasted to have record harvests due to increasing acreage
22 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Mathijs Deguelle (+31 20 344 21 79)
Agriculturals | Soybeans Despite a decline in the US, global production reaches record levels China forecasted to make up 30% of world demand on back of increasing feed demands Markets to reach comfortable equilibrium with increasing supplies matching demand
• • •
Global soybean output forecasted at record levels
Historical price soybeans 1,800 1,600 1,400 1,200 1,000 800 600 400 200 03
05
07
09
11
13
Soyabeans, No.1 Yellow C/Bushel Source: Thomson Reuters Datastream
Soybeans production and consumption (x million metric tons)
After having reached a record high in August last year, when fears about the worst expected yield since 2003 held markets in its grip, soybean prices strongly declined in Q4 2012. On the back of better-than-expected yields, the global output forecast for the 2012/13 season currently stands at 267 million tonnes, matching a record set two years ago, despite lower US output than last season. According to the US Department of Agriculture’s November forecast, US production will total 80.9m tonnes, up by 3.1m tonnes from its previous forecast, but still 3m tonnes below last year’s results. This means that the year-on-year expansion in output is mostly dependent on expectations of record crops in South America, which are set to be harvested in the first half of 2013. Demand is still high, however, and is not expected to decline any time soon. Indeed, US export data through early December showed record levels at 648 million bushels. This pace is unlikely to continue very long, however, as a steep decline in new sales and limited availability should start slowing down US exports. Exporters, in particular those in South America, will respond to the growing demand, with Russia and Ukraine also starting to produce soybeans for export purposes.
300
South American producers stepping up
250
As a result of the promising 2012/2013 season output figures and the favourable stock position forecasted for the end of the season, ABN AMRO expects prices to slightly fall during the course of 2013. While demand from China, the world’s largest consumer, will steeply increase on the back of stronger demand for animal feed, domestic demand in the US, the world’s second-largest consumer, is expected to fall sharply this season. Despite the recent upgrades in yield prospects, 2012/2013 production is disappointing. This means a limited availability for export and domestic use. In the longer term, we expect US production to recover, given the likelihood that prices, although less strong, will remain attractive, and weather conditions will be more favourable than last year. Coupled with South American exporters becoming more important suppliers to global markets, with Brazil, in particular, increasing its exportable supplies in reaction to increasing demand from China (as US exports are limited), and with Ukraine increasing its soybean production to replace other crops more susceptible to winterkill, we expect supplies will be abundant in coming years. Demand will also rise, especially in China, which is projected to make up 30% of global demand in 2014/2015. Markets will remain in a comfortable equilibrium, however, which will be reflected in price levels. All in all, ABN AMRO expects lower prices, not only in 2013, but also in the seasons following, as the increase in supplies will outpace the increase in demand.
200 150 100 50 0 06/07 07/08 08/09 09/10 10/11 11/12 12/13 production
consumption
Source: IGC
Commodity Research price forecast (Cts/bushel) 3-month
2013
2014
2015
1,440
1,390
-
-
Soy
Source: ABN AMRO
Upside to the forecast:
Downside to the forecast:
- Weather conditions in South America deteriorate, threatening
- China’s production is ramped up to decrease the country’s
harvests
dependence on imports
- Feed demand in Southeast Asia increases sharply
23 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Hans van Cleef (+31 20 343 46 79)
Agriculturals | Sugar The 2012/2013 crop was better than expected, mainly due to favourable weather in November An even bigger harvest is expected in 2013/2014, while demand is picking up only slowly ABN AMRO expects sugar prices to trade around USDc 19/lb in 2013
• • •
High production kept pressure on sugar prices
Historical price sugar 35 30 25 20 15 10 5 03
05
07
09
11
13
Raw Sugar-ISA Daily Price c/lb Source: Thomson Reuters Datastream
Sugar production and consumption
Prices to remain low until demand picks up
200
x 1,000 tonnes
180 160 140 120 100 2002/03 2005/06 2008/09 2011/12 Production Consumption
Source: ISO
Commodity Research price forecast (Cts/lb) Sugar
Unica revised its estimate for Brazilian 2012/2013 sugarcane output to 532 million tonnes from 518.5 million tonnes. Brazilian sugar output was raised to 34 million tonnes from 32.7 million tonnes. This is higher than the 2011/2012 harvest, but below the 2010/2011 harvest. As a result of the high production, sugar prices (benchmark ICE Sugar NO11 2nd futures contract) remained under pressure, but stayed within a range of USDc 18.50 – 20.00/lb in Q4 2012. As a result, the downtrend that started after Q1 2011 continues. Demand remained relatively weak. The ~2% rise was the result of better crops and low prices and was almost fully covered by increased demand in emerging markets. With sugar prices trading above the USDc 17/lb ethanol parity level, sugar production got priority. The resulting oversupply was partly used for ethanol production after all, mainly driven by the strong rise in ethanol import demand from the US (which accounts for around 85% of the Brazilian ethanol exports). The strong rise in ethanol exports to the US is the main reason that sugar prices did not weaken even further.
3-month
2013
2014
2015
18.50
19.00
-
-
Source: ABN AMRO
Q1 is the final quarter of the 2012/2013 harvest season. Normally, Q1 is relatively quiet, but this time it is different. Since the Brazilian South Centre harvest (accounting for approximately 90% of Brazil’s sugar and ethanol production) was exceptionally strong – mainly due to favourable weather conditions in November – mills were producing sugar into January. The International Sugar Organization (ISO) expects a 6.18-million-tonnes sugar surplus this crop year. Both Unica and the Economist Intelligence Unit (EIU) expect Brazilian production to increase even further in the 2013/2014 crush (585 million tonnes, Unica), similar to what the USDA predicts for US sugar production. As a result, sugar prices are expected to remain under pressure, as demand is picking up only modestly, while supply is ample. The fact that sugar prices are near the Brazilian production cost price of approximately USDc 18.00/lb does not automatically lead to lower production in Brazil, as farmers have a longer scope than just the current crop year. The Brazilian government is expected to raise the required amount of ethanol within the gasoline blend (from 20% to 25%) sometime around June. As a result, domestic ethanol production is expected to rise, even though sugar prices are trading above the ethanol parity level. However, this rise in ethanol production is likely to be modest and only a few percentage points. The impact on sugar, therefore, should not be overestimated. Market participants are positioned with exceptionally large short positions. Forecasts, however, are set for ideal weather conditions. When news about a shift in the weather forecast reaches the market, it could trigger a reaction that would probably lead to higher sugar prices as a result of short covering. Such a reaction was already spotted after news about a cold front in China. In Q1, we expect sugar prices to remain around the current levels of USDc 18.50/lb, due to large production and lower Chinese imports. In the longer run, the surplus is expected to remain. A gradual decline can be expected though when global economic growth picks up speed, leading to slightly higher sugar prices.
Upside to the forecast:
Downside to the forecast:
- Weather-related production risks in big production areas
- Supplies become even larger than forecasted
- Unexpected rise in Chinese imports
- Economic recovery takes longer
- Increase of ethanol production is even bigger than expected
24 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Thijs Pons (+31 20 628 64 37)
Agriculturals | Coffee Another bumper crop in Vietnam in 2011/2012 Robusta certified stocks will continue to decrease Robusta price will remain supported whilst Arabica will remain weak in Q1
• • •
Historical price coffee
Production surplus after several years of deficit
300 250 200 150 100 50 0 03
05
07
09
11
13
Coffee-Brazilian (NY) Cents/lb Source: Thomson Reuters Datastream
Coffee: production and consumption 160 140 120
x 1 million bags
100 80 60 40 20 0 2003/04
2006/07
Production
2009/10
2012/13
Consumption
Source: USDA
Commodity Research price forecast (Cts/lb)
Coffee
3-month
2013
150
140
2014
2015
-
-
Source: ABN AMRO
In 2012/2013, global coffee output is set to increase by 4.8% to 151.3 million bags (source: USDA). Brazilian production will rise to a level of 55.9 million bags which will be a record for an on-year in the Brazilian biennial Arabica production cycle. Vietnamese Robusta production has declined after the bumper crop in 2011/2012 but remains significant. Last season’s coffee production was extremely good and massively underestimated by traders and analysts alike. Excellent fertilization and general husbandry resulted in impressive yields, while new coffee areas and new high-yielding hybrids came into production. In 2012/2013, global coffee consumption is expected to increase slightly in line with the trend. Consumption growth is mainly attributable to increasing consumption in exporting countries, as well as in other emerging markets, while the traditional, developed markets are likely to show a slightly decreasing consumption, due to economic developments and greater market saturation. The global consumption balance between Arabica and Robusta has seen a shift towards the cheaper Robusta. Roasters have rebalanced their blend profiles to use less costly Robusta, which has resulted in a 6% hike at the expense of the more expensive Arabica. In addition, Robusta has the largest market share in emerging markets. According to global production and consumption forecasts, 2012/2013 will end with a production surplus, after several years of deficit. The Arabica surplus will be the larger, whereas the Robusta surplus will be small, if at all. Global stocks will recover, but will remain at the lower end of the recent range.
Price differential is narrowing In 2013/2014, global production will increase. The Brazilian crop is expected to decline, due to it being an off-year in the production cycle. Nevertheless, flowering is good and early estimates have been set high. Assuming good weather conditions, Brazilian production will be above trend. Vietnamese production will continue to improve due to new areas taken into production and the good husbandry techniques. In the long term, global production will increase, due to ambitious expansion plans in many coffee-producing countries. Global consumption is likely to maintain its trend growth. In the traditional markets, consumption will remain relatively static, due to macroeconomic developments. There is strong potential for growth in exporting countries and emerging markets. Certified Robusta stocks are declining and are at multi-year lows. They will therefore be less able to act as a buffer against potentially high-priced fresh origin stocks. In 2013/2014, Robusta stocks may increase slightly, but this will depend on whether the increased Robusta demand is sustainable. Certified Arabica stocks are increasing, due to the weakened Arabica market. In 2012, the differential between Arabica and Robusta prices narrowed, due to market fundamentals. Robusta prices fell by 5.8%, while Arabica fell by around 36%. We expect Robusta prices to stabilize in Q1 2013, due to the almost balanced supply/demand figures. With Robusta stocks at a low level, there is almost no potential for further downward price movements. Arabica prices will decline, due to increasing stocks.
Upside to the forecast:
Downside to the forecast:
- Coffee production’s sensitivity to weather conditions
- Downturn in the global economy
- Speculative short position in NY Coffee
- Underestimation of Vietnamese crop
25 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Thijs Pons (+31 20 628 64 37)
Agriculturals | Cocoa Despite a production deficit, global stocks are high Ivory Coast cocoa sector successfully reformed Cocoa prices to remain at current levels
• • •
Historical price cocoa
2012/2013 production deficit
4,000
In 2011/2012, global grindings were almost flat at 3.921 million tonnes (source: ICCO). Grindings at origin increased to 1.716 million tonnes. In 2012/2013, global grindings are anticipated to grow slightly, even with European demand in decline, due to steadily growing demand from North America and developing countries. In Asia for example, cocoa processing in Malaysia, Singapore and Indonesia increased by 2.8% in Q4 2012. During the same period, grinding in Europe declined by 6.2% due to poor grinding margins and the economic downturn. Processors worked off heavy stocks. In North America grinding rose by 0.95% in Q4 2012, the first increase since Q4 2011. In 2011/2012, global production decreased by 6.1% to 4.052 million tonnes. Cocoa production suffered due to less favourable weather conditions in West Africa and outbreaks of disease. In 2012/2013, production is expected to decline slightly. Production in Ivory Coast is forecast to decrease, despite weather conditions being favourable during the crucial growing phase for the main crop season. The effect of a prolonged Harmattan wind on the mid-crop is still to be seen. In Ghana, production is expected to decline, due to a lack of rainfall during the growing season. This decline comes despite investments in the sector, such as the rejuvenation of old trees by new high-yielding hybrids and increasing use of fertilisers. The combined production of Ivory Coast and Ghana amounts to 58% of global output. Prospects for production in other West African countries are mixed. In 2011/2012, the production surplus of 90,000 tonnes brought the end-of-season stocks to 1,864,000 tonnes, or 47.5% of total world grindings. Stocks and the stock-to-use ratio are currently at historically high levels. In 2012/2013, as production is expected to decrease slightly and global grindings are expected start to recover, we expect a production deficit of only 80,000 tonnes.
3,500 3,000 2,500 2,000 1,500 1,000 03
05
07
09
11
13
Cocoa-ICCO Daily Price US$/MT
Source: Thomson Reuters Datastream
Cocoa beans production and consumption 5
x 1 million tonnes
4 3 2 1 0 01/02 03/04 05/06 07/08 09/10 11/12 Production Grindings
Successful cocoa sector reform in Ivory Coast
Source: ICCO
Commodity Research price forecast (USD/t) Cocoa
3-month
2013
2014
2015
2,300
2,500
-
-
Source: ABN AMRO
In 2012, the Ivory Coast reformed its cocoa sector significantly. The government launched a series of auctions to sell a portion of its 2012/2013 crop as part of its plan to overhaul the cocoa industry. The reform included the introduction of a fixed farm gate price and forward selling via auction. The haste with which the new system was introduced, with forward sales occurring at the same time as the sale of the 2011/2012 crop, and the lack of clarity about the reform process, put off many at the time. Since its launch, however, farmers and traders have appeared to embrace the new system, and it is proving more successful than initially expected. Cocoa arrivals, although 11% down at the end of December, are flowing smoothly. The quality of beans arriving at warehouses for export is improving, based on fears of rejection. In 2012/2013, the major factors driving cocoa prices will be the production deficit, the success of the Ivory Coast cocoa-sector reform and the global stock situation. In Q1 2013, cocoa prices will remain trading at current levels. The marketing of the 2013/2014 crop has already begun. Origin-related hedging intended to cap significant increases and carry-over stocks from the past two years suggest limited upside potential.
Upside to the forecast:
Downside to the forecast:
- Cocoa production’s sensitivity to weather conditions
- Downturn in the global economy
- High vulnerability of the cocoa crop to diseases
26 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics Thijs Pons (+31 20 628 64 37)
Agriculturals | Cotton In 2012/2013 global stocks are at a record level In 2013/2014 global stocks will decline, due to decreasing production and increasing mill use Chinese cotton policy is the main driver for cotton prices in 2013
• • •
Historical price cotton
Stock-to-use ratio at high level
250
In 2012/2013, global cotton production will decrease by 4.4% to 26.08 million tonnes (source: ICAC). Planted areas in the main cotton-producing countries are declining, due to lower cotton prices and increased planting of other crops, such as corn and soybeans. The average yield remains stable. Despite weak economic developments globally, cotton mill use is projected to increase by 3.1% to 23.50 million tonnes globally, as a result of lower prices. Spinners are switching back from manmade fibres and blends to cotton. In 2011/2012, the global cotton trade increased sharply, driven by large imports from China. China implemented a minimum cotton support price and started to rebuild its strategic national reserve at the same time. In the current season, the global cotton trade is decreasing, due to lower imports by China. Due to the large Chinese purchases for its national reserve, supply to Chinese mills is tight. The competitiveness of the Chinese textile industry is falling, due to high domestic cotton prices. Forecasts for 2012/2013 global production and consumption point to a production surplus of 2.58 million tonnes. Global stocks are expected to increase by 18% to 16.62 million tonnes, of which 42% are held in China and thus not free on the market. Global stocks are at record levels. The stock-to-use ratio is increasing and has reached its highest level (0.71) since the end of WWII. In 2012/2013, the main drivers of the international cotton market are China’s purchases to support the minimum cotton price and to rebuild its national reserve, and increasing stocks, which are at a historically high level.
200 150 100 50 0 03
05
07
09
11
13
Cotlook ' A' Index (CFR FE) UC/lb Source: Thomson Reuters Datastream
Cotton production and consumption
x 1 million tonnes
30
20
10
China’s cotton policy will remain an important driver 0 2007/08 2009/10 Production
2011/12 2013/14 Consumption
Source: ICAC
Commodity Research price forecast (USDc/lb) Cotton
3-month
2013
80
65
2014
2015
-
-
In 2013/2014, global production is forecast to decline by 11% due to a decreasing cotton-planting area and lower cotton prices. Cotton is less competitive for farmers than other crops. Global mill use is forecast to increase by 3%, assuming a recovery of the global economy, driven by South Asia. Long-term cotton consumption will grow moderately, driven by population and income growth. Production and consumption forecasts point to a production deficit, and global stocks to decrease by 6%. In 2012, cotton prices were high, despite the large global stockpile. Cotton prices are supported by Chinese cotton policy. In 2013, Chinese purchases will continue until the end of March. In Q1 2013, cotton prices will be stable. The principal issues regarding prices in Q2 2013 will be China’s actions on the international cotton market and how it manages its large national reserve. Prices will decline when China abolishes its cotton policy.
Source: ABN AMRO Upside to the forecast:
Downside to the forecast:
- Weather-related problems in the main cotton-producing countries
- Chinese policy regarding the large national reserve - Downturn in the global economy
27 | Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics
Macro-economic data | Leading indicators supporting commodity price forecasts Macro-economic forecasts ABN AMRO Group Economics | Macro and Emerging Markets Research: GDP growth (% y-o-y) 2011 2012e US China Japan EU UK Germany World
2013e
2014e
Inflation (CPI, % y-o-y avg) 2011 2012 2013e
2014e
GDP per cap USD 2011 48,328
1.8%
2.3%
2.0%
3.0%
3.2%
2.1%
1.6%
1.9%
9.3%
7.8%
8.0%
8.0%
5.5%
2.6%
4.3%
4.1%
5,417
-0.5%
1.9%
2.5%
2.5%
-0.3%
-0.1%
0.3%
0.7%
45,870
1.5%
-0.5%
-0.2%
1.0%
2.7%
2.5%
1.5%
1.2%
35,185
0.9%
0.0%
0.8%
1.7%
4.5%
2.8%
2.3%
2.0%
38,811
3.1%
0.9%
0.8%
2.2%
2.3%
2.0%
1.9%
2.0%
44,111
3.8%
2.9%
3.2%
3.8%
4.7%
3.9%
3.6%
3.6%
10,189
GDP forecast developed and developing countries 9% 8%
China
7%
Poland US Sweden
5% GDP growth (y-o-y) 2014
Vietnam
UAE Turkey
6% world GDP growth (2014): 3.8% (yoy)
4% 3% 2%
Netherlands
1%
Portugal
0%
France
Norway
-4%
Mexico
Russia
Australia
Brazil South Korea
Japan
Canada
Denmark
Italy
world GDP growth (2013): 3.2% (yoy)
-2% -5%
Indonesia
South Africa
Spain
Greece
-1%
Switzerland Germany Ireland UK
India
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
GDP growth (y-o-y) 2013
Regional manufacturing PMI (index)
Consumer prices per region (change in CPI, % y-o-y) 7
70
6 5 4
60
% change y-o-y
50
40 2010
2011 US PMI China PMI PMI neutral level
2012 EU PMI Japan PMI
1 0 -1 -2 2009
2010
EU27
Import share seaborne trade per region 1993-2012
2011 US
2012
2013
Japan
China
Apparent copper use and GDP per capita per country
28%
14%
14,000 Brazil (2011)
12,000
Russia (2011)
13%
20%
52%
74%
10,000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
2
-3
Coal, iron ore, grains import into EU Coal, iron ore, grains import into Asia Coal, iron ore, grains import into Others
South Africa (2011)
8,000
GDP per capita (USD)
PMI (index)
3
China (2011)
6,000 South Africa (2000)
4,000
Brazil (2000)
India (2011)
2,000
Russia (2000) China (2000)
0 0
India (2000) 100
200
300
400
500
Apparent steel use per capita (kg)
Consulted sources for this publication: Economic forecasts, insights and publications from ABN AMRO | Group Economics, Metal Bulletin, CRU, Commodities Now, Mining Journal, Coaltrans, Bloomberg, IGC, IISI, ISSB, NBS, IGC, IEA, Energy Intelligence, ICCO, ICO, USDA, China Mining, Clarkson Research Services, ABARE, AME, Thomson Reuters Datastream, World bank, ECB, Eurostat, IMF
28
|
Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics
Contributors E-mailbox Commodity Research Team of Group Economics:
[email protected]
Group Economics: Contact information ABN AMRO | Group Economics: Primary area of expertise:
Phone:
- Nick Kounis
Head Macro Research
+31 20 343 56 16
E-mail:
[email protected]
- Hans van Cleef
Energy
+31 20 343 46 79
[email protected]
- Georgette Boele
Precious Metals, top down
+31 20 629 77 89
[email protected]
- Casper Burgering
Ferrous and Non-ferrous metals
+31 20 383 26 93
[email protected]
- Thijs Pons
Soft commodities & food
+31 20 628 64 37
[email protected]
- Mathijs Deguelle
Soft commodities & food
+31 20 344 21 79
[email protected]
- Theo de Kort
Information specialist
+31 20 628 04 89
[email protected]
More information: Websites Group Economics -
Internet Group Economics (Macro Research and theme reports, including commodities):
www.abnamro.nl/groupeconomics www.abnamro.nl/economischbureau
-
Internet Group Economics (Sector & Commodity Research):
www.abnamro.nl/sectoren
29
|
Quarterly Commodity Outlook 24 January 2013
ABN AMRO Group Economics
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