Commodity Monthly Market might be somewhat ahead of fundamentals

Transcription

1 Investment Research General Market Conditions 13 May 9 Commodity Monthly Market might be somewhat ahead of fundamentals The last two months have been very impressive in commodity markets. Prices have recovered strongly: year to date copper prices are 44% higher and WTI oil is up 33%. The market is clearly starting to price that the global economy will recover from the current recession. Thus the market s focus has moved away from recession, which was the main theme in Q4 8 and Q1 9, towards recovery. For several months we have argued that global PMIs would turn up and push commodity prices higher. A turnaround in indicators would indicate that the sharp decline in economic activity in Q4 and Q1 was coming to an end. In fact, this has been happening: global leading indicators have continued to improve in all regions in April, pointing to a relatively synchronous recovery. Commodity-intensive Asia in particular has shown strong recovery signs. PMIs are rising above and hard data for exports and production have also risen. This is not least the case in China, South Korea and Japan. But also in the US, ISM manufacturing has continued to march higher, driven by further increases in new orders. And even Euroland PMI and German ifo have surprised positively. Our economists continue to expect further improvements in leading indicators in the coming months. Lean inventories in coination with demand being lifted by substantial stimulus should pave the way for increases in production and commodity demand. But also, hard data have started to appear, confirming that we have passed the bottom. In China, fixed asset investments rose an impressive 3.4% year-to-date in April compared to the same period in 8. However, we are a bit cautious after the latest almost synchronous rally in commodities. There is a risk that some commodity markets have decoupled from fundamentals. The fundamental outlook represented by e.g. stocks for aluminium, nickel and lead has not changed significantly in the last month. Demand for oil in the US is also still pretty weak. It seems that the commodity market has run a bit ahead of the fundamental picture. In our view, both base metals and oil are quite vulnerable if we get a set-back in risk sentiment. Hence, e.g. corporate clients might consider staying on the sideline for a while, awaiting a possible set-back in prices before hedging commodity exposure. However, as the turnaround in the global economy and sentiment looks real this time, one certainly shouldn t expect to see significantly lower prices; the risk is that the upside we are looking for in Q4 occurs now. If the quick recovery in global PMIs is followed by an equal improvement in hard data, there is further upside risk for commodity prices in Q2 and Q3.. Key points Optimism has returned to commodity markets with copper taking the lead China PMIs are now above, indicating expansion Look out for comments from OPEC ahead of meeting 28 May Imports of aluminium and copper surging in China. However, a possible slowdown in imports is a clear risk for prices We expect higher prices in Q3 and Q4, but see significant risk of a set-back in prices over the next couple of weeks due to near-term weakness in fundamentals. Contents Energy...2 Energy charts... 3 Base metals... Agriculturals charts... 8 Precious metals charts... 9 Commodity prices...1 Commodity forecasts...11 BRIC PMIs take the lead 8 In d e x In d e x In d ia 7 6 China Brazil 4 3 Russia Chinese investment boom Commodity sales: Senior Dealer Martin Vorgod mavo@danskebank.dk Senior Dealer Trine Kamph tri@danskebank.dk Commodity Research Source: Markit and Reuters Ecowin Source: Markit and Reuters Ecowin Chief analyst Arne Lohmann Rasmussen arr@danskebank.dk

2 Energy Market looking towards tighter market in second half of 9 Oil prices have risen significantly lately, boosted by an improvement in macro data, high OPEC compliance, a weaker dollar and strong investor sentiment. Prices are now close to % higher from the bottom reached at Christmas last year. The performance is even stronger for gasoline, which has more than doubled as the gasoline crack spread has improved as well. We have on several occasions pointed to high OPEC compliance as pivotal for the oil market. According to the latest info from the IEA, compliance is now running at 8%. But as always the nuer is highly uncertain. OPEC s attention has now turned to the next OPEC meeting n 28 May. As usual, the price hawk Iran is calling for a new production cut at the meeting. Iran argues that the closely-watched OECD stocks have risen to the equivalent of 61 days of consumption. OPEC prefers a level of 2-3 days. However, we doubt that the more influential OPEC meers like Saudi Arabia will agree to further productions cuts if the current price level is sustained. But it is quite likely that OPEC will repeat that the goal is % compliance, which in fact would take another 6-7k barrels off the market per day. IEA has already warned OPEC against another production cut as they argue it would jeopardize the fragile recovery of the global economy. But looking at the stock situation it is easy to see why some OPEC meers are a bit worried about the stock overhang. The latest EIA weekly crude oil nuers showed that stocks are now running at a stunning 1% above the 8 level. Also, the US demand nuers continue to disappoint. The preliminary EIA nuers showed that daily fuel demand (implied) averaged 18.2 in the four weeks ended 1 May, down 7.9% from a year ago. Yesterday, the EIA report also contained a new downward revision to demand growth. The EIA expects global demand to contract by 1.8 /d in 9. The IEA expects 2.2/d. But we still argue that we will see a tightening of the global oil market in the course of 9. In our view OPEC will start to tighten the market in the next couple of months. It is no surprise that stocks rise in Q2, when demand is seasonally weak. But when we enter the summer period we estimate that current OPEC production (not least if compliance is improved) will be well below call on OPEC. Relatively high OPEC compliance EIA weekly crude oil stocks on the rise W1 W W9 W W21 Growth forecasts EIA weekly crude oil stocks, US Mean 3-7 Min/max last years 9 21 IMF OECD Danske Bank IMF OECD Danske Bank USA Euroland Japan Source: Danske Bank,IMF,OECD W29 W37 W4 W The development in the market balance will of course also depend on global demand and non- OPEC production. Regarding global demand, the latest green shoots in the global economy such as rising PMIs point to a quicker recovery in the global economy and henceforth in oil demand than forecast by e.g. OECD and the IMF. We forecast growth of -2.7% in the US and Euroland in 9, whereas IMF expects -2.8% and -4.2%, respectively. Regarding non-opec production, we still argue that both 9 and 21 will see a long list of disappointments. The IEA refers to spending surveys that envisage upstream spending down around 1-2% in 9. Major cash rich oil companies and national oil companies will be least affected, whereas independents and smaller oil companies are likely to reduce investment heavily in the next two years. We expect non-opec production to fall at least./d in 9 and would not be surprised to see even weaker production. Also, future OPEC production capacity is at stake. According to the OPEC Secretary General Al-Badri, the impact of low prices over the last six months, the financial crisis and the severe production cutbacks are now having a major impact on the investment projects of OPEC meers. According to OPEC, 3 out of 16 planned projects have been delayed. Hence, we continue to expect oil prices to trade between USD 6 and USD 7 a barrel in Q4 9. However, short-term we are a bit more cautious. Oil prices have surged despite growing global stocks as the market has looked towards a possibly tighter market in the second half of 9. It seems that near term weakness is being completely ignored. But the optimism might not last forever, and we would not be surprised to see a correction of -1% in the near future in the oil price. Hence, given that we expect oil prices to recover again in Q3 and Q4, we recommend that risk-averse clients hedge oil exposure for 9 and 21. But due to the relative steep contango and the current stock build, the less risk-averse client might consider awaiting a possible correction in prices. US oil demand is weak 22, 21, 21, 2, 2, 19, 19, 18, << Product supplied, US (EIA) 18, 17, 17, 16, Source:Ecowin 22, 21, 21, 2, 2, 19, 19, 18, 18, 17, 17, 16, 2 13 May 9

3 Energy charts Crude oil prices WTI futures curve WTI 1-pos, NYMEX Brent, 1-pos , 7, 67, 6, 62, 6, 7,, 2,, 47, One month ago , 7, 67, 6, 62, 6, 7,, 2,, 47, Natural Gas, Henry Hub, 1-pos Bunker fuel oil, 38 cst Amsterdam USD/mmBtu USD/mmBtu Gasoline RBOB, 1-pos NYMEX RBOB gasoline futures curve 4 3 c/gallon c/gallon 4 3 1,8 1,8 USD/gallon USD/gallon 1,8 1,8 1, 1,7 1,6 1,6 1, 1,7 1,6 1, , 1, , 1,4 1,4 One month ago , 1,4 1,4 Heating oil, 1-pos NYMEX Coal, 1-pos, API c/gallon c/gallon Coal API2 1.pos. future May 9

4 Electricity price, Nordpool, 1-pos, quarterly Emission rights, CO2, ICE ECX EUR/mwh EUR/mwh 1. pos. quarterly forward , 3, EUR/mt 27,, 22, 2, 17, 1, 12, 1, 7, aug dec aug dec 6 Carbon Dioxide, emission right aug dec 7 aug dec 8 EUR/mt 9 32, 3, 27,, 22, 2, 17, 1, 12, 1, 7, Bunker fuel oil and crack spread Total crude oil stock, EIA 1 1 Light crude oil WTI, NYMEX Buncker oil crack - - Bunker fuel oil, 38 cst Amsterdam W1 W W9 W EIA weekly crude oil stocks, US Mean 3-7 Min/max last years W21 W29 W37 W W3 Gasoline stock, EIA Gasoline crack spread, NYMEX 1-pos Mean 3-7 Min/max last years W1 W W9 W13 W21 W29 W37 W W Distillate stock, EIA Heating oil crack, NYMEX 1-pos W1 W Mean Min/max last years W13 W9 W21 W29 W37 W W May 9

5 Base metals Base metals continued to rebound last month with copper and lead taking the front seat, whereas nickel and aluminium have lagged. The divergent developments for the different base metals this year show in our view an important characteristic that will prevail in 9. In our view the market will very much look at fundamentals for the single base metal to decide prices, and to a lesser degree trade metals as one single asset. For base metal demand it is of utmost importance how Chinese growth evolves. Therefore it is very encouraging that the two Chinese manufacturing PMIs rebounded strongly in April to above. But even more important, we focus on the very encouraging signs from Fixed Asset Investment statistics that showed a jump of 3.% y/y in April. China continues to hoover up copper For some months we have been watching Chinese import data for commodities, and April was no disappointment. Monthly imports of copper jumped to an all-time high of 399,883 tons in April, up 66% y/y. There is little doubt that without the Chinese buying, LME stocks of not least copper would have surged even further, mitigating current positive sentiment. Base metals recovery Chinese copper imports surge China is buying base metals and other commodities for several reasons. First, it seems that China actually started to destock quite early in 8. Second, there is little doubt that the recovery in domestic demand reflected in Fixed Asset Investments nuers will spur heavy commodity demand. Finally, China has often acted opportunistically to buy when prices are low to build strategic stocks. This is probably also the case this time. The obvious question is of course whether this Chinese shopping spree is sustainable. LME cancelled warrants for copper that is metal being prepared to leave warehouses are still at a record high level. Many analysts use this as an indication of strong future demand. But on the other hand we also notice that the price differential between Shanghai and LME prices are narrowing, indicating that Chinese demand is less strong. But all in all we have to conclude that the current Chinese import pace will be difficult to sustain. A drop in Chinese imports is an imminent risk for not least copper prices. But given our global outlook we argue that non-chinese demand for copper will start to recover in the second half of 9, replacing weaker Chinese imports. Furthermore, the supply side for copper is under pressure. For example, problems at the huge Escondida mine in Chile are an ongoing issue for the market. In Q1 copper output dropped an unprecedented 14% due to declining ore grades and mill closure. The drop in industrial activity on a global scale has also put copper scrap availability under pressure. All in all we forecast that LME copper prices will reach USD, a ton by end 9. Aluminium picture still weak Aluminium prices have recovered approximately 18% from the bottom in March. But still prices are only up marginally year-to-date. The relatively dismal performance relative to copper is no surprise looking at fundamentals. The demand picture is still quite weak, which is reflected in the relentless surge in aluminium stocks. LME stocks are now running at 3.87m tons. It seems that even though Chinese imports of aluminium in April surged to 44, ton it has done little to mitigate the stock-build. The latest news from the North American aluminium industry is also quite pessimistic. In April new orders dropped 33% after falling 21% in March. However, the downside for aluminium should be pretty well protected at the current level as prices get support from costs. The independent consultancy group CRU estimates that average costs are now running at USD 1,4 a ton. Furthermore, the production cut-backs have continued. Nuers from the International Aluminium Institute shows that global production ex. China was down 7% y/y. However, China is a quite important factor here. It seems that the higher prices seen lately have spurred some re-opening of smelters, which could put renewed downward pressure on prices. All in all we are a bit cautious regarding the short-term picture for base metals. Prices are vulnerable to a new stock-build, and not least if the Chinese import boom comes to an end. We could easily see a set-back of -1 % in prices in the coming weeks but still we expect another leg up in prices in Q4. Consider awaiting a possible set-back in prices before hedging commodity exposure. Source:Ecowin Cancelled warrants for copper jump China also likes aluminium Aluminium stocks continues higher 13 May 9

6 Base metals charts Copper, LME Copper forward curve, LME 1,,9,8,7,6,,4,3,2,1, Mill.ton Copper, LME << LME stocks Nickel, LME Nickel forward curve, LME Thousand ton << Stocks, LME Nickel, LME >> Lead, LME Lead forward curve, LME Thousand ton << Stocks, LME Lead, LME >> Zinc Zinc forward curve, LME Mill. ton << LME stocks Zinc, LME >> May 9

7 Aluminium, LME Aluminium forward curve, LME 4, 4, Mill. ton 3, << LME stocks 3, Aluminium, LME >> 2, 2, 1, 1,,, -, Tin, LME Tin forward curve, LME Ton << Stocks, LME Tin, LME >> Spread between Shanghai and LME Metal price index and the ISM 2 1 Shanghai Copper 1M>> << Spread % y/y Index << Metal price index ISM >> LME 3M Copper >> mar maj jul sep nov 8 mar 9 maj Steel Billets, LME Stainless steel Steel Billet future, LME Far East 4 Steel Billet future, LME Mediterranean mar maj jul sep nov 8 mar 9 maj Stainless steel, CR type May 9

8 Agriculturals charts Sugar Soybeans 2, 17, 1, 12, 1, 7,, 2, USD/lbs USD/lbs Sugar no 11, NYBOT , 17, 1, 12, 1, 7,, 2, USD/bushel Soybeans USD/bushel Wheat Corn EUR/ton << Wheat, CBOT Milling Wheat, Liffe >> USD/bushel USD/bushel Corn USD/bushel Nominal prices Real price* 1974= Wheat Corn Soybeans Index = Index Wheat Soybeans Corn Sugar 1 Sugar Pig prices Feeder cattle 11 USc/pound << Lean hogs Denmark, average pork prices >> DKK/kg USc/pound USc/pound Feeder cattle May 9

9 Precious metals charts Gold, spot Forward curve, Gold, Nymex Gold Silver, spot Forward curve, Silver, COMEX 22, 2, 17, 1, 12, 1, 7, Silver 22, 2, 17, 1, 12, 1, 7, 14, 14, 14, 13, 13, 13, 14, 14, 14, 13, 13, 13,, 2, , 2, 13, 12, , 12, Platinum, spot Future curve, Platinum, Nymex Platinum Palladium, spot Future curve, Palladium, Nymex Palladium May 9

10 Commodity prices Year ago This year Price Price %, m/m Price %, y/y Start level YTD change, % Energy NYMEX WTI - 1.pos. 8,8 49,7 18,2 1, -3, 44,3 32,6 NYMEX Gasoline RBOB (Usc/gln) 1.pos. 168,2 14,8 1,3 319, -47,3,3 67,3 ICE Brent 1.pos. 7,8 2,2 1,7 124,1-3, 4,6 26,7 ICE Carbon (/tn), DEC-9 14,8 #VALUE!#N/A N.A.,7-42,6 16, -7,4 Electricity Nord Pool,, 1.month 3,6 #VALUE!#N/A N.A TTF Natural Gas,, 1st. month 11, 11,6 -,9 - -6,1 21,4-46, Natural Gas, Nymex, 1.pos. 4, 3,6 24,8 11,4-6,4,6-19, API2, steam coal, 1st month 61,3 66, -7,2 148, -8,6 73, -16,7 Base m etals: LME 3M Prices (US$/t) Aluminium , , ,62 Copper , , ,3 Lead , , ,14 Nickel , , ,27 Zinck , , ,69 P reciuos Metals: Spot Prices (US$/oz) Gold 92,7 896,2 2,7 869,3,9 884,4 4,1 Silver 14, 12,8 9, 16,8-16, 11, 22, Agriculturals: Front Month Prices CBOT Wheat (US$/bushel) 9, 34,8 11,3 848, -29,9 634, -6,2 Matif Mill Wheat (/t) 147, 136, 8, 21, -29,8 137,3 7, CBOT Corn (US$/bushel) 4, 387, 9,7 97, -28,9 47, 4,4 CBOT Soybeans (US$/bushel) 1.13, 1.21, 12, , -16,1 972,3 18,6 NYBOT Sugar (US$/lb) 1, 13,3 16,6 11,1 39,2 11,8 31, Commodity indicies Reuters/CRB TR 242, 2,7 7,4 423,6-42,7 228,4 6,1 S&P GSCI Energy TR 8,9 817,3 7,2 2.6,3-66,3 913,7-4,1 S&P GSCI Industrial Metals TR 1.133,4 1.11,1 2, ,3-46,6 93,7 21,1 S&P GSCI Agriculture TR 616,9 6,4 1,9 866,3-28,8 92,9 4, S&P GSCI Precious Metals TR 1.27, ,9,6 1.23,2, ,6 6, AIG 12,8 112,7 7,1 21,8-43,9 116,8 3,4 Rogers commodity index TR 2.783,8 2.63,8 8,6.31,8-47,6 2.8,7 7,6 Steel prices (EUR/t) EU domestic hot rolled coil 36, 36, 1,4 7, -47,9 4, -14,1 EU domestic cold rolled coil 43, 4, 6,2 76, -43,4 4, -2,4 EU domestic hotdip galv. Coil 487, 4, 2,6 77, -36,7, -11,4 Source: Blooerg, Danske Markets 1 13 May 9

11 Commodity forecasts 9 21 AVERAGE Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Energy (Front Month Prices) NYMEX WTI 8, ICE Brent 7, Base m etals: LME 3M Prices (US$/t) Aluminium Copper Zinc Nickel/ P reciuos Metals: Spot Prices (US$/oz) Gold 92, A griculturals: Front Month Prices CBOT Wheat (US$/bushel) 9, CBOT Corn (US$/bushel) 433, Source: Danske Markets May 9

12 Disclosure This report has been prepared by Danske Research, which is part of Danske Markets, a division of Danske Bank. Danske Bank is under supervision by the Danish Financial Supervisory Authority. The author of this report is Arne Lohmann Rasmussen, Chief Analyst. Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high quality research based on research objectivity and independence. These procedures are documented in the Danske Bank Research Policy. Employees within the Danske Bank Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and to the Compliance Officer. Danske Bank Research departments are organised independently from and do not report to other Danske Bank business areas. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or dept capital transactions. Danske Bank research reports are prepared in accordance with the Danish Society of Investment Professionals Ethical rules and the Recommendations of the Danish Securities Dealers Association. Financial models and/or methodology used in this report Calculations and presentations in this report are based on standard econometric tools and methodology as well as publicly available statistics for each individual country. Documentation can be obtained from the above named authors upon request. Risk warning Major risks connected with recommendations or opinions in this report, including as sensitivity analysis of relevant assumptions, are stated throughout the text. First date of publication Please see the front page of this research report. Disclaimer This publication has been prepared by Danske Markets for information purposes only. It has been prepared independently, solely from publicly available information and does not take into account the views of Danske Bank s internal credit department. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. The Equity and Corporate Bonds analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for retail customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S. Danske Bank A/S is authorized by the Danish Financial Supervisory Authority and subject to limited regulation by the Financial Services Authority (UK). Details on the extent of our regulation by the Financial Services Authority are available from us on request. Copyright (C) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission May 9