Commodities Monthly Review Monday, December 02, 2013 Higher Iron Ore, Lower Crude Oil Prices We are raising our iron ore price forecasts due to stronger-than-expected demand and lower capacity from high-cost producers. The emergence of several potential sources of increased supply in 2014 has led us to lower our Brent and WTI price forecasts. Favorable weather has continued, increasing the expected supply of agricultural commodities, but this is being partially offset by stronger demand. Downward Revision For Agricultural and Energy Prices Itaú Commodities Index * (2010=100) *Monthly average prices The Itaú Commodity Index (ICI) remained roughly flat in November, rising by 0.2% for the month. The breakdown shows small changes in all sub-indexes: agricultural (-0.8%), metals (+0.1%) and energy (+0.9%). Despite the small changes, we have made several adjustments to our price forecasts. 120 We have lowered our 2014 year-end forecasts for Previous Current 110 100 the agricultural and energy sub-indexes, to levels that are respectively 0.6% below and 3.4% below our previous forecasts. Meanwhile, we have raised our forecast for the metal sub-index to a level that is 2.0% above our previous forecast. Hence, our Jan-11 Jan-12 Jan-13 Jan-14 forecasts now assume a lower divergence between the Source: Itaú recent outperformers (energy-related commodities) and the recent underperformers (non-precious metals). Agricultural prices continue to be negatively affected by favorable weather conditions, which have led to higher expected supply. This growth is being partly offset by stronger demand (particularly for corn and soybeans). Nevertheless, we are lowering our 2014 year-end forecast for cotton prices, to USD 0.76/lb from USD 0.80/lb, due to a greater-than-expected planted area in the U.S. and in Brazil. We are also lowering our 2014 coffee price forecast to USD 1.15/lb from USD 1.25/lb, as the main producing countries governments have not been able to prevent falling prices in response to the prospect of a sizable surplus. Among the agricultural commodities we track, sugar saw the biggest price declines in the period as the outlook for a global sugar surplus in 1H14 became clearer, a trend we highlighted in our previous report. Divergence between iron ore prices and other non-precious metals price dynamics due to a surprisingly tight iron ore balance in the short term. The ICI metals sub-index remained roughly flat in November, resulting from rising iron ore prices (+3.6%) and falling prices for other non-precious metals (-3.7%). This divergence can be explained by a surprisingly tight balance in the iron ore market, which is keeping prices above USD 130/ton, far above our previous 2013 year-end forecast of USD 118/ton. The tight balance is being caused by a decrease in highcost mining capacity and stronger-than-expected demand in China, Japan and Europe. In general, the fundamentals are still consistent with falling metal 140 130 93 91 89 87 Divergence Between Iron Ore and Other Non-Precious Metals Prices 2010=100 ICI Metals (ex iron ore) Iron Ore 85 Oct-13 Nov-13 Dec-13 Source: Bloomberg, Itaú Please refer to the last page of this report for important disclosures, analyst and additional information. Itaú Unibanco or its subsidiaries may do or seek to do business with companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the single factor in making their investment decision.
prices, but we are raising our 2014 year-end forecast for the price of iron ore to USD 105/ton from USD 102/ton, mitigating our forecast for declining ICI metal prices throughout 2014. Interim nuclear deal between Iran and the P5+1 1 countries poses another downside risk for crude oil prices in 2014. The interim agreement can be seen as a first step toward a potential normalization of diplomatic relations between Iran and the Western countries, but it is not expected to lead to more Iranian crude oil exports in the coming months. The main change it brings to the outlook is that it adds another upside risk for oil supply in 2014 the other risks being potential improvements in the currently constrained production levels in Iraq, Libya and Nigeria. Even if exports from these four countries remained constant, OPEC would have a hard time offsetting a strong increase in non-opec supply next year, in its efforts to keep Brent prices close to USD 110/bbl. A 1.0 mb/d supply increase from these countries is becoming a more likely scenario, which would probably prevent OPEC from being able to keep prices close to current levels. Hence, we are lowering our 2014 year-end forecasts for the Brent oil price to USD 105/bbl from USD 108/bbl and for the WTI price to USD 101/bbl from USD 105/bbl. Grains: Prices Still Affected by Favorable Weather Falling corn and wheat prices. Corn and wheat prices fell again in November, to USD 4.15/bushel from USD 4.28/bushel and to USD 6.55/bushel from USD 6.75/bushel, respectively. The fall was driven by a surplus in the global balance. Meanwhile, soybean prices increased to USD 13.36/bushel from USD 12.8/bushel, influenced by strong demand. Production increase partially offset by stronger demand. After an interruption in its publication schedule due to the government partial shutdown, the U.S. Department of Agriculture (USDA) has released its World Agriculture Supply and Demand Estimates (WASDE) report. In general, ending stock estimates were raised. However, due to stronger demand estimates, the increase in inventories was lower than the market expected. The estimates for corn and soybeans are still indicating a surplus in the 2013/14 crop year, while the wheat balance remains close to equilibrium. The increase in U.S. corn production was less than the market expected (at 351.6 million tons, vs. 355.3 million tons) due to a downward revision in planted area. However, the supply increase was offset by stronger demand, mainly in external markets. Export sales have kept up their strong pace, according to the USDA's weekly data. Prices Still Affected By the Favorable Weather Changes in South America corn production are 37 42 47 52 4 9 14 19 24 29 34 Week inconsistent with recent developments. In the rest Source: USDA, Itaú of the world, the highlights were a downward revision in Brazilian production (to 70 million tons from 72 million tons) and unchanged production in Argentina (26 million tons), which came as surprises given Brazil s favorable weather conditions and the dry weather in Argentina (which typically acts as a drag on planting). Biofuel mandate change may have limited impact on corn prices. The U.S. Environmental 800 700 600 500 400 Jan-13 50 45 40 35 30 25 20 15 10 5 0 Corn Wheat Soybean (RHS) Jul-13 Source: Bloomberg Prices correspond to CBOT first future US: Strong External Demand For Soybean Accumulated Exports + Outstanding Contracts, Million tons Range : 99-11 Average 5 years 2012-13 2013-14 USDA Forecast 1700 1600 1500 1400 1300 1200 1 The five permanent members of the U.S. Security Council plus Germany. Page 2
Protection Agency (EPA) unveiled a proposal that would lower the annual requirement for the amount of ethanol to be used in gasoline in 2014. According to the new proposal, the corn-based ethanol mandate would be around 13 billion gallons (down from 13.8 billion in 2013), below the market consensus estimate. Despite the new proposal, we believe that the ethanol mandate change may have a limited impact on prices, because: i) ethanol production remains at high levels and will not be affected by changes in the mandate in the short term; ii) ethanol margins are high; iii) the relative prices of corn, ethanol and gasoline might lead to domestic consumption being higher than the mandated amount (we forecast consumption of nearby 13.5 billion gallons); and iv) the USDA scenario already assumes weaker demand for corn used for ethanol production. Brazil: Wheat imports from the northern hemisphere are expected to continue into 2014. With Brazilian production affected by unfavorable weather conditions and with lower production in other Mercosur countries that have historically provided supply in Brazil, the country will probably continue importing wheat from the northern hemisphere. Forecasts unchanged for 2014. We maintain our year-end 2014 price forecasts at USD 5.0/bushel for corn, USD 12.2/bushel for soybeans and USD 6.8/bushel for wheat. Our forecasts are consistent with surpluses in corn and soybean and an equilibrium in the global wheat balance. Crude Oil: Lower Forecasts Due to Larger Expected Supply Interim nuclear deal between Iran and the P5+1 countries poses another downside risk for crude oil prices in 2014. The interim agreement can be seen as a first step toward a potential normalization of diplomatic relations between Iran and the Western countries by 2014. A comprehensive agreement would mean stronger crude oil exports in the medium term and lower geopolitical risk priced into crude oil. However, the easing of sanctions in the current agreement is not expected to increase Iranian crude oil exports in the coming months. Aggregated production from currently constrained countries will probably increase next year. Due to internal political conflicts and mismanagement, oil production fell in several OPEC countries throughout 2013: Iraq, Libya and Nigeria are all producing less than expected. By adding the sanctionconstrained Iran to the account, there is a potential 2.0 mb/d gain to crude oil supply, which represents a huge upside risk. Hence, we are now assuming a 1.0 mb/d supply increase from these countries in our base-case scenario. Increasing production in non-opec and currently constrained countries will likely lead to a looser balance ahead and lower prices. According to the International Energy Agency s last Oil Market Report, non-opec supply is expected to increase by 1.8 mb/d in 2014 (mainly due to North American production), while global demand is expected to increase by 1.0 mb/d. Thus, the rich wing of OPEC is already likely to have a hard time offsetting the increase in non-opec supply next year, in its efforts to keep Brent prices close to USD 110/bbl. The addition of another 1.0 mb/d increase from the currently constrained countries will probably prevent OPEC from being able to keep prices close to their current levels. Hence, we are lowering our 2014 year-end forecasts for the Brent price to USD 105/bbl from USD 108/bbl and for the WTI price to USD 101/bbl from USD 105/bbl. Artur Manoel Passos Verena Paiva Page 3
Forecasts: Itaú Commodity Index (ICI) * - by Group Agricultural Metals Energy 150 130 110 90 * Monthly average prices Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Source: Itaú 70 CRB Index Itaú Commodity Index (ICI)* Agricultural Energy Metals ICI - Inflation ** Commodities 2013F 2014F Current Previous Current Previous yoy - % -5.5-5.6 0.3-0.6 avg growth - % -3.1-3.0-2.7-3.6 yoy - % -7.7-6.3-1.2-1.4 avg growth - % -3.9-3.7-4.3-3.4 a/a - % -21.2-19.0 3.3 1.2 avg growth - % -11.4-11.0-8.3-7.3 yoy - % 3.1 5.8-1.0-0.1 avg growth - % 0.7 1.2 0.7 2.9 yoy - % -7.7-9.4-7.0-7.2 avg growth - % -1.6-2.2-8.3-9.9 yoy - % -11.3-10.1 0.4-0.2 avg growth - % -7.2-7.1-4.2-3.3 * The Itaú Commodity Index is a proprietary index composed of commodity prices, measured in U.S. dollars and traded in international exchanges, which are relevant to global production. Its sub-indexes are Metals, Energy and Agriculture **The ICI-Inflation is a proprietary index composed of commodity prices, measured in U.S. dollars and traded in international exchanges, which are relevant to inflation in Brazil (IPCA). Its sub-indexes are Food, Industrial and Energy. Macro Research at Itaú Ilan Goldfajn Chief Economist Tel: +5511 3708-2696 E-mail: macroeconomia@itaubba-economia.com Click here to visit our digital research library. Page 4
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