Commodities Monthly Review March 9, 2016 We forecast higher oil and lower iron ore prices Iron-ore prices rose to USD 60/ton from USD 40/ton, but fundamentals for the sector still point to the downside, and our scenario assumes a drop to USD 42/ton by 3Q16. We lowered our price forecasts for corn and wheat, after incorporating high carryover stocks and the outlook of stable planted area in the next crop. We forecast a recovery in oil prices to USD /bbl by YE16, as the market finds a new equilibrium by 2H16, with a possible partial pass-through to prices of basic metals (via refining and transportation costs). The Itaú Commodity Index has risen 6.9% since the end of January, driven by higher metal (18%) and oilrelated (9.2%) prices. The ICI-agricultural fell 1.2% over the same period. Metal prices advanced 17.6% year-to-date, with the improvement in investor sentiment and the replenishment of iron ore inventories in China. The latter is a temporary boost. Investor sentiment improved as fears of a global recession calmed. Metal prices positive year-to-date 65 60 50 45 40 35 30 Itaú Commodities Index* (2010 = 100) ICI Agricultural (rhs) ICI Energy ICI Metals 25 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Source: Itaú and Bloomberg Oil prices rose to USD 40/bbl, despite excess supply in the short term. In our view, this resilience was ensured by news related to (some) coordination between Russia and Saudi Arabia (which we doubt that will lead 85 84 83 82 81 80 79 78 77 76 to an actual cut in supply) and signals of lower production guidance by several companies. This situation reinforces our assumption that lower U.S. output will offset rising exports from Iran, rebalancing the global market by mid-2016. We expect Brent crude prices to climb to USD /bbl by YE16. The rebound may increase metal prices through higher refining and transportation costs. Recovery in the ICI to be driven by oil Itaú Commodity Index* (2010=100) Previous Current 45 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Source: IEA and Itaú. 125 115 105 On the other hand, we expect iron ore prices to decline, erasing recent gains. Macro and microeconomic factors drove prices to USD 60/ton recently, from USD 37/ton in mid-january. However, the global oversupply will likely get larger in 2016, with 95 85 65 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.
stable global output (higher production in Australia offsetting capacity cuts and reductions due to environmental issues in China) and lower global demand. We thus maintain our YE16 forecast at USD 42/ton, or almost 20% lower than current levels. Lower price forecasts for corn and wheat. Agricultural prices fell slightly in February, due to favorable weather conditions in producing regions and signs that U.S. farmers will not reduce the planted area in the next crop year. We cut our price forecasts for corn and wheat by nearly 5%, as we acknowledged a combination of high carryover stocks and strong supply in the next crop year. Our scenario for YE16 (higher oil prices, lower iron ore prices, small price increases for metals and agricultural products) implies a 10.7% hike in the Itaú Commodity Index (ICI) from current levels. Oil: End of oversupply in 2016, even without a reaction from OPEC Oil prices rose to USD 40/bbl, despite excess supply in the short term. Weekly inventory changes registered by the U.S. Department of Energy show the oversupply. In our view, such resilience was ensured by news related to deals between Russia and OPEC, and indications of lower production by several companies throughout 2016. Oil: Recent rebound far from offsetting 2015 slide 80 70 60 Prices correspond to the Brent ICE Futures first future contract OPEC/Russia coordination will not prompt the adjustment. Saudi Arabia and Russia agreed to freeze production at January levels, and Qatar and Venezuela committed to following the agreement. The deal will probably materialize and reduces the risk of further production increases by these countries, but will not deter countries that are likely to expand output (Iran and Iraq). Conflicts between Saudi Arabia and Iran represent headwinds to a broader agreement. The adjustment is taking place in the rest of the world, particularly in the U.S. Global oil supply is adjusting and the main reasons that led to oversupply are being corrected. In particular, investments in shale oil in the U.S. plummeted and onshore output already fell to 7.63 mbpd in December from 8.24 mbpd last May. We anticipate a partial recovery in prices in 2016, as oversupply vanishes in the middle of the year. According to our estimates, the global balance will transition from a seasonally-adjusted deficit of 0.2 mbpd in 3Q16 from a surplus of 2.2 mbpd in 4Q15 even without coordinated reaction by OPEC. This transition will take place as the decline in U.S. output offsets rising exports from Iran after the end of sanctions, without significant shocks on demand or on the remaining supply. We assume that i) demand will follow a path that is consistent with global growth and with price drops seen in the past two years, ii) the other OPEC members will sustain current production levels and iii) other producers in the world will remain on the trend seen in recent years, as production does not yet react to lower prices (and investments). We forecast Brent crude prices at USD /bbl at YE16. Agriculture: Waiting for the next crop in the Northern Hemisphere 50 40 Price International prices (first due date) for corn and wheat have fallen since late January, while soybean prices have been relatively stable. 30 20 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Source: Bloomberg. Page 2
Corn and wheat prices drop, while soybean prices are stable 530 480 Corn (Mar-16) Wheat (Mar-16) Soybean (Mar-16) (rhs) 1000 950 next crop is less favorable for soybeans than the average of the past three years (see chart). We lowered our YE16 price forecasts for corn to USD 3./bushel from USD 4.0, after incorporating expectations for strong supply next year. We lowered our forecast for wheat to USD 5.15/bushel from USD 5.3, for the sake of consistency with the new scenario for corn. 430 900 Less incentive to transfer planted area to soybeans from corn in the U.S. 380 850 2.8 CBOT futures price 2.7 330 800 Sep-15 Nov-15 Jan-16 Mar-16 Source: Itaú and Bloomberg. 2.6 2.5 Weather forecasts indicate that 2Q16 will be marked by an increasingly weak El Niño. In Brazil, this outlook is favorable for the winter corn crop, but may hinder the beginning of sugarcane processing. There are no clear signs for the rest of the year yet. The focus is changing to the 2016/17 crop. Overall, the outlook for corn, soybeans and wheat is still for large global carryover stocks into the 2016/17 crop. No signs of reaction to low prices by U.S. farmers. The market is beginning to anticipate figures in the report that address planting intentions in the U.S., to be released in late March. So far, there is no expectation of a reduction in the planted area, although prices are below total production costs. This is because the share of the cost related to fair compensation for the land does not affect decisions of whether or not to plant. Migration of planted area to soybeans from corn in the U.S. should be less intense in the 2016/17 crop. The ratio between soybean and corn contracts for the 2.4 2.3 2.2 Nov-15 Dec-15 Jan-16 Feb-16 Source: Bloomberg. Soybean jan-17/ Corn dez-16 Ratio Average 2013-2015 We forecast soybean prices at USD 8.8/bushel at YE16. Artur Manoel Passos Ivan Lasaro Page 3
Forecasts: Itaú Commodity Index (ICI) * - by Group * Monthly average prices 1 135 115 95 Agriculture Metals Energy 35 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Source: Itaú Commodities CRB Index Itaú Commodity Index (ICI)* Agricultural Soybean - usd/bu Corn - usd/bu Energy Brent - usd/bbl Metals Iron Ore - usd/mt Copper - usd/mt ICI - Inflation ** 2015 2016F 2017F Current Current Previous Current Previous yoy - % -15.1 6.4 6.4 0.6 0.6 avg growth - % -14.0-4.5-4.9 3.1 3.6 a/a - % -28.4 14.9 16.5 0.4 0.4 avg growth - % -32.7-13.7-14.4 12.1 14.6 a/a - % -12.5-0.4 3.4 1.0 1.0 avg growth - % -16.0-5.0-2.2 3.0 3.9 yoy - % 880 880 880 888 888 avg growth - % 943 870 873 885 885 yoy - % 371 3 405 379 409 avg growth - % 378 365 383 377 407 a/a - % -39.1 39.9 39.9-0.1-0.1 avg growth - % -44.7-21.5-24.0 30.2 34.4 yoy - % 39 avg growth - % 54 42 43 a/a - % -33.6 7.0 7.0 0.5 0.5 avg growth - % -29.7-14.4-17.5 1.0 4.8 yoy - % 38 42 42 42 42 avg growth - % 53 43 41 42 42 yoy - % 4640 5000 5000 5060 5060 avg growth - % 01 4797 4796 5032 5032 yoy - % -22.2 6.5 8.4 0.7 0.7 avg growth - % -25.0-9.9-10.2 6.4 8.6 Macro Research Itaú Ilan Goldfajn Chief Economist Tel: +11 3708-2696 Click here to visit our digital research library. Page 4
Relevant Information 1. This report has been prepared and issued by the Macro Research Department of Banco Itaú Unibanco S.A. ( Itaú Unibanco ). This report is not a product of the Equity Research Department of Itaú Unibanco or Itaú Corretora de Valores S.A. and should not be construed as a research report ( relatório de análise ) for the purposes of the article 1 of the CVM Instruction NR. 483, dated July 06, 2010. 2. This report aims at providing macroeconomics information, and does not constitute, and should not be construed as an offer to buy or sell, or a solicitation of an offer to buy or sell any financial instrument, or to participate in any particular trading strategy in any jurisdiction. The information herein is believed to be reliable as of the date on which this report was issued and has been obtained from public sources believed to be reliable. Itaú Unibanco Group does not make any express or implied representation or warranty as to the completeness, reliability or accuracy of such information, nor does this report intend to be a complete statement or summary of the markets or developments referred to herein. Opinions, estimates, and projections expressed herein constitute the current judgment of the analyst responsible for the substance of this report as of the date on which it was issued and are, therefore, subject to change without notice. Itaú Unibanco Group has no obligation to update, modify or amend this report and inform the reader accordingly. 3. The analyst responsible for the production of this report, whose name is highlighted in bold, hereby certifies that the views expressed herein accurately and exclusively reflect his or her personal views and opinions and were prepared independently and autonomously, including from Itaú Unibanco, Itaú Corretora de Valores S.A. and other group companies. 4. This report may not be reproduced or redistributed to any other person, in whole or in part, for any purpose, without the prior written consent of Itaú Unibanco. Additional information on the financial instruments discussed in this report is available upon request. Itaú Unibanco and/or any other group companies is not, and will not be liable for any investment decisions (or otherwise) based on the information provided herein. 1. Additional Note to reports distributed in: (i) U.K. and Europe: This material has been prepared by Itau BBA International plc (IBBAI) for information purposes only. The sole purpose of this material is to provide information only, and it does not constitute or should be construed as a proposal or request to enter into any financial instrument or to participate in any specific business strategy. The financial instruments discussed in this material may not be suitable for all investors, and are directed solely at Eligible Counterparties and Professionals as defined by the Financial Conduct Authority. This material does not take into consideration the objectives, financial situation or specific needs of any particular client. Clients must obtain financial, legal, accounting, economic, credit and market advice on an individual basis, based on their personal characteristics and objectives, prior to making any decision based on the information contained herein. By accessing the material, you confirm that you are aware of the laws in your jurisdiction relating to the provision and sale of financial service products. You acknowledge that this material contains proprietary information and you agree to keep this information confidential. IBBA UK exempts itself from any liability for any losses, whether direct or indirect, which may arise from the use of this material, from its content and is under no obligation to update the information contained in this document. Additionally, you confirm that you understand the risks related to the financial instruments discussed in this material. Due to international regulations not all financial instruments/services may be available to all clients. You should be aware of and observe any such restrictions when considering a potential investment decision. The information contained herein has been obtained from internal and external sources and is believed to be reliable as of the date in which this material was issued, however IBBA UK does not make any representation or warranty as to the completeness, reliability or accuracy of information obtained by third parties or public sources. Additional information relative to the financial products discussed in this material is available upon request. Itau BBA International plc registered office is 20 th floor, 20 Primrose Street, London, United Kingdom, EC2A 2EW and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (FRN 5225) Itau BBA International plc Lisbon Branch is regulated by Banco de Portugal for the conduct of business. Itau BBA International plc has representative offices in France, Germany, Spain which are authorised to conduct limited activities and the business activities conducted are regulated by Banque de France, Bundesanstalt fur Finanzdienstleistungsaufsicht (BaFin), Banco de España respectively. For any queries please contact your relationship manager; (ii) U.S.A: Itau BBA USA Securities, Inc., a FINRA/SIPC member firm, is distributing this report and accepts responsibility for the content of this report. Any US investor receiving this report and wishing to effect any transaction in any security discussed herein should do so with Itau BBA USA Securities, Inc. at 767 Fifth Avenue, 50th Floor, New York, NY 10153; (iii) Asia: This report is distributed in Hong Kong by Itaú Asia Securities Limited, which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities) regulated activity. Itaú Asia Securities Limited accepts all regulatory responsibility for the content of this report. In Hong Kong, any investors wishing to purchase or otherwise deal in the securities covered in this report should contact Itaú Asia Securities Limited at 29th Floor, Two IFC, 8 Finance Street Central, Hong Kong; (iv) Japan: This report is distributed in Japan by Itaú Asia Securities Limited Tokyo Branch, Registration Number (FIEO) 2154, Director, Kanto Local Finance Bureau, Association: Japan Securities Dealers Association; (v) Middle East: This report is distributed by Itau Middle East Limited. Itau Middle East Limited is regulated by the Dubai Financial Services Authority and is located at Suite 305, Level 3, Al Fattan Currency House, Dubai International Financial Centre, PO Box 482034, Dubai, United Arab Emirates. This material is intended only for Professional Clients (as defined by the DFSA Conduct of Business module) no other persons should act upon it; (vi) Brazil: Itaú Corretora de Valores S.A., a subsidiary of Itaú Unibanco S.A authorized by the Central Bank of Brazil and approved by the Securities and Exchange Commission of Brazil, is distributing this report. If necessary, contact the Client Service Center: 4004-3131* (capital and metropolitan areas) or 0800-722-3131 (other locations) during business hours, from 9 a.m. to 8 p.m., Brasilia time. If you wish to re-evaluate the suggested solution, after utilizing such channels, please call Itaú s Corporate Complaints Office: 0800-570-0011 (on business days from 9 a.m. to 6 p.m., Brasilia time) or write to Caixa Postal 67.600, São Paulo-SP, CEP 03162-971.* Cost of a local call. Page 5