Spurt in prices to be driven by dollar weakness, rise in demand and low supplies.
The gobal bull run in commodities is likely to continue through next year due to dollar weakness, supply restraint and, eventually, a pick-up in demand.
After plummeting in the fourth quarter of the last calendar year, commodities have performed well this year, with prices having surged by 140 per cent on supply constraints and demand. The Dow Jones UBS index is up 15 per cent over a year on Wednesday, led by a staggering 64 per cent lift in industrial metals’ prices, the latest report by Standard Chartered said.
| AIMING HIGH Forecast of average prices of commodities (in $/tonne) | ||||
| Q4 | 2009 | 2010 | 2011 | |
| Aluminium | 2,000 | 1,692 | 1,888 | 1,950 |
| Copper | 6,645 | 5,175 | 6,700 | 7,500 |
| Lead | 2,385 | 1,753 | 2,250 | 2,300 |
| Nickel | 18,000 | 14,824 | 16,500 | 17,000 |
| HRC, Europe | 670 | 582 | 718 | 770 |
| Gold* | 1,100 | 973 | 1,150 | 1,300 |
| Silver* | 18 | 14.8 | 18 | 20.5 |
| Palm oil (ringgit/tn) | 2,250 | 2,202 | 3,000 | 3,500 |
| *Spot prices (in $/oz) Source: Standard Chartered | ||||
Crude oil prices are also up 74 per cent, but the energy complex as a whole is down, as natural gas prices are weighed down by massive oversupply. Precious metals have also risen 37 per cent.
Crude oil demand bottomed in the second quarter of the current calendar year and is now edging higher. The levels of demand are still below previous peaks. However, prices are not expected to hit that level, as the demand for crude oil is estimated to return to the previous peak of $147 a barrel before 2012.
While demand is now picking up and crude inventories are starting to fall, the market is weighed down by high product inventories, particularly for middle distillates, which will suppress refinery margins.
The upside will be limited by the capacity of the Organisation of Petroleum Exporting Countries (Opec) to expand output. Prices are expected to average $88 a barrel by the fourth quarter of 2010.
The base metals complex has performed well this year, driven by the rebound in growth in China, although some of the increased demand has gone into inventory.
However, supplies are also expanding, particularly in the aluminium and nickel sectors. Analysts are relatively more bullish on copper and lead, as the supply situation is tighter.
The investment case for gold has become increasingly compelling, with central bank buying and a structural change in interest in gold as an investment at the retail level.
However, the upside will be capped by lower jewellery demand (until consumers/investors become accustomed to higher prices) and increased scrap availability as the price reaches new levels.
The latest report by Kotak Commodity Services says, “Gold spot resistance is around $1,175 an oz; if broken, then an extended rally can be seen till $1,201 an oz. Until the price closes below the short-term support level of Rs 16,983, buying on dips is advisable.”
Periodic dollar strength will also provide headwinds in the first half, but gold would continue to move higher to average $1,300 an oz in the fourth quarter of 2010 once the dollar resumes its weakening trend.
In addition to the upward momentum provided by the gold market, platinum prices are also well supported by supply issues, including rising costs and a vulnerable power grid in South Africa. Platinum is likely to outperform gold in 2010.
Agricultural prices have underperformed the complex this year, as huge grain harvests have swelled supplies.
For the upcoming season, however, poor weather conditions have affected maize in the US and China, and are likely to result in a fall in end-season stocks, providing more price support and leading the grains complex higher, as macro conditions become more supportive in the second half of 2010.
Corn, along with palm oil, should also benefit from firmer energy prices in the second half of the year.
Sugar and soybeans have been the exception in 2009, rising sharply while the rest of the agricultural complex underperformed. This was largely on supply issues; improved crops in 2009-10 are expected to flood the market, dampening prices.
