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Commodities Monthly: Demand lags fading tail risks

Commodities Monthly: Demand lags fading tail risks

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Published by SEB Group
Global growth is unlikely to be sufficiently strong to boost commodities prices generally, though many selective valuation opportunities remain. Potentially, several commodities may rally due to supply constraints or a greater chance of a steady increase in demand, say SEB’s experts in a new issue of Commodities Monthly.
Global growth is unlikely to be sufficiently strong to boost commodities prices generally, though many selective valuation opportunities remain. Potentially, several commodities may rally due to supply constraints or a greater chance of a steady increase in demand, say SEB’s experts in a new issue of Commodities Monthly.

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Published by: SEB Group on Feb 26, 2013
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Commodities Monthly
Demand lags fading tail risks
26 FEBRUARY 2013
 
 2
 
Commodities Monthly
Demand lags fading tail risks
GENERAL
0-3 M
4-6 M
7-12 M
 
 
Energy and metal prices have increased on higher risk appetitedue to more stable US and Chinese growth and decreasingEuropean tail risks.
 
With global growth still weak, despite recent improvements,supply issues will determine which commodities will movehigher - or not.
ENERGY
0-3 M
4-6 M
 7-12 M
 
 
Driven mainly by improving macroeconomic expectations,Brent crude prices began the year at their highest levels sinceearly 2012.
 
Their outperformance relative to other benchmarks mainlyreflects strong investor interest based on its position as themost global benchmark.
 
Due to the lack of Chinese transparency, structural changesand seasonal effects, the actual crude oil market balance iscurrently very uncertain.
 
Barring significant geopolitical events we expect Brent to tradebelow $115/b in H1-13.
INDUSTRIAL METALS
0-3 M
 4-6 M
 7-12 M
 
 
Following a three month rally, slightly ahead of fundamentals,industrial metals experienced an expected, justified correctionin late February.
 
Prices remain high enough relative to production costs,stimulating production and rising inventories due to weakdemand.
 
We still expect industrial metals prices to end 2013 higherrelative to 2012.
PRECIOUS METALS
0-3 M
 4-6 M
 7-12 M
 
 
Gold remains under pressure due to stronger investor demandfor higher risk assets, trading towards the low end of its$1550-1800/ozt range prevailing since mid-2011.
 
Short speculative positions in COMEX gold have reached theirhighest level since the late 1990’s while long positions alsoremain substantial, reflecting a wide divergence in marketviews.
 
Although prices may rebound in the short-term due toextreme short speculative positioning, we expect a bearishlong-term trend.
 
A continued outflow from physical ETF holdings should beconsidered a strong warning signal.
AGRICULTURE
0-3 M
 4-6 M
 7-12 M
 
 
After falling during H2-12, grain prices are largely unchangedso far this year, supported by drought related stress.
 
Assuming a generally successful US corn and soybean season,12-month forward futures prices are on average consistentwith our price expectations.
 
USDA Agricultural Outlook Forum estimates for total US corn,wheat and soybean acreage are almost exactly in line withtheir 2012 outcome.
 Arrows indicate the expected price action during the period in question.
UBS Bloomberg CMCI Sector Indices
(price indices, weekly closing, January 2011 = 100)
 
7580859095100105110115120125130135140
   j  a  n -   1   1   f  e   b -   1   1  m  a  r -   1   1  a  p  r -   1   1  m  a   j -   1   1   j  u  n -   1   1   j  u   l -   1   1  a  u  g -   1   1  s  e  p -   1   1  o   k   t -   1   1  n  o  v -   1   1   d  e  c -   1   1   j  a  n -   1   2   f  e   b -   1   2  m  a  r -   1   2  a  p  r -   1   2  m  a   j -   1   2   j  u  n -   1   2   j  u   l -   1   2  a  u  g -   1   2  s  e  p -   1   2  o   k   t -   1   2  n  o  v -   1   2   d  e  c -   1   2   j  a  n -   1   3   f  e   b -   1   3
Industrial MetalsPrecious MetalsEnergy Agriculture
 
Sector performance
(MSCI World, UBS Bloomberg CMCI price indices)
-9-8-7-6-5-4-3-2-1012345
   E  q  u   i   t   i  e  s   C  o  m  m  o   d   i   t   i  e  s   E  n  e  r  g  y   I  n   d  u  s   t  r   i  a   l  m  e   t  a   l  s   P  r  e  c   i  o  u  s  m  e   t  a   l  s   A  g  r   i  c  u   l   t  u  r  e
YTD (%) M/M (%)
 
Winners & Losers over the last month
(%)
 
-12-10-8-6-4-20246810
   S   i   l  v  e  r   W   h  e  a   t   N  a   t .  g  a  s   (   U   S   )   G  o   l   d   S   t  e  e   l   b   i   l   l  e   t  s   T   i  n   P   l  a   t   i  n  u  m   C  o  r  n   C   O   2   (   E   U   A   )   C  o  p  p  e  r   C  o   f   f  e   (   A  r .   )   P  o  w  e  r   (   C  o  n   t .   )   W   T   I   C  o  c  o  a   (   U   S   )   N   i  c   k  e   l   A   l  u  m   i  n   i  u  m   L  e  a   d   P  o  w  e  r   S  o  y   b  e  a  n  s   S  u  g  a  r   P  a   l   l  a   d   i  u  m   H  e  a   t .  o   i   l   (   U   S   )   B  r  e  n   t   Z   i  n  c   C  o   t   t  o  n   G  a  s  o   l   i  n  e
 
Chart Sources: Bloomberg, SEB Commodity Research
 
 3
 
Commodities Monthly
General
Global growth is unlikely to be sufficiently strong toboost commodities prices generally, though manyselective valuation opportunities remain.Potentially, several may rally due to supplyconstraints or a greater risk of a steady increase indemand. Backwardated commodities such as Brentcrude may also offer solid roll yield this year,provided their entry level is fair. Additionally, thereis always the possibility that governmentsworldwide may embark on a global currency warthat eventually inflates all commodity prices. Whilesuch a development remains unlikely, it is clearlybeing discussed, especially with Japan resuming aninflationary, yen depreciating policy.
Globally, investors are breathing a sigh of relief, with tailrisks declining. Growth in the US and China has stabilizedwhile fears the Euro zone may disintegrate havesubstantially decreased. As a result, exposure to equitiesand growth commodities such as oil and metals hassurged, boosting valuations. Seemingly however, suchflows reflect only marginal investments with most moneystill invested in the safe havens they have occupied forthe last four years of financial crisis.Worldwide growth has stabilized, but remains weak. Eurozone economic activity deteriorated further thanexpected in Q4-12 and is set to decrease again in 2013,even though the downturn has begun to slow. Moreover,in China politicians are unlikely to follow up thegovernment’s latest stimulus measures with furtheraggressive infrastructure spending and credit expansionduring the coming year. Consequently, with its economicactivity facing headwinds from a weak Europeancounterpart, we project Chinese GDP growth to slowfrom 8.1% in 2013 to 7.7% in 2014. Generally, westernhouseholds, governments and banks still need more timeto consolidate their debts.Governments worldwide could decide to print moremoney to resolve their debt and deficit problems due tothe failure of continuing austerity measures. If they do,commodity prices may nominally increase. Otherwiseglobal growth may be insufficient to ensure theirsubstantial, broad-based appreciation over the comingyear. Instead we expect diverse commodity pricedevelopments based on supply constraints and thesporadic effects of intermittent speculative trading. Sincethe beginning of November, metals and oil have provedpopular, gaining 5% and 6% respectively, while gold andagricultural commodities have lost 8% and 4%respectively. Clearly, investor sentiment has favouredhigher growth commodity prices including energy andmetals, while abandoning traditional safe havens likegold.
UBS Bloomberg CMCI
(price index, weekly closing)
 
75080085090095010001050110011501200125013001350140014501500155016001650170017501800
   2   0   0   7   2   0   0   8   2   0   0   9   2   0   1   0   2   0   1   1   2   0   1   2   2   0   1   3
 
JPM global manufacturing PMI
(monthly, PMIs >50 expansive)
 
34363840424446485052545658
   2   0   0   7   2   0   0   8   2   0   0   9   2   0   1   0   2   0   1   1   2   0   1   2   2   0   1   3
 
OECD composite leading indicators
(monthly, 100 corresponds to long term trend growth in industrial production)
93949596979899100101102103104
   2   0   0   7   2   0   0   8   2   0   0   9   2   0   1   0   2   0   1   1   2   0   1   2
ChinaEurozoneOECDUSAReference
Chart Sources: Bloomberg, SEB Commodity Research

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