Coming over all bullish on commodities

OUT of the doldrums, yes – but how far is another matter. The Outcrop, by Robin Bromby.
Coming over all bullish on commodities Coming over all bullish on commodities Coming over all bullish on commodities Coming over all bullish on commodities Coming over all bullish on commodities


Staff Reporter

The headline for an opinion piece from Wells Fargo capital management chief strategist James Paulsen in The Financial Times today could not have been more positive: “The only way is up for commodities”

Meanwhile, BNP Paribas sees the silver lining. “Small is beautiful”, is the headline on its latest note, suggesting that some base metal prices will lift but not in any spectacular way.

Deutsche Bank is a little more circumspect, saying the expected increased demand will be offset in many instances by rising supply, so capping prices.

But at least it concedes there might be better demand.

Deutsche notes that being outright short the industrial metal complex would have been among the most successful investment strategies in 2013, with an equal weighted basket delivering a 9% return over the course of the year.

Even nickel looks good at the moment, thanks to the Indonesians.

It was up $US205 per tonne last night in London at $14,353/t (and peaked at $14,622/t).

The closing price has climbed $1100/t since last Thursday.

And have a look at tin inventories at the London Metal Exchange – just 9580 tonnes in the warehouses.

Leading the charge of the bulls in the FT, Paulsen says it looks as if commodities may be in a cyclical recovery in 2014 after underperforming over the past two years.

He notes that US growth looks likely to exceed 3% this year, while Japan and Europe seem to have ended their contraction phase (and, indeed, Deutsche is separately predicting Europe will lead the rebound in steel output in 2014).

“Economic growth has strengthened nearly everywhere as we enter 2014, which should produce a better year for commodity investors,” Paulsen writes.

He sees the US dollar falling this year.

A weak greenback directly pushes dollar-commodity prices higher. (Interestingly, he does not allow that the currency fall will do anything for gold, arguing that the haven-premium embedded in the metal’s price since the 2008 was effectively dissolved over the past 12 months. Well, time will tell.)

Industrial commodity prices started to turn in October and the average is up 4% so far.

The Baltic Dry Index was, until recently, on a tear – last Friday, it lost 11% on news that Colombia was tightening environmental controls on coal loading. But, yes, overall it has been up and the Colombian thing is a separate issue.

BNP Paribas senior metals strategist Stephen Briggs does differentiate.

He still thinks you should short copper and suggests going long on lead, tin and zinc, mainly because there will be supply constraints in 2014-15 in those metals.

Aluminium and nickel “remain in oppressive structural supply surplus” but Briggs allows that the Indonesian export restrictions may change that to some extent.

But BNP agrees that growth will pick up.

The bank’s economics team is forecasting global growth of 3.5% in 2014-15 (against 3% in 2013). This will be enough to ensure further growth in base metals usage, particularly in developing countries.

Briggs expects the tin market to tighten quite quickly, while smelter cutbacks have already made inroads into zinc stocks and the upcoming closure of several large mines will turn this into something more structural.

Lead will be barely affected by mine closures but then it hardly features among new mine projects. And lead inventories are much lower than zinc ones.

But Lachlan Shaw and his commodities team at the Commonwealth Bank of Australia point out that China has already mitigated supply risks ahead of Indonesian nickel export ban.

Chinese companies are building 84,000 tonnes of new nickel smelter capacity in Indonesia.

Shaw says while these smelters are not finished, CBA believes the Chinese owners of these projects will likely be allowed access to exported nickel ore in the meantime.

There is also anecdotal reportage of China having built significant stockpiles of Indonesian nickel ore, with estimates of between six and nine months of requirements. (They would have been crazy not to have: the ban has been expected for a long time.)

This is important because Indonesia is the largest supplier of nickel ore and concentrates (about 20% of the global export market) and, as Shaw points out, is the key supplier to Chinese and Japanese ferronickel smelters.

In November, Indonesia accounted for 61% of Chinese nickel ore and concentrate imports.

The country’s nickel is also attractive because Chinese rotary kiln electric furnaces require nickel grades of at least 1.5%.

Indonesia’s grades range between 1.5% and 3%, against Philippine grades of between 0.5% and 2%.

So perhaps nickel’s rebound might be short-lived and even more so if Jakarta winds back some of the export ban.

Otherwise, though, fingers are crossed for a slightly better year in metals.

Assuming the analysts have got it right, of course.