Market Strategy - Weekly Commodities Strategy: Looking Ahead To 2018 - JAN 2018


Although we are bullish on most commodity prices from a multi-year perspective, we expect that the rapid rebound of the past two years is reaching its limits. In particular, we expect industrial commodities (coal, oil and industrial metals) to experience a pause in their medium-term uptrends over 2018. We expect agricultural commodities to outperform over the next 12 months after underperforming so far in 2017, led by grains and cocoa. Crop damage from a La Nina weather cycle in the coming months could reinforce agricultural price outperformance, although this remains a risk rather than our core view for now ( see 'La Nina Threats Return', October 18).

Chinese Buying Lifts LNG
Singapore SLInG & UK NBP, USD/mnBTU
Source: Bloomberg

Other Key Views:

  • Oil: Brent is enjoying a short-term boost from an outage on the Forties Pipeline System, with prices hovering around the mid-USD60/bbl range. The 450,000b/d outage will offer continued fundamental support over the remainder of the year, ahead of repairs. However, our short-term (three-to-six-month) outlook is bearish and we expect seasonally weaker demand, returning US shale growth and OECD stock builds will drive Brent back down towards the mid-USD50/bbl level in Q118 ( see ' Brent Heading Lower Into 2018 ' , December 1).

  • Industrial Metals: We maintain a neutral view on base metals over the coming months, expecting more muted gains in 2018 compared with the spike in prices over the past year. We have revised up our lead price from an average of USD2,200/tonne to USD2,350/tonne in 2018, on the back of widening market deficits. This level implies weakness from spot levels of USD2,526/tonne as of December 20 2017, as seasonal demand for lead in car batteries comes to an end in Q118. However, prices will remain largely supported above USD2,200/tonne over 2018 due to a widening refined market deficit fuelled by ongoing environmental-driven supply cutbacks in China and solid demand from major consumer countries ( see ' Lead: Prices To See Moderate Gains In 2018 ' , December 19 2017).

  • Precious Metals: We are bearish on gold prices on a three-month basis and modestly bullish from a multi-quarter perspective. Even if US real yields fail to push significantly higher in the near term, the surge in short-end yields over November-December already suggests that gold prices will trend lower. Gold prices are hovering around support at USD1,260/oz as of December 20 and next support comes in around USD1,200/oz. Over the longer term, we expect that a demographic-driven widening of fiscal deficits in developed markets will send inflation structurally higher in these markets, thereby eroding real yields and eventually boosting gold prices ( see: ' Gold: Sideways Drift To Persist Into 2018 ' , November 16 2017).

  • Grains: Corn and soybean prices have moved lower over December, as attention turns to the 2017/18 season in South America (harvesting begins in Q118). We still forecast corn and soybean production to fall in Brazil, following this year's record harvest, and project smaller contractions in Argentina. La Nina poses further downside risks to production across the Americas ( see 'La Nina Threat Returns', October 18). Beyond the 2017 calendar year, we expect a tightening global grain market as yields will likely return towards trend-line averages, leading to a combined global grain market deficit for corn, wheat and soybean in 2017/18. This underpins our view for price gains from spot levels. However, elevated stocks will prevent a significant move higher and we are either at or below consensus for our grain price forecasts.

  • Softs: In line with our recent view, gains in sugar prices due to optimism over ethanol have proven temporary; we are still forecasting bumper sugar surplus to emerge over 2018, and it will take at least six months for a proposed Brazilian biofuel support policy to become effective (See 'Sugar: Policy Changes To Drive Sugar Market Disruption', October 2017). Strong short-term demand for US exports is driving cotton price increases, but upward revisions to US production and stocks in recent weeks suggest that these gains will also be reversed as we move into Q118. Cocoa prices have moved considerably lower in recent weeks, but we expect prices to rebound. Finally, we are in the process of revising down our milk price forecasts due to buoyant supply and tepid Chinese WMP import growth.

Select Commodities - Performance & BMI Forecasts
Commodity Unit Current price YTD (% chg) 1 Year (% chg) 2016 (ave) YTD (ave) 2018f (ave) 2019f (ave)
Note: All metals prices except steel and iron ore refer to generic third-month contracts. All energy and agricultural prices refer to generic front-month unless otherwise stated. Source: Bloomberg, BMI. Updated December 21
Agriculture
Class III Milk (Third-Month) USD/cwt 13.64 -19.5 -19.3 15.15 16.18 14.00 14.50
Cocoa (London) GBP/tonne 1,405 -18.9 -24.1 2,195 1,560 1,700 1,750
Coffee USc/lb 123 -10.1 -14.8 136 133 140 145
Corn USc/bushel 350 -0.7 0.6 358 359 380 390
Cotton USc/lb 76 7.9 8.7 65.7 73.4 70.0 75.0
Feeder Cattle USc/lb 142 8.7 9.1 142.9 143.0 na na
Lean Hogs USc/lb 68 3.4 6.8 66 69.9 na na
Live Cattle USc/lb 119 0.3 6.5 119 117.7 na na
Palm Oil (Third-Month) MYR/tonne 2,449 -21.2 -21.4 2,631 2,708 2,500 2,580
Rough Rice USD/cwt 12 26.5 26.4 10.3 11.0 11.2 11.4
Soybean USc/bushel 953 -4.4 -5.4 989 976 1,020 1,035
Sugar #11 USc/lb 15 -25.0 -19.6 18.2 15.8 13.5 15.0
Wheat USc/bushel 425 4.0 6.3 436 436 465 465
Energy
Coal, Thermal (Newcastle) USD/tonne 102.6 8.6 23.0 65.7 87.8 80.0 65.0
Brent Crude USD/bbl 64.5 13.4 18.4 45.1 54.5 54.0 60.0
OPEC Basket, Oil USD/bbl 62.2 16.6 19.6 40.8 na 50.0 48.0
WTI Crude USD/bbl 58.0 7.9 10.5 43.5 50.7 57.0 63.0
Natural Gas (HH) USD/mnBtu 2.6 -29.5 -25.9 2.55 3.02 3.05 3.12
Natural Gas (NBP) USD/mnBtu 7.9 16.2 36.7 4.69 5.82 na na
Metals
Aluminium USD/tonne 2,130 25.8 23.5 1,611 1,976 2,000 2,050
Copper USD/tonne 7,032 27.0 27.5 5,167 6,183 6,300 6,400
Gold USD/oz 1,266 10.3 11.8 1,249 1,258 1,300 1,325
Iron Ore (62% CFR, Qingdao) USD/tonne 70 -11.7 -11.9 58.4 na 50.0 48.0
Lead USD/tonne 2,488 23.4 14.0 1,875 2,322 2,350 2,350
Nickel USD/tonne 12,055 20.3 11.3 9,648 10,439 10,000 9,750
Palladium USD/oz 1,038 51.9 54.6 616 866 na na
Platinum USD/oz 916 1.6 0.2 991 951 na na
Silver USD/oz 16 1.2 0.8 17.1 17 na na
China Domestic Hot Rolled Steel Average CNY/tonne 4,346 16.4 12.7 2,763 3,789 na na
Tin USD/tonne 19,450 -7.9 -7.0 17,896 19,988 20,500 21,500
Zinc USD/tonne 3,231 25.4 23.3 2,101 2,884 2,800 2,850