8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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SEB Commodities MonthlyBullish market disguised in bearishcorrections
31 MAY 2011
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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Commodities Monthly
Bullish market disguised in bearish corrections
GENERAL 0-3 M 4-6 M 7-12 M We expect sideways and volatile commodity markets in the
months ahead as growth momentum and leading indicators
are likely to weaken further and risk appetite is tempered byEuropean sovereign debt, the end of QE2 and Chineseslowdown worries
We recommend using the volatility bursts to build long
commodity positions as the global recovery remains on trackwith growing demand and strained supply
ENERGY 0-3 M 4-6 M7-12 M Investors shed some speculative length during the May
correction but are still substantially long and further correctivesell-offs are therefore likely on periods of general risk aversion
However geopolitical risk is high (MENA), with escalations in
Yemen and Syria, and fundamentals remain strong
The shortage of sweet crude oil due to the Libyan outage isgoing to test the market over the coming months as refineriesin the Atlantic basin ramp up production
INDUSTRIAL METALS 0-3 M4-6 M7-12 M The industrial metal sector remains highly vulnerable to
indications of China moving towards a hard landing but is alsobeing impacted by OECD slowdown worries
Sideways and volatile price action in the months ahead willcreate attractive buying opportunities
We recommend buying copper on dips into the $8500-9000/t
range as Chinese destocking eventually comes to an end
We recommend buying aluminium on dips below $2500/t as
demand recovery and energy prices will offer supportPRECIOUS METALS 0-3 M4-6 M7-12 M The gold market rests on solid support mainly from a high
level of uncertainty and fear regarding the European sovereigndebt situation in general and the Greek in particular
A widespread negative real interest rate environment, centralbank buying and growing Asian demand all remain supportive
However, we see a non negligible risk that dollar strength and
falling Chinese inflation at least temporarily could put an endto the gold rally during the second half of 2011
AGRICULTURE 0-3 M4-6 M7-12 M Short to medium term fundamentals in the agricultural sector
have strengthened significantly, e.g. on widespread droughthitting winter crops in several regions.
Consequently, we upgrade our short term view from neutral to
mildly bullish since the upside is likely to be limited by demanddestruction.
Due to low inventory levels, at least for corn and soybeans,
and relatively easy substitution we expect the grainmovements to be fairly synchronized.
The long term view remains bearish as the probability ofurther adverse weather falls with the fading La Nia cycle
Arrows indicate the expected price action during the period in question.
COMMODITIES MONTHLY WILL NOW TAKE A SUMMERBREAK UNTIL SEPTEMBER
UBS Bloomberg CMCI Sector IndicesUBS Bloomberg CMCI Sector IndicesUBS Bloomberg CMCI Sector IndicesUBS Bloomberg CMCI Sector Indices(price indices, weekly closing, January 2010 = 100)
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Nickel
Coffe(Ar.)
CottonWTI
Cocoa(US)
Gasoline
Brent
Heat.oil
Aluminium
Power
Sugar
Platinum
Palladium
CO2(EUA)
Copper
Nat.gasGold
LeadZinc
Steel
Soybeans
Power
Corn
Wheat
Chart Sources: Bloomberg, SEB Commodity Research
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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Commodities Monthly
General
Over the next few months, we expect a volatile andrange-bound commodity market to provideattractive buying opportunities. The global recovery
continues, a view supported by the G8 statement atthe end of May confirming that the global economyis in general strengthening and becoming more self-sustained. However, despite continuing growthand the sustained recovery, growth momentum,PMIs and consequently risk appetite are flagging.Markets remain unsure whether to expect a hard orsoft landing in China given its current monetarypolicies to dampen inflation and excessive growth.Further, EU peripheral debt concerns are rising,investors are wary as the end of US QE2 approachesand the inventory cycle is creating a soft-patch in IPgrowth momentum. Despite decreasing during the
May commodity correction, current speculativepositions remain high implying the possibility offurther volatile corrective action.
After reaching record highs at the beginning of April,commodities corrected strongly at the start of May. Atthe height of the sell-off, Bloombergs broad CMCIcommodity index closed down 7.3% compared to theend of April, and up to 9.2% lower relative to its Aprilhigh. The correction occurred against the background ofrecord high speculative positions in many commoditiesand low volatility levels and was triggered by an ECB
statement declaring that even if rate hikes had startedthis did not imply that they would rise rapidly. Thisindication rapidly reversed USD depreciation, sendingthe USD index as much as 4.35% higher in Maycompared to its April close. The ECBs comments cameamid growing concerns regarding the Europeanperipheral debt situation including rapidly rising bondyields especially in Greece and Ireland which also lentsupport to the USD and reduced risk appetite generally.
At the end of May, the realization that China intended tobuy Eurozone bailout bonds slightly eased marketconcerns surrounding the Greek debt crisis. Also,markets regarded as positive the fact that Europeanimplementation of Basel III will be somewhat easier onEuropean banks than had been feared, and wereimpressed by the G8s reassuring statement on theglobal economy. As a result commodities have partlyrecovered previous losses while USD depreciation hasresumed. Nevertheless, gold stands only 1% off its all-time high, the Swiss franc is record strong against boththe USD and euro, while yields on 10-year US andGerman government bonds have declined to around 3%.In other words, risk aversion and recovery concerns stillstalk the markets.
If we neutralize the USD effects in the movements ofCMCI commodity index by dividing it by the USD indexwe get that it is marginally down year to date.
UBS Bloomberg CMCIUBS Bloomberg CMCIUBS Bloomberg CMCIUBS Bloomberg CMCI(price index, weekly closing)
300
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15001600
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JPM global manuJPM global manuJPM global manuJPM global manufacturing PMIfacturing PMIfacturing PMIfacturing PMI(monthly, PMIs >50 expansive)
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35
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65
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OECD composite leading indicatorsOECD composite leading indicatorsOECD composite leading indicatorsOECD composite leading indicators(monthly, 100 corresponds to long term trend in industrial production)
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9394
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ChinaEurozone
OECD
USA
Reference
Chart Sources: Bloomberg, SEB Commodity Research
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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Commodities Monthly
Crude oil
The May sell-off in crude oil reduced speculativepositions sharply though prices fell much less. Thispartly reflects reduced investor risk appetite due to
increased uncertainty concerning the upcoming endof QE2, at the same time as physical marketparticipants find current prices attractive based onstrong fundamentals. In our opinion, the worst ofthe technical sell-off is over leaving us bullish forQ2-11 with an average price forecast of $120/b. Wealso regard risk as biased to the upside as refineriesramp up production ahead of the start of the USdriving season, exacerbating the effect of the sweetcrude shortage caused by events in Libya. Our priceoutlook for H2-11 is relatively conservative andincludes a projected oil price of $105/b. Firstly, weexpect oil demand to ease following this summersdriving and flying season. Secondly, it remains tooearly to assess the demand destruction effect ofcurrent high oil prices. Thirdly, we should have aclearer idea by the end of the summer when at leastsome Libyan oil production will be back on-linedespite uncertain developments going forward. Still,we regard price risk as lying above $105/b with theMENA situation the pivotal factor. A deterioratingglobal macroeconomic situation, including aChinese hard landing, radical European peripheraldebt eruption or stumbling US recovery, takentogether with an improved MENA situation would
clearly depress the Brent crude oil price below$105/b although this is not our main scenario.
In Libya positions remain locked, with significantvolumes of oil unlikely to be back on the market beforethe end of the year whatever the scenario. Elsewhere inthe region, Yemens president Saleh continues to avoidresponding to peace initiatives from the GulfCooperation Council, bringing his country to the verge ofcivil war, and threatening to destabilize the MENA regionfurther. In Syria protests continue despite indiscriminatekilling by security forces, fanning further discontent.
In China little rain has fallen resulting in low hydroreserves which have forced authorities to rationelectricity. In addition, due to the high cost of coal andregulated power prices producers with coal fired powerplants have become reluctant to produce. At the sametime, authorities are disinclined to raise power prices,mirroring inflation concerns. We expect consumers toswitch to diesel-generated sources instead.
US demand remains surprisingly resilient despite currenthigh prices. Implied demand for both gasoline anddistillates is consistent with normal seasonality. The
definitive test of demand will take place over the summerdriving season lasting from Memorial Day until LabourDay.
Crude oil priceCrude oil priceCrude oil priceCrude oil price(NYMEX/ICE, $/b, front month, weekly closing)
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j f m a m j j a s o n d
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2011
Chart Sources: Bloomberg, SEB Commodity Research
Current global crude oil demand estimatesCurrent global crude oil demand estimatesCurrent global crude oil demand estimatesCurrent global crude oil demand estimates
2010
(mb/d)
Revision
(kb/d)
2011
(mb/d)
Revision
(kb/d)IEA 87.9 +/-0 89.2 -200EIA 86.68 +/-0 88.08 -120
OPEC 86.67 +120 88.08 +140
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Commodities Monthly
EnergyWTI futures curveWTI futures curveWTI futures curveWTI futures curve(NYMEX, $/b)
Brent futures curveBrent futures curveBrent futures curveBrent futures curve(ICE, $/b)
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11-05-27
Gasoline and heating oil pricesGasoline and heating oil pricesGasoline and heating oil pricesGasoline and heating oil prices(NYMEX, /gal, front month, weekly closing)
Gasoline and distillate inventoriesGasoline and distillate inventoriesGasoline and distillate inventoriesGasoline and distillate inventories(DOE, mb, weekly data)
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Distillate fuel oil 2011
US natural gas pricesUS natural gas pricesUS natural gas pricesUS natural gas prices(NYMEX, $/MMBtu, front month, weekly closing)
US natuUS natuUS natuUS natural gasral gasral gasral gas futures curvefutures curvefutures curvefutures curve(NYMEX, $/MMBtu)
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Chart Sources: Bloomberg, SEB C ommodity Research
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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Commodities Monthly
Nordic power
At the end of May, a decision regarding the future ofnuclear power in German finally came. The seven plantstaken offline in the three month moratorium on reactor
lifetime extensions after the Japanese incident in Marchwill be permanently close. The rest of the reactors will gooffline in 2021. There is one possible exception however,if the transition to renewable energy does not go asquickly as planned three of the plants will be allowed tocontinue operating until 2022. Even though the markethad priced in most of this after a month of speculationsand rumours, it traded up rapidly during the last days ofMay.
In May, the Nordic power market was dominated by verywet weather that pushed prices lower and finallyimproved the much strained hydro-balance somewhat.The deficit shrunk from -35 to -24 TWh m/m, which is anunusually large move but still small relative to the totaldeficit.
Despite the wet weather, spot prices in May deliveredvery high and stable averaging at EUR 54.49/MWh, upEUR 0.65/MWh compared to April. That is yet again aclear sign that producers are in good control and that thesystem can still absorb huge volumes of water. TheSwedish spot traded largely in line with the system price.In Germany spot prices picked up much more during Mayand delivered EUR 2.34/MWh above the Nordic system
price at EUR 56.83/MWh, which is the largest premiumsince October 2009.
In spite of the German decision, all parts of the Nordicforward curve retreated in May. Q3-11 lost EUR1.30/MWh and closed at around EUR 55.00/MWh whileYR-12 lost EUR 0.40/MWh and closed at around EUR51.95/MWh. The German curve was stable during mostof the month but gained a lot on the nuclear decision. Asa result of this the spread between Nordic and GermanyYR-12 widened EUR 1.75/MWh m/m to around EUR8.70/MWh.
Looking ahead, we are still comfortable in our beliefthat Nordic power prices will remain strong. Despitewet weather and the resulting improvement in thehydro-balance, support from stable spot prices, theGerman nuclear shutdown and firm fuel prices willoffer good support. A large German vs. Nordic YR-12premium, which signals export, as well as a largehydro deficit are very bullish signals going forward.
Nordic power priceNordic power priceNordic power priceNordic power price(Nord Pool, /MWh, front quarter, weekly closing)
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Chart Sources: Bloomberg, SEB Commodity Research
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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Commodities Monthly
Industrial metals
The outlook for the industrial metal sector is beingobscured by the slowdown in OECD growth impliedby softer economic indicators, as well as
uncertainty regarding the effect of measures totighten Chinese monetary policy. General riskappetite is also being undermined by concernsconnected with the upcoming end of QE2, whichtogether with the continued deterioration of theEuropean sovereign debt situation has hurtcommodities due to the strong dollar. Consequently,general price levels have fallen back in line withthose last seen in Q4-10. Despite further high shortterm uncertainty, we regard current prices asattractive for accumulating long term positions.However, we do not expect industrial metal indicesgenerally to increase beyond previous highs, at leastuntil late this year. Instead, we foresee range-boundand volatile trading as industrial metals seek a newbase from which to advance after softening over thesummer. While we still recommend selectiveexposure, preferring copper and aluminium to nickeland zinc, a broader investment profile is once againattractive following the recent market pricecorrection. However, there is some risk of morebearish short term downside in the event of asustained dollar rally when QE2 ends and the Fedpotentially signalling upcoming interest rate hikes.
Following eight reserve requirement ratio (RRR)increases, four interest rate rises and the renminbistrengthening 5% against the US dollar, we believeChinese authorities have probably completedimplementation of most planned measures to curbinflation and dampen economic activity. Given the usuallag of between six and 24 months before the effects ofsuch measures become apparent, we expect their effectsto become increasingly apparent going forward,intensifying discussions on whether the country faces asoft vs. hard landing. The countrys reluctance to buymetals when prices are high was already apparent earlier
this year with prices near record highs. However, in viewof continued strong industrial activity, industryinventories must have fallen resulting in a greater needto restock. Anecdotally, buying interest may well haveincreased in May as consumers took the opportunity torestock partially on price weakness.
The worst drought in 50 years has hit Chinese hydropower production hard. As a result, power rationing wasintroduced in several provinces in April, a s ituation whichis bound to worsen over the summer as consequentlyreduced industrial activity adversely impacts both metalproduction and consumption. The energy intensive early
segment of the value chain will most probably be worstaffected, hitting supply even harder than demand withincreasing supply tightness as a result.
LME indexLME indexLME indexLME index(weekly closing)
900110013001500170019002100230025002700290031003300350037003900
4100430045004700
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Industrial metal pricesIndustrial metal pricesIndustrial metal pricesIndustrial metal prices(LME, indexed, weekly closing, January 2010 = 100)
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CopperNickel
Aluminium
Zinc
Lead
Tin
LME price and inventory changesLME price and inventory changesLME price and inventory changesLME price and inventory changes last monthlast monthlast monthlast month
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Aluminium
Copper
Nickel
Zinc
Lead Ti
n
Steel
Price (%) Inventories (%)
Chart Sources: Bloomberg, SEB Commodity Research
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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Commodities Monthly
Industrial metalsAluminiumAluminiumAluminiumAluminium LME aluminium price and inventoriesLME aluminium price and inventoriesLME aluminium price and inventoriesLME aluminium price and inventories
(weekly data)
Chinese power rationing will probably have a negative
effect on domestic aluminium supply in particular, with
potentially stronger import demand going forward. High marginal production costs, possibly as high as
$2500/t, have built a strong floor under aluminiumprices, skewing price risk to the upside from currentlevels. We expect aluminium to rebound above $2800/tquickly when general sentiment turns bullish again.
Bearishly, however, the market remains in surplus this
year and probably also in 2012-13.
Although LME inventories are at record highs, a major
share in both the US and Europe is tied up in f inancialtransactions and warehouse queues. As a result thephysical market is in fact significantly tighter than itappears.
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CopperCopperCopperCopper LME copper price and inventoriesLME copper price and inventoriesLME copper price and inventoriesLME copper price and inventories(weekly data)
Anecdotal evidence suggests that Chinese bonded
warehouse inventory levels have begun to decrease aslower prices trigger restocking demand, a trend alsoreflected in the narrowing LME vs. SHFE premium.
Stabilizing or falling SHFE, LME and COMEX copper
inventories also suggest the copper market is tightening.
We recommendation to build long copper positions in
the $8500-9000/t range as we expect the market to
remain tight until at least the end of next year with pricesrising well above $10000/t before moving lower again.
Long term, copper will be strongly supported by Chinasambitious plans to build low cost housing.
Speculative positions in COMEX copper have fallen
sharply implying scope to accumulate new longs.
The Peruvian election scheduled for June poses a bullishevent risk if Ollanta Humala wins.
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NickelNickelNickelNickel LME nickel price and inventoriesLME nickel price and inventoriesLME nickel price and inventoriesLME nickel price and inventories(weekly data)
LME inventories have continued to fall in May on strong
demand from the stainless steel industry as well assupply disruptions. However, recent trends suggestinventories may be starting to reverse.
So far, the market appears to have successfully absorbed
strong production growth in China.
We expect the nickel market to reverse from deficit to
surplus moving into the second half of this year, withresulting further price weakness.
We will remain bearish on nickel until prices fall to a
fundamentally sound level around $20000/t.
Power rationing in China represents potential upside risk
as it could hurt NPI production going forward. 0
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Chart Sources: Bloomberg, SEB Commodity Research
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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Commodities Monthly
Industrial metalsZinZinZinZincccc LME zinc price and inventorieLME zinc price and inventorieLME zinc price and inventorieLME zinc price and inventoriessss
(weekly data)
While for this year, the zinc market still appears
oversupplied, we believe it could move into balance in
2012. However, the market may tighten earlier thananticipated due on weaker Chinese production andmetal being tied up in financing deals.
Currently, we see little value in zinc above $2000/t.
Recently released data from the International Lead and
Zinc Study Group (ILZSG) concerning the zinc marketshowed supply of refined zinc exceeding demand by111,000 tonnes, a 4.8% y/y increase in mine output, a4.7% rise in refined output, and 6% higher consumption.
According to documents released in connection with the
Glencore IPO the company controls 60% of marketablezinc output worldwide, implying potentially significantpricing power concerning zinc production.
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SteelSteelSteelSteel LME steel billet price and inventoriesLME steel billet price and inventoriesLME steel billet price and inventoriesLME steel billet price and inventories(weekly data)
Chinese 62% iron ore corrected 5.7% down in May
versus the April close which also coincided with a 6.3%fall in the Shanghai equity index over the same period.
LME 3 month steel billets closed between $535/t and
$566/t in May closing the moth at $566/t, up 1.25%versus the April close.
In Europe domestic shredded scrap was down 5.2%while domestic European HRC was down 9.4% andNorth American, Midwest HRC was down 6.4% in May
With weakness in iron ore in China, scrap in Europe andHRC in both the US and Europe we expect to seeweakness also in LME steel billets ahead. The ongoinginventory cycle driven soft-patch and flagging growthmomentum should also put a lid on the upside for aperiod.
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Chart Sources: Bloomberg, SEB C ommodity Research
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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10
Commodities Monthly
Industrial metalsAluminiumAluminiumAluminiumAluminium futures curvefutures curvefutures curvefutures curve(LME, $/t)
Copper futures curveCopper futures curveCopper futures curveCopper futures curve(LME, $/t)
2600
2625
2650
2675
2700
2725
2750
2775
2800
2825
2850
28752900
2925
2950
2975
jun-11
sep-11
dec-11
mar-12
jun-12
sep-12
dec-12
mar-13
jun-13
sep-13
dec-13
mar-14
jun-14
sep-14
dec-14
mar-15
jun-15
11-03-31
11-04-28
11-05-27
8500
8600
8700
8800
8900
9000
9100
9200
9300
9400
9500
jun-11
sep-11
dec-11
mar-12
jun-12
sep-12
dec-12
mar-13
jun-13
sep-13
dec-13
mar-14
jun-14
sep-14
dec-14
mar-15
jun-15
11-03-31
11-04-28
11-05-27
Nickel futures curveNickel futures curveNickel futures curveNickel futures curve(LME, $/t)
Zinc futures curveZinc futures curveZinc futures curveZinc futures curve(LME, $/t)
21500
22000
22500
23000
23500
24000
24500
25000
25500
26000
26500
27000
jun-11
sep-11
dec-11
mar-12
jun-12
sep-12
dec-12
mar-13
jun-13
sep-13
dec-13
mar-14
jun-14
sep-14
dec-14
mar-15
jun-15
11-03-31
11-04-28
11-05-27
2225
2250
2275
2300
2325
2350
2375
2400
2425
2450
jun-11
sep-11
dec-11
mar-12
jun-12
sep-12
dec-12
mar-13
jun-13
sep-13
dec-13
mar-14
jun-14
sep-14
dec-14
mar-15
jun-15
11-03-31
11-04-28
11-05-27
Lead futures curveLead futures curveLead futures curveLead futures curve(LME, $/t)
Tin futures curveTin futures curveTin futures curveTin futures curve(LME, $/t)
2400
2425
2450
2475
2500
2525
2550
2575
2600
26252650
2675
2700
2725
2750
jun-11
sep-11
dec-11
mar-12
jun-12
sep-12
dec-12
mar-13
jun-13
sep-13
dec-13
mar-14
jun-14
sep-14
dec-14
mar-15
jun-15
11-03-31
11-04-28
11-05-27
27000
27400
27800
28200
28600
29000
29400
29800
30200
30600
31000
31400
31800
32200
jun-11
jul-11
aug-11
sep-11
okt-11
nov-11
dec-11
jan-12
feb-12
mar-12
apr-12
maj-12
jun-12
jul-12
aug-12
11-03-31
11-04-28
11-05-27
Chart Sources: Bloomberg, SEB C ommodity Research
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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11
Commodities Monthly
Precious metals
Our bullish short term view on gold remains strongon widespread disagreement between Europeanleaders concerning Greece. Contagion risk has also
increased. In addition, OECD central banks remainreluctant to meet rising inflation with interest ratehikes, fearing adverse effects on the recovery.Meanwhile, Chinese inflation looks likely to increasefurther despite several rate hikes. Gold is thereforelikely to continue to be supported by safe haven andinflation hedge demand at least during Q3-11. Themain threat over this period is potential dollarappreciation. Although it has been suggested thatthe end of QE2 could drive the dollar upward,potentially greater uncertainty and higher riskaversion could also act supportive for gold. In boththe short- and long term, continued central bank
buying supports the gold price with GFMSestimating an accumulation of 240 tonnes this year.Asian demand in general is also likely to remainstrong, acting as a major underlying driver. Still, weregard the long term outlook more conservatively,believing that gold may be adversely affected by astronger US dollar in Q4-11 and decreasing Chineseinflation.
Markets are increasingly concerned about Greek debtrestructuring. While modest measures could adverselyaffect the countrys banking system, major provisions
could hurt public finances in more healthy countrieswithin the Euro-zone. While European politicians havealready begun discussing soft restructuring, i.e.extending debt maturities, the ECB strongly opposes allsuch talks. Further, meddling with debt maturities couldmake the countrys bonds unusable as collateral,reducing ECB funding for Greece. Also depressing arebond valuations and indicators concerning prospects forIreland and Portugal. It is very difficult to imagine ascenario in which the downward spiral can be reversedwithout considerable social and economic hardship.
The inflation and interest rate environment remains veryaccommodative for gold. Despite rising US headline andcore CPI and pressure from the OECD, the Fed is unlikelyto raise interest rates before 2012. Also, inflation isprobably not that unwelcome in the US, with dollar debtincreasing. The ECBs first post crisis rate increase (by25bp to 1.25%) is likely to be followed by two more hikeslater this year (by 25bp in July and October), which wouldonly bring rates into line with current core inflation. InChina, we expect one more interest rate increase(probably in July) although inflation may rise to around6% before tightening measures take effect. Real interestrates are therefore likely to remain negative over the next
half year, supporting the investment attractions of goldcompared to other safe haven investments.
Precious metal pricesPrecious metal pricesPrecious metal pricesPrecious metal prices(COMEX/NYMEX, indexed, weekly closing, January 2010 = 100)
8090
100110120130140150160170180190200210220230240250260
270280290
jan-10
feb-10
mar-10
apr-10
maj-10
jun-10
jul-10
aug-10
sep-10
okt-10
nov-10
dec-10
jan-11
feb-11
mar-11
apr-11
maj-11
SilverPlatinum
GoldPalladium
Gold to silver ratioGold to silver ratioGold to silver ratioGold to silver ratio(front month, weekly closing)
30
34
38
42
46
50
54
58
62
66
70
74
78
82
86
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Gold and currencies vs. USDGold and currencies vs. USDGold and currencies vs. USDGold and currencies vs. USD
-4
-3
-2
-1
0
1
2
3
4
5
6
78
9
10
GOLD EUR JPY GBP SEK RUB NOK CHF
YTD (%) MoM (%)
Chart Sources: Bloomberg, SEB Commodity Research
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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12
Commodities Monthly
Precious metalsGoldGoldGoldGold Gold priceGold priceGold priceGold price
(COMEX, $/ozt, front month, weekly closing)
Our bullish short term view on gold has strengthened
further mainly due to the European debt crisis, as well as
present and feared future inflation. We expect gold toeasily pass above $1600/ozt.
Our long term view concerning potential dollar strength
and easing Chinese inflation remain more modest.
According to the World Gold Council (WGC) China
overtook India as the largest market for goldinvestments during Q1-11.
After decreasing during the general commodity
liquidation wave in early May, physical gold ETP holdingsrecovered during the second half of the month to closeat 2058 tonnes, only 57 tonnes below the previous high.
Long speculative positions in COMEX gold fell 10% in
May to relatively low levels compared to open interest.
200
300
400
500
600
700
800
900
1000
1100
1200
13001400
1500
1600
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
SilverSilverSilverSilver Silver priceSilver priceSilver priceSilver price(COMEX, $/ozt, front month, weekly closing)
Silver suffered an expected, violent and wholly justified
20% correction in May and remains sensitive to furtherdownside.
We see little value in silver above $30/ozt (i.e. agold/silver ratio below 50).
The recent almost hysterical rally appears to have been
driven by demand mainly from US, Indian and Chineseretail investors.
Despite a recent explosion in silver trading in Chinaturnover remains far behind Europe and the US.
Physical silver ETP holdings fell dramatically in May to
currently 13780 tonnes vs. a record 15518 tonnes inApril.
Long speculative positions in COMEX silver have
continued to fall and are now relatively low compared toopen interest.
2468
101214161820
222426283032343638404244464850
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Platinum & PalladiumPlatinum & PalladiumPlatinum & PalladiumPlatinum & Palladium Platinum and palladium pricesPlatinum and palladium pricesPlatinum and palladium pricesPlatinum and palladium prices(NYMEX, $/ozt, front month, weekly closing)
Disrupted global auto production as a result of the
Japanese earthquake continues to dampen palladiumand platinum prices. However, demand is likely to catchup as automakers seek to offset shortfalls in Q4-11.
Johnson Matthey expects the platinum market to be
balanced in 2011 although insufficient investments inmining capacity are likely to drive it into deficit in both2012 and 2013.
Johnson Matthey is even more bullish on palladium with
a deficit expected as early as this year.
The downside risk for both platinum and palladium is
strongly supported by high production costs.
While physical platinum ETP holdings remain close to
record highs, palladium holdings have trended lower inrecent months.
100
200
300
400
500
600
700
800
900
1000
1100
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
300
550
800
1050
1300
1550
1800
2050
2300Palladium(left axis)
Platinum (right axis)
Chart Sources: Bloomberg, SEB Commodity Research
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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13
Commodities Monthly
Precious metalsGoldGoldGoldGold futures curvefutures curvefutures curvefutures curve(COMEX, $/ozt)
SilverSilverSilverSilver futures curvefutures curvefutures curvefutures curve(COMEX, $/ozt)
1400
1450
1500
1550
1600
1650
1700
1750
jun-11
sep-11
dec-11
mar-12
jun-12
sep-12
dec-12
mar-13
jun-13
sep-13
dec-13
mar-14
jun-14
sep-14
dec-14
mar-15
jun-15
sep-15
dec-15
mar-16
jun-16
11-03-3111-04-28
11-05-27
36
37
38
39
40
41
42
43
44
4546
47
48
jul-11
okt-11
jan-12
apr-12
jul-12
okt-12
jan-13
apr-13
jul-13
okt-13
jan-14
apr-14
jul-14
okt-14
jan-15
apr-15
jul-15
okt-15
11-03-31
11-04-28
11-05-27
Palladium futures curvePalladium futures curvePalladium futures curvePalladium futures curve(NYMEX, $/ozt)
Platinum futures curvePlatinum futures curvePlatinum futures curvePlatinum futures curve(NYMEX, $/ozt)
755
760
765
770
775
780
785
jun-11
sep-11
dec-11
mar-12
jun-12
11-03-31
11-04-28
11-05-27
1770
1780
1790
1800
1810
1820
1830
1840
1850
jul-11
okt-11
jan-12
apr-12
jul-12
11-03-31
11-04-28
11-05-27
Physical sPhysical sPhysical sPhysical silver and goldilver and goldilver and goldilver and gold ETPETPETPETP holdingsholdingsholdingsholdings(weekly data, tonnes)
Physical pPhysical pPhysical pPhysical palladium and platinumalladium and platinumalladium and platinumalladium and platinum ETPETPETPETP holdingsholdingsholdingsholdings(weekly data, tonnes)
1100
1200
1300
1400
1500
1600
1700
1800
1900
2000
2100
2200
jan-10
feb-10
mar-10
apr-10
maj-10
jun-10
jul-10
aug-10
sep-10
okt-10
nov-10
dec-10
jan-11
feb-11
mar-11
apr-11
maj-11
Silver holdings / 10
Gold holdings
20
25
30
35
40
45
50
55
60
65
70
75
jan-10
feb-10
m
ar-10
apr-10
maj-10
jun-10
jul-10
aug-10
sep-10
okt-10
nov-10
dec-10
jan-11
feb-11
m
ar-11
apr-11
maj-11
Palladium
Platinum
Chart Sources: Bloomberg, SEB C ommodity Research
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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14
Commodities Monthly
Agriculture
Short- to medium term fundamentals in theagricultural commodity sector have strengthenedsignificantly due to protracted droughts in several
parts of the world which have substantially reducedyield expectations for developing winter crops. Inaddition, wet and cold weather conditions areadversely affecting yield expectations for springcrops currently being planted. Hoarding byconsumers to secure supply and to some extent alsoby producers hoping for even higher prices isexacerbating the situation. Consequently, weupgrade our previous neutral short term view tomoderately bullish as demand destruction is likelyto limit rallies due to already record high prices. Weexpect high sector sensitivity and unpredictabilityas the market follows weather forecasts closely. As
a result of relatively easy substitution and lowinventories, at least for corn and soybeans, weexpect grain movements to be largely synchronized.Reduced protectionism is a bearish short termfactor with Ukrainian and Russian restrictions to beremoved. A drastic improvement in weatherconditions, major general risk aversion, significantdollar strength and/or lower energy prices wouldsupport an improved outlook for supply, restrictingprospects for prices. Our long term view remainsbearish with adverse weather conditions likely tobecome less frequent during the second half of the
year following the end of the current La Niameteorological phenomenon this summer.However, previous record high prices could beexceeded before such a position is reached.Nevertheless, considering current low inventoriesthe market is unlikely to soften much before the UScorn and soybean harvest in Q4-11.
The global crop weather situation continues to dampenthe present production outlook. The US is most widelyaffected with a severe drought in southern winter wheatgrowing areas, where the crop is developing, andexcessive rain in the spring wheat growing areas in thenorth, where planting is progressing. Simultaneously inthe Midwest rains are delaying corn and soybeanplanting. In Canada planting has also been delayed bywet conditions. These disturbances are typical late stageLa Nia phenomena. According to latest data, the effectsof the anomaly continued to weaken during March withpresent forecasts indicating a neutral environment willbe achieved between May and July, and will continue forthe rest of the year, hopefully improving growingconditions significantly. In South America, while heavyrain has delayed the harvest high moisture levels willbenefit the approaching planting season. Droughts of
varying intensities will adversely affect developing wintercrops in Europe, China and the former Soviet Union.
Grains pricesGrains pricesGrains pricesGrains prices(CBOT, indexed, weekly closing, January 2010 = 100)
70
80
90
100
110
120
130
140
150
160
170
180
190
jan-10
feb-10
mar-10
apr-10
maj-10
jun-10
jul-10
aug-10
sep-10
okt-10
nov-10
dec-10
jan-11
feb-11
mar-11
apr-11
maj-11
Wheat
Soybeans
Corn
Year end grain inventories (days of supply)Year end grain inventories (days of supply)Year end grain inventories (days of supply)Year end grain inventories (days of supply)(USDA, yearly data updated monthly)
50
60
70
80
90
100
110
120
130
00/01
01/02
02/03
03/04
04/05
05/06
06/07
07/08
08/09
09/10
10/11
11/12
Wheat
Soybeans
Corn
Chart Sources: Bloomberg, USDA, SEB Commodity Research
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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15
Commodities Monthly
AgricultureCornCornCornCorn Corn priceCorn priceCorn priceCorn price
(CBOT, /bu, front month, weekly closing)
Since despite high corn prices ethanol costs only half
that of gasoline net of subsidies, corn demand for
ethanol production remains high. Sharply lower crude oilprices would however hurt demand for ethanol.
Despite wet conditions in the Midwest, corn planting has
moved back on schedule in recent weeks at 79%. Still,compared with a 5-year average of 87% as of May 22,planting is slower than at any time since 1995.
Initial US Department of Agriculture (USDA) estimates
for 2011/2012 indicate that global corn inventories areexpected to recover slightly vs. 2010/2011.
The International Grains Council (IGC) estimates
2011/2012 production/consumption/inventories at848/853/116 mt respectively, compared withcorresponding USDA forecasts of 868/861/129 mt.
100
200
300
400
500
600
700
800
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
WheatWheatWheatWheat Wheat priceWheat priceWheat priceWheat price(CBOT, /bu, front month, weekly closing)
Drought developments in coming months will be
extremely important for the wheat market.
In the southern Great Plains drought conditions are nowrated exceptional, i.e. their most severe. On May 22some 44% of the US winter wheat crop was rated pooror very poor vs. only 9% last year.
US spring wheat planting is also lagging with only 54%
planted on May 22 compared to a 5-year average of 89%
due to cold, wet conditions. Initial USDA production estimates for 2011/2012 suggest
global wheat inventories are expected to fall slightlycompared to 2010/2011.
The IGC estimates 2011/2012 production/consumption/
inventories at 667/669/185 mt respectively, comparedto corresponding USDA data of 669/670/181 mt.
200
300
400
500
600
700
800
900
1000
1100
1200
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
SoybeansSoybeansSoybeansSoybeans Soybean pricSoybean pricSoybean pricSoybean priceeee(CBOT, /bu, front month, weekly closing)
The soybean market remains tighter than for wheat but
less so than for corn.
Uncertainties affecting Asian demand render thesoybean market less predictable.
With both corn and soybean growing in the US based in
the Midwest, soybeans are also being affected byplanting delays due to wet conditions, although withsoybean planting starting later than for corn thesituation is less problematic.
As of May 22, some 41% of US planting had been
completed compared with a 5-year average of 51%.
Initial USDA production estimates for 2011/2012 showglobal soybean inventories in terms of days of supply areexpected to fall slightly vs. 2010/2011.
USDA forecasts 2011/2012 production/consumption/
inventories of 263/263/62 mt respectively.
400
600
800
1000
1200
1400
1600
1800
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Chart Sources: Bloomberg, SEB Commodity Research
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Commodities Monthly
AgricultureCorn futures curveCorn futures curveCorn futures curveCorn futures curve(CBOT, /bu)
Wheat futures curveWheat futures curveWheat futures curveWheat futures curve(CBOT, /bu)
550
575
600
625
650
675
700
725
750
775
jul-11
okt-11
jan-12
apr-12
jul-12
okt-12
jan-13
apr-13
jul-13
okt-13
jan-14
apr-14
jul-14
okt-14
11-03-31
11-04-28
11-05-27
725
750
775
800
825
850
875
900
925
950
975
jul-11
okt-11
jan-12
apr-12
jul-12
okt-12
jan-13
apr-13
jul-13
11-03-31
11-04-28
11-05-27
Soybean futures curveSoybean futures curveSoybean futures curveSoybean futures curve(CBOT, /bu)
SugarSugarSugarSugar(NYBOT, /lb)
1250
1275
1300
1325
1350
1375
1400
1425
jul-11
okt-11
jan-12
apr-12
jul-12
okt-12
jan-13
apr-13
jul-13
okt-13
jan-14
apr-14
jul-14
11-03-31
11-04-28
11-05-27
0
5
10
15
20
25
30
35
40
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
CottonCottonCottonCotton(NYBOT, /lb)
CocoaCocoaCocoaCocoa(NYBOT, $/t)
20
40
60
80
100
120
140
160
180
200
220
2
002
2
003
2
004
2
005
2
006
2
007
2
008
2
009
2
010
2
011
1200
1400
1600
1800
2000
2200
2400
2600
2800
3000
3200
3400
3600
3800
2
002
2
003
2
004
2
005
2
006
2
007
2
008
2
009
2
010
2
011
Chart Sources: Bloomberg, SEB C ommodity Research
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Commodities Monthly
Commodity related economic indicatorsEUROZONE Current Date Previous Date NextIndustrial production (%, YoY) 5,6 2011-03-31 7,8 2011-02-28 2011-06-15
Industrial production (%, MoM) 0,0 2011-03-31 0,6 2011-02-28 2011-06-15
Capacity utilization (%, sa) 81,3 2011-06-30 80,3 2011-03-31
Manufacturing PMI 54,8 2011-05-31 58,0 2011-04-30 2011-06-01
Real GDP (%, YoY) 2,5 2011-03-31 2,0 2010-12-31 2011-06-08
Real GDP (%, QoQ, sa) 0,8 2011-03-31 0,3 2010-12-31 2011-06-08
CPI (%, YoY) 2,8 2011-04-30 2,7 2011-03-31 2011-06-16
CPI (%, MoM) 0,6 2011-04-30 1,4 2011-03-31 2011-06-16
Consumer confidence -9,8 2011-05-31 -11,6 2011-04-30 2011-06-22
USA
Industrial production (%, YoY) 5,0 2011-04-30 5,3 2011-03-31
Industrial production (%, MoM) 0,0 2011-04-30 0,7 2011-03-31 2011-06-15
Capacity utilization (%) 76,9 2011-04-30 77,0 2011-03-31 2011-06-15
Manufacturing PMI 60,4 2011-04-30 61,2 2011-03-31 2011-06-01
Real GDP (%, YoY) 2,3 2011-03-31 2,8 2010-12-31
Real GDP (%, QoQ, saar) 1,8 2011-03-31 3,1 2010-12-31 2011-06-24
CPI (%, MoM) 3,2 2011-04-30 2,7 2011-03-31 2011-06-15
CPI (%, MoM, sa) 0,4 2011-04-30 0,5 2011-03-31 2011-06-15
OECD Composite Leading Indicator 103,4 2011-03-31 103,1 2011-02-28Consumer confidence (Michigan) 74,3 2011-05-31 69,8 2011-04-30 2011-06-17
Nonfarm payrolls (net change, sa, 000) 244 2011-04-30 221 2011-03-31 2011-06-03
JAPAN
Industrial production (%, YoY, nsa) -13,1 2011-03-31 2,9 2011-02-28 2011-05-31
Industrial production (%, MoM, sa) -15,5 2011-03-31 1,8 2011-02-28 2011-05-31
Capacity utilization (%, sa) 73,6 2011-03-31 93,7 2011-02-28
Manufacturing PMI 45,7 2011-04-30 46,4 2011-03-31 2011-05-31
Real GDP (%, YoY, nsa) -1,0 2011-03-31 2,2 2010-12-31
Real GDP (%, QoQ, sa) -0,9 2011-03-31 -0,8 2010-12-31 2011-06-09
CPI (%, YoY) -0,1 2011-05-31 -0,1 2011-04-30 2011-07-01
CPI (%, MoM) 0,3 2011-04-30 0,3 2011-03-31
OECD Composite Leading Indicator 104,9 2011-02-28 104,2 2011-01-31
Consumer confidence 33,6 2011-04-30 38,3 2011-03-31
CHINAIndustrial production (%, YoY) 13,4 2011-04-30 14,8 2011-03-31 2011-06-14
Manufacturing PMI 52,9 2011-04-30 53,4 2011-03-31 2011-06-01
Real GDP (%, YoY) 9,7 2011-03-31 9,8 2010-12-31 2011-07-15
CPI (%, YoY) 5,3 2011-04-30 5,4 2011-03-31 2011-06-14
OECD Composite Leading Indicator 102,3 2011-03-31 102,1 2011-02-28
Consumer confidence 107,6 2011-03-31 99,6 2011-02-28
Bank lending (%, YoY) 17,5 2011-04-30 17,9 2011-03-31
Fixed asset investment (%, YoY) 23,8 2010-12-31 24,0 2010-09-30
OTHER
OECD Area Comp. Leading Indicator 103,2 2011-03-31 103,0 2011-02-28
Global manufacturing PMI 55,0 2011-04-30 55,8 2011-03-31
Sources: Bloomberg, SEB Commodity Research
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
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Commodities Monthly
DISCLAIMER & CONFIDENTIALITY NOTICE
The information in this document has been compiled by SEB Merchant Banking, a division within Skandinaviska EnskildaBanken AB (publ) (SEB).
Opinions contained in this report represent the banks present opinion only and are subject to change without notice. All
information contained in this report has been compiled in good faith from sources believed to be reliable. However, norepresentation or warranty, expressed or implied, is made with respect to the completeness or accuracy of its contents andthe information is not to be relied upon as authoritative. Anyone considering taking actions based upon the content of thisdocument is urged to base his or her investment decisions upon such investigations as he or she deems necessary. Thisdocument is being provided as information only, and no specific actions are being solicited as a result of it; to the extentpermitted by law, no liability whatsoever is accepted for any direct or consequential loss arising from use of this documentor its contents.
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SEB Commodity Research
Bjarne Schieldrop, Chief Commodity [email protected]
+47 9248 9230
Filip Petersson, Commodity [email protected]
+46 8 506 230 47
8/6/2019 Commodities Monthly: Bullish market disguised in bearish corrections
20/20
www.seb.se/mb