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Commodity Monthly

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Recovery in OECD demand the next theme

Wed, Sep 23 2009, 16:17 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


We believe there is still some momentum left in selected commodities. Copper has been testing USD6,500/tonne, gold has passed the magic USD1,000/ounce and lead is up more than 140% this year. But other commodities appear to be running out of steam. Aluminium could not stay above USD2,000/tonne and oil is back at about USD70/barrel. Finally, we could mention soft commodities, which appear to be in a world of their own, not taking part in the bull-market in energy and base metals. In other words, it seems that the market has become much more selective in pricing.

Our relative bullish view on commodities during the past two quarters has been based on the view that the global economy would recover during the summer and that is in fact what we are seeing now. We have moved from a situation of improvement in forwardlooking indicators such as the ISM and PMIs to an improvement in hard data. France, Germany and Japan all moved out of recession in Q2, and manufacturing production is on the rise in G7.

But growth has not peaked yet. The current quarter and the next look likely to be quite strong on a global scale. A positive inventory cycle, strong financial and monetary stimulus and improving financial conditions are expected to deliver a huge boost to global growth for the rest of 2009 and in Q1 10. For more on our view on the global economy, we recommend to take a look at our quarterly macro publication Global Scenarios. Of important calls, it is worth highlighting that we expect the US ISM to hit 60 indicating strong growth in manufacturing and employment to stabilise in the US by year-end. If these forecasts come through we believe it will give a strong boost to sentiment in commodity markets.

In our view, we are now moving from a situation in which commodity demand was only positive in Asia (China), to a fully-fledged global recovery in demand. The resumption of OECD demand is going to be the next big theme in the commodities market and underlines that the current price levels are in fact sustainable and that a final leg up in prices is likely late-2009 or early-2010. But looking into 2010, the scope for even higher prices is in our view limited. Growth could be approaching trend in the OECD area and China is expected to continue to power ahead. But the stock overhang from the 2008-09 recession is, together with spare capacity in many commodities, too overwhelming to create the upside pressure on commodities that we saw in the first part of 2008.

Furthermore, there is a risk that a soft patch in global growth could arise next year when the current stimuli from fiscal and monetary policy more or less dry up. The discussion of if we are going to see a V- or W-shaped recovery will be of utmost importance for commodity prices. However, as we forecast a pure V-recovery we do see upside risk to our commodity forecasts for 2010.

Published on  Wed, Sep 23 2009, 16:17 GMT

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Still some upside left

Fri, Aug 21 2009, 07:19 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


During the summer optimism has returned with financial markets now feeling more confident that the worst of the economic and financial crisis is over and that the recovery has finally taken hold.

The improvement in the global growth outlook is notably reflected in the global PMIs that are heading for, and in some instances are already above, the magic 50-level. The indicators are pointing towards a recovery. We argue that the global economy should experience a manufacturing boost in Q3 as stocks were run down significantly over the last six months and now need to be rebuilt. The cyclical recovery together with the weaker dollar turned out to be a very potent combination for the commodity markets. Both copper and oil prices have doubled since the cyclical trough in February. Even aluminium has recovered strongly, trading close to USD 2,000/tonne despite stocks at an all-time high.

But the rally might not be over yet. We look for more dollar weakness and a further improvement in the economic growth numbers during Q3 and Q4. It increasingly looks like the recovery is going to surprise on the upside and that we are going to see a vshaped recovery. The fact that both Germany and France moved out of recession in Q2 is just the latest proof that the demand picture is improving.

The economic recovery has not least been evident in Asia spearheaded by China. In Q2 Chinese GDP rose an impressive 7.9% or approximately 16% annualised. Growth in China is still driven mainly by very strong domestic demand. In particularly investment demand looks extraordinarily strong due to the huge Chinese stimuli packages.

Government investment was the sole driver behind the increase in investments in late 2008 and early 2009. However, this is no longer the case. Private investment including real estate has accelerated sharply in recent months. This is important as it diminishes the risk that we will see a sharp slowdown in growth when the impact from fiscal easing starts to wane. But for now the outlook looks encouraging. The latest set of PMI numbers once again surprised on the upside and the indices continue to be well above the 50- expansion level. But the market is quite nervous about signs that might point to future Chinese weakness. The market fears that Bank of China will have to curb lending going forward. We believe monetary policy will be kept loose in the foreseeable future, but the market will continue to stay alert to Chinese news. The Chinese stock market, which rose strongly earlier this year as cheap money poured in, briefly turned into a bear market with prices down 20% at one point this week compared to the 4 August level.

But growth optimism and improved risk appetite need to be measured against the fundamental picture for the different commodities. Here, a few eyebrows have been raised that, e.g. aluminium stocks are at an all-time and yet prices continue to march higher, and oil stocks are not falling despite OPEC production cuts. The fact that spare capacity in the oil market is also pretty high also counts as one of the downside risks in the energy complex.

Published on  Fri, Aug 21 2009, 07:19 GMT

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Economic recovery to push prices higher in Q4

Wed, Jun 17 2009, 15:05 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


Commodity markets have been very impressive over the past three months. Prices have recovered strongly. Oil has topped USD70/bbl, copper is trading above USD5,000/t and even aluminium is up close to 30% from the bottom.

As we wrote in the previous edition of this publication, there is little doubt that the market is now pricing in an expectation that the global economy will recover from the current recession. We think the market is right in this presumption. Last week our Economics research team released new economic forecasts. Our economists argue that lean global inventories and record stimuli provide a powerful cocktail for growth. It continues to expect global leading indicators to improve and argues that the global recovery in 2009 is likely to be stronger than expected by consensus. The global recession is expected to end in Q3 09.

If this quite upbeat scenario materialises, it will – everything else being equal – be a very positive factor for commodity prices. That said, it could also already be reflected in the current pricing in many financial markets including commodity markets.

There is little doubt that the fundamental picture has improved in many commodity markets. In oil OPEC has shown strong commitment to reduce the current stock overhang, while in metals China has continued to vacuum the global market for base metals, and the numbers coming out of China are surprisingly strong. All in all it seems that commodity demand is not just stabilising but actually picking up – albeit a much lower level than before the crisis.

However, we have to acknowledge that the market in many aspects seems to be ahead of current fundamentals. Global oil stocks are still significantly above normal levels. OECD forward demand cover was running at 62 days in May, which is 7.5 days above the 2008 level and close to 10 days above the preferred OPEC level. US demand is also quite weak. The latest weekly data from the EIA showed that total products supplied to the US were down more than 10% y/y in the beginning of June.

In our view, the market is pushing oil prices higher in anticipation of a tighter market later this year when the OPEC cuts start to feed through into stocks and demand recovers. The story is much the same in other commodity markets. Prices are pushed higher in anticipation of an improved market balance. But one should always be cautious when markets are moving on expectations alone. There is a risk that markets once again start to focus on current fundamentals. Commodity prices could be quite vulnerable if there is a setback in risk sentiment. It is never healthy for commodity prices in the long run if price movements have to be explained by speculative investors that are in the market to gain inflation and dollarweakness protection.

Hence, hedging clients might consider staying on the sidelines for a while awaiting a possible setback in prices before hedging commodity exposure. However, as the turnaround in the global economy seems for real this time, one should certainly not expect to see significantly lower prices, and the risk is that the positive sentiment continues and the market just neglects the current weak fundamentals. If the recovery in global PMIs is followed by an equal improvement in hard data, there is further upside risk for commodity prices in Q4 and in 2010. Furthermore, one should not underestimate the power of investors purchasing commodities to position for a global recovery. Investors might very well have the ability to ‘sit and wait’ for better fundamentals to prevail later this year. In other words, there is certainly a risk that the long-awaited setback in prices will never materialise to any significant degree.

Published on  Wed, Jun 17 2009, 15:05 GMT

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Market might be somewhat ahead of fundamentals

Thu, May 14 2009, 06:35 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


The last two months have been very impressive in commodity markets. Prices have recovered strongly: year to date copper prices are 44% higher and WTI oil is up 33%. The market is clearly starting to price that the global economy will recover from the current recession. Thus the market’s focus has moved away from recession, which was the main theme in Q4 08 and Q1 09, towards recovery.

For several months we have argued that global PMIs would turn up and push commodity prices higher. A turnaround in indicators would indicate that the sharp decline in economic activity in Q4 and Q1 was coming to an end. In fact, this has been happening: global leading indicators have continued to improve in all regions in April, pointing to a relatively synchronous recovery. Commodity-intensive Asia in particular has shown strong recovery signs. PMIs are rising above 50 and hard data for exports and production have also risen. This is not least the case in China, South Korea and Japan.

But also in the US, ISM manufacturing has continued to march higher, driven by further increases in new orders. And even Euroland PMI and German ifo have surprised positively.

Our economists continue to expect further improvements in leading indicators in the coming months. Lean inventories in combination with demand being lifted by substantial stimulus should pave the way for increases in production and commodity demand. But also, hard data have started to appear, confirming that we have passed the bottom. In China, fixed asset investments rose an impressive 30.4% year-to-date in April compared to the same period in 2008.

However, we are a bit cautious after the latest almost synchronous rally in commodities. There is a risk that some commodity markets have decoupled from fundamentals. The fundamental outlook represented by e.g. stocks for aluminium, nickel and lead has not changed significantly in the last month. Demand for oil in the US is also still pretty weak. It seems that the commodity market has run a bit ahead of the fundamental picture.

In our view, both base metals and oil are quite vulnerable if we get a set-back in risk sentiment. Hence, e.g. corporate clients might consider staying on the sideline for a while, awaiting a possible set-back in prices before hedging commodity exposure. However, as the turnaround in the global economy and sentiment looks real this time, one certainly shouldn’t expect to see significantly lower prices; the risk is that the upside we are looking for in Q4 occurs now. If the quick recovery in global PMIs is followed by an equal improvement in hard data, there is further upside risk for commodity prices in Q2 and Q3.

Published on  Thu, May 14 2009, 06:35 GMT

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China goes shopping

Tue, Apr 7 2009, 13:32 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


Optimism seems to have returned to commodity markets. Since the beginning of March, we have seen significantly higher prices for most commodities. Brent oil is above USD51/bbl and LME copper is above USD4,300/t. Prices are still well below their 2008 highs but we have seen a definite shift away from the recessionary pricing seen at the beginning of the year.

Commodities have been boosted by several factors. We have seen a strong performance in global equity markets boosted by higher risk appetite and the dollar has weakened. In addition, we believe higher prices can also be attributed to an improved economic outlook. The world economy was more or less in freefall in Q4 08 and in the first two months of 2009. However, as we wrote in the last issue of Commodity Monthly, we have now seen clear signs of stabilisation in the demand outlook and the improvement has continued in March and the beginning of April.

Once again China takes the limelight. PMI for China compiled by NBS showed a jump from 49 in February to 52.4 in March, and even more importantly we saw new orders jump to 54.6. The Chinese PMI report suggests that Chinese industrial activity is again expanding and even export orders seems to be expanding, albeit demand is primarily driven by domestic demand. In general, global leading indicators have continued to improve over the past month with further improvement in the balance between orders and inventories. A rapid decline in inventories means production will soon have to rise in order to meet demand. In fact, production plans in Japan already point to rising production in March and April. In the US, the ISM index surprised on the upside and details of the report showed a strong increase in the new orders index. Euroland PMI also surprised positively but, as expected, the improvement is happening more slowly here. We continue to expect further improvement in leading indicators going forward as stimuli should improve demand and inventories have become very lean globally. We have also seen new steps from the global community to tackle the global recession. The G20 meeting last week agreed to quadruple the IMF's financial capacity with a USD1trn commitment. It should help the battered emerging markets and help kickstart the global economy together with the significant global easing in monetary and fiscal policies.

However, we are not out of the woods yet. The surge in commodity prices in Q1 09 might look a bit exaggerated given that we are just starting to emerge from a global recession. The commodity rally might have gone a bit too far for now. We argue that the price risks for commodities such as oil and copper now looks more two-sided. For the risk-averse client we continue to recommend hedging commodity exposure not least for latter part of 2009 and the beginning of 2010. But one might also consider waiting for a likely setback in prices. However, one should certainly not expect to see new lows in prices. But a setback of 5- 10% should not be ruled out. However, any drop in the spot prices might very well be accompanied by steeper forward curves. The market has definitely bought the idea that going forward prices will continue to rise as the economic stimuli boost the global economy. In that respect, note that the December 2011 Brent crude oil future is currently trading above USD70/bbl. We expect that level to be reached end-2009.

Published on  Tue, Apr 7 2009, 13:32 GMT

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Signs of stabilisation in commodity demand

Thu, Mar 5 2009, 14:13 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


The economic downturn has continued to spread around the globe. The latest victim to be hit is Central and Eastern Europe (CEE). Several years of high impressive growth rates have been replaced with a dismal economic performance. And in our view the outlook for the next couple of quarters does not look bright. An overheated housing market funded in CHF, and governments unable to mitigate the situation make for a very bleak outlook.

For commodities, CEE is not pivotal. But it is still another nail in the coffin for the weak demand outlook that is expected to prevail in 2009. There is little doubt that Q4 looked terrible on a global scale, but the risk is that the slump will be even more protracted than expected. In that respect, the latest PMI data for Euroland fell to a record low of 33.5 in February. The ongoing pressure on global stock markets is also hurting the commodity market.

But it is not all doom and gloom for the global economy and hence commodity demand. Chinese PMI rose to 45.1 in February from 42.2 in January. It is the third month in a row with an improvement, albeit still below the 50-level that indicates growth. The higher PMI reading was driven by strong gains in the new orders and current output component. Total new orders continue to perform better than export orders, suggesting that particularly domestic demand is contributing to a stabilisation in Chinese manufacturing. It seems that the many fiscal measures that China has introduced and the strong easing of credit policies are now working to boost domestic demand. China is probably one of the best recovery cases globally, albeit the weak export markets for Chinese goods will remain a significant challenge. The Chinas State Reserves Bureau (RSB) has over the last couple of months bought a significant amount of metals, helping to stabilise prices. We have also seen other signs of stabilisation in the global economy. The US ISM seems to have bottomed in the current quarter, albeit the level of 35.8 is historically low. Our US economists still forecast that that the important US ISM index will reach the 45-50 range by mid this year. Such a development would be very constructive for commodities.

In general we stick to our view that commodity prices will be trading higher in H2 2009. However, based on the current demand and stock situation and not least the protracted risk that the global economy will weaken even further going forward, we have revised our commodity forecasts lower. However, we still think buyers should take advantage of the current depressed prices and lock-in commodity exposure. We argue that base metals like zinc, nickel and not least aluminium, are trading well below marginal costs. Hence, if we start to see a demand pick-up or supply being cut further, the risk of higher prices is evident. However, the growing stocks in e.g. aluminium evidently reduce the upside risk.

In oil we continue to keep our eyes on OPEC action. The latest news indicates that quota compliance is quite high at the moment. The next important event will be the March 15 OPEC meeting. We continue to see oil prices trading above USD 50 a barrel during the summer and above USD 60 barrel in Q4. But we have also revised our forecast lower for oil.

Published on  Thu, Mar 5 2009, 14:13 GMT

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Signs of improving demand − but huge stocks

Thu, Feb 5 2009, 17:15 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


Over the past couple of months we have argued that the significant supply reaction currently being seen in many commodities - most notably in oil, aluminium, nickel and zinc - would stabilise prices and eventually push prices higher. An expected improvement in not least the growth outlook for Asia and the US is also a supportive factor going forward in our view.

There is little doubt that supply cutbacks and cuts in spending plans continued in January in the commodity sector. This week, Marathon oil announced that capital spending in 2009 would be 24% lower than in 2008. Marathon Oil, BP and Dutch Shell have now all reported losses in Q4. Considering the price development so far Q1 does not look any better. Weak earnings in many commodity companies and the credit crisis do not bode well for capital spending in 2009 and 2010. We have also seen a string of production cutbacks in e.g. aluminium. According to CRU, more than 13% of 2009 production is currently closed down, as 60% of all aluminium is currently produced at a loss. In addition, in zinc, oil and nickel, companies are cutting back on spending and production to minimise losses as marginal costs are higher than current prices. The financial crisis has also taken its toll on spending plans in base metals. Funding is very difficult not least for minor producers. In oil, OPEC continues to cut back production and another cut in quotas is likely in March. However, if OPEC is going to be successful in bringing oil prices higher, quota compliance should be improved. We base our forecast on improved compliance.

Producers are facing a tough job. The stock build over the past couple of months has been much stronger than foreseen by most analysts. The near stalling in the global economy in Q4 - not least in construction and stainless steel production - has pushed aluminium and nickel stocks through the roof. We estimate that the reported days to stock consumption ratio has jumped to 85 days in the current quarter from 53 days in Q3 08. Oil stocks are also higher. The so-called forward demand cover in the OECD area rose to 56.4 days in November and it could hit 58 days this year. OPEC prefers a ratio of around 52. The bottom line is that although we currently see significant production cutbacks in many commodities, the stock overhang that has to be worked off in the coming quarters is significant. The higher-than-expected stock build is the main reason why we in general have revised our 2009 forecast downwards slightly.

It is not all doom and gloom for the commodity business. Lately, we have seen very encouraging (albeit tentative) signs that the Chinese Dragon has reawakened. Chinese PMI jumped from 41.2 in December to 45.3 in January. We have also seen dry bulk rates rising strongly over the past couple of days on the back of China once again purchasing iron ore. Also apparent demand for copper seems to be jumping. The obvious destocking that we have seen in several commodities in China seems to be coming to an end. If the positive news continues to flow from Asia it will be very constructive for the commodity complex. We keep our cautious positive view on commodities for H2 09 based on the assumption that Asia and the US will move out of recessionary territory during the period. Hence, despite the fact that many commodities are trading in contango, we recommend investors hedge commodity exposure at the current depressed price level.

Published on  Thu, Feb 5 2009, 17:15 GMT

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From demand weakness to supply destruction

Wed, Jan 7 2009, 10:45 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


After the collapse in commodity prices during the second half of 2008, we have seen a number of commodity prices move higher over the last two weeks. Oil has once again taken the limelight, rising from a year low of USD 34 a barrel to just below USD 50. But commodities like nickel and wheat have also jumped significantly. Prices have in general been moving higher in line with equities and improved risk appetite in financial markets. But we note that prices tend to be extra volatile round Christmas and New Year due to thin liquidity. An expected reweighting of commodity investment indices in favour of base metals like nickel, zinc and copper might also have pushed these base metals higher over the last couple of days. Looking into 2009, the big question is, of course, whether we are finally seeing an end to the six month long bear market in commodities, or are we just seeing a "dead cat bounce"?

We argue that commodities have in fact moved into a consolidation phase and that prices will end the current year at a somewhat higher level. The combination of production cut backs, lack of investment and improved economic growth during 2009 should in general lift sentiment, and not least improve the demand and supply balances going forward. We argue that 2008 was a year of "demand destruction" and that 2009 will be a year of "supply destruction" - most notably in crude oil, aluminium, nickel and zinc, and to a lesser degree in copper and agriculturals. But the commodity markets are in for another volatile year and the market might not be fully out of the woods yet. The next three months will most likely be characterized by relatively weak growth numbers and weak commodity demand. However, we expect the US economy to move out of recession during Q2. We stick to our forecast for e.g. oil, implying an unchanged price of approx. USD 50 a barrel for the next six months. But as the global economy recovers during the summer of 2009 we should see good support for commodity prices. Hence, we expect the oil price to end 2009 at USD 75. Remember, like equities, commodity markets are also forward looking. In our view, a very negative growth trajectory is already priced into commodities. The market seems to be forgetting that the next couple of quarters are going to see very accommodative economic policies on a global scale. It also seems to be overlooking the strong supply reduction seen recently in many commodities - most notably in oil, aluminium and steel.

Given our view that the global economy will recover during the summer boosted by aggressive monetary easing and fiscal stimuli, we recommend locking in 2009-2010 commodity exposure at the current level. Unfortunately, this view is also shared in the market and many commodity curves are currently trading in contango - that is forward prices are above spot prices. The DEC09 WTI crude oil is trading at USD 63 USD compared to USD 50 for the front-contract. But even taking the contango into account, we find value in hedging commodity exposure. That said, the strong contango in e.g. the oil curve does pose a risk on the downside for prices. Just as commodity prices might have "overshot" last year, it certainly cannot be ruled out that we will see some sort of "undershooting" this year as speculators are entering short positions to bet on an even more severe "global recession". And this bet is actually quite cheap at the moment due to the strong contango in the curve. You earn a significant positive carry entering a short position in the commodity market at the moment.

Published on  Wed, Jan 7 2009, 10:45 GMT

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Economic slowdown continues

Wed, Dec 3 2008, 15:02 GMT
by Danske Research Team

Danske Bank A/S


Over the last couple of months it has become clear that the economic crisis had turned into a global recession. Furthermore, the crisis has spread to emerging markets with a vengeance, and commodity demand is not just slowing, but is currently falling compared to earlier this year. The short-term outlook for the global economy is very bleak. Over the last couple of days global PMIs have nose-dived: the indicators were a record low in November in countries such as UK, Germany, Japan and China. In the US the ISM has dropped to the weakest level since 1982. Overall, the data releases point to an unprecedented drop in manufacturing activity in Q4. In light of the weak outlook, we published our new global growth forecasts in Global Scenarios last week. Basically, we forecast that in the coming three to six months the major economies are expected to continue to contract as the negative impact from the credit crisis, a further deepening of the housing slowdown, a backlash in emerging markets, and the negative recession dynamics, already in train, dominate.

Published on  Wed, Dec 3 2008, 15:02 GMT

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Commodity supply under pressure

Wed, Nov 5 2008, 14:03 GMT
by Danske Research Team

Danske Bank A/S


We saw a record fall in commodity prices in October. Energy prices together with copper were particularly hard hit and declined by more than 30% over the month. Other metals and agricultural commodities were affected to a lesser extent but it is still quite difficult to find a commodity that did not post a double-digit decline in percentage terms over the month. There can be little doubt that the escalation of the financial crisis and growing evidence that the global economy is heading for - or in fact is already in - a global recession is very tough on commodities. The setbacks we have seen in global PMIs have been astonishing. In October the important US ISM dropped to 38.9 - the lowest level since 1982. The decline in the ISM, which has been mirrored in global PMIs, suggests even weaker global growth in the coming months than previously thought by most forecasters. Hence, the global outlook in the short term does not bode well for even a stabilisation in commodity prices.

On top of the weaker growth numbers we could add closure of long commodity positions both from speculators and investors, but also from businesses that closed down loss-incurring commodity hedges entered in the summer when the outlook for commodities was very different from today. Just as speculative activity might have added to prices in the first half of 2008, it cannot be ruled out that the opposite is now happening. Speculators are entering short positions to bet on a severe 'global recession'. Hence, just as commodity prices might have 'overshot' earlier in the year, it certainly cannot be ruled out that we are now seeing some sort of 'undershooting'. But that said, it is not the main explanation behind lower prices. The main reason is the unprecedented weakening of the global economy due to the escalating financial crisis.

The financial crisis and significantly lower commodity prices are now starting to have a strong effect on supply. Base metals like nickel and aluminium are now trading well below marginal costs, and many producers are incurring a loss and have started to close down production. Industry sources estimate that 7% of nickel and 4-5% of aluminium production capacity is currently shut down. In that respect, the OPEC cut of 1.5% seems quite modest. But even more importantly, across the commodity board we are seeing several producers postponing or outright cancelling new investments. In that respect, the pressure in several commodities might reappear in 2010-12 when the global economy hopefully rebounds. We still think that the commodity market during 2009 will start to focus on this issue.

All in all, we are of the view that the combination of supply cutbacks and commodity prices below marginal costs will mean an end to the price slide for commodities. In that respect, the recent apparent stabilisation in financial markets with higher equity prices and slightly tighter credit spreads should also act as a stabilising factor for commodity prices. Commodity prices are also expected to be some of the first assets to react to the first incipient signs of better times ahead. However, positive newsflow could be some way off and one should expect high volatility over the next couple of months. But all in all we do recommend considering hedging commodity exposure at the current price level - not least given that many commodities are now 'eating' into cost curves. We think the market is 'fishing' for a bottom when it comes to commodity prices.

Published on  Wed, Nov 5 2008, 14:03 GMT

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Commodity forecast update

Fri, Oct 17 2008, 08:07 GMT
by Danske Research Team

Danske Bank A/S


Due to the extraordinary situation in all financial markets, including commodities, we have moved forward our regularly monthly forecast update on commodity prices. See page 13 for the complete forecast table. Most notably we have slashed our average oil price forecast for 2009 from USD 110 to USD 80 a barrel.

The financial crisis is sweeping across all markets at the moment, and commodities have not been the place to hide. During the last month we have seen an almost collapse in commodity prices as the crisis has accelerated.

To stop this death-spiral in financial markets from accelerating into an outright credit crunch, central banks have pumped liquidity into the system on an unprecedented scale, and governments have injected capital into several commercial banks. The effect has been incipient signs of optimism in global financial markets. US stocks jumped the most since 1939 on Monday and the important inter bank rates have finally started to drop.

It might be that we have seen the worst of the financial crisis and the global rescue packages will stabilize markets. But we are now entering a period of very weak growth numbers. The real economy now has to pay the bill for the financial crisis. The latter is exactly what Fed Governor Bernanke warned about last night.

Europe in particular will have to pay the bill on a relative basis to the US in 2009. We expect a further strengthening of the USD relative to EUR to 125 on a 12M horizon. Previously we forecast EUR/USD at 135 in 12M. But remember, the stronger USD comes as a consequence of a weaker Euroland economy, not a stronger US economy. But for commodities, the effect of a stronger USD will most likely be negative, as we continue to expect commodities to trade in a close tandem with EUR/USD in 2009.

The big question for commodities is how severe the impact of the credit crisis will be on the real economy on a global basis. Last week our global economists once again had to revise their 2008 and 2009 forecasts lower. They are particularly worried about the current quarter and the first half of 2009, and we now basically call for a global recession in 2009. China and the Middle East are now the only major economic areas where we expect decent growth over the next 12 months. China is going to be pivotal for commodities going forward. And here we still forecast a growth rate of 8.8%. China is one of the countries where the central bank still has the power to boost the economy effectively. Remember, China tightened monetary policy quite strongly in H1 2009; the central bank is now reversing this tightening by cutting rates and easing credit curbs. Due to its relatively low inflation, China can possibly counter the impact of a slump in global growth. But even China cannot hide from the fact that global commodity demand growth will most likely slow significantly going forward.

Published on  Fri, Oct 17 2008, 08:07 GMT

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Financial meltdown bad for commodities

Tue, Sep 30 2008, 16:49 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


The financial crisis is sweeping across all markets at the moment - and commodities are not the place to hide. The current turmoil has one sure loser (besides equity and debt holders!), and that is growth. Banks collapsing or struggling to remain alive hammers lending and consequently investments. The message is clear: the financial crisis does and will have an effect on global growth going forward. Many people had hoped the huge US bailout plan would mark a turning point this week, but its rejection by the US House of Representatives means the crisis continues to rage. The crisis is now well and truly global, and all financial institutions are feeling the liquidity squeeze in an unprecedented way.

Last week we published our new global growth forecast in Global Scenarios, and in general we have slashed all global growth centres, with the Middle East now the only major pocket of strength remaining. In Europe, Germany in particular has suffered, and morphed from last man standing to last man falling. The slowdown has spread to most emerging markets, with GDP growth and industrial activity weakening in Asia, Central and Eastern Europe and Latin America. In our view, the global economy is now on the brink of recession.

As a consequence of the bleaker growth outlook we have slashed our commodity forecast for Q4 and for 2009, though we still believe there is some upside for prices in 2009. In our view the market has already priced in a very negative growth trajectory in 2009. It is no big surprise for the commodity market that global growth is under pressure. If we see signs of relief in financial markets or incipient signs of a better growth outlook, commodity prices will be the first asset class to move higher. But uncertainty is high in commodity markets and further price drops should be expected as long as the financial crisis continues to rage as intensely as at present. That said, some of the "automatic stabilisers" in the market have started to work. OPEC has drawn a line the sand at USD 100 a barrel for oil; aluminium, zinc and nickel prices are trading close to or below marginal costs; and the strengthening of the dollar should now start to slow down. Hence, we maintain our medium-term positive view of the commodity market, but certainly recommend caution given the worries about economic growth. On the other hand, the current volatility in commodity markets provides a window to hedge commodity exposure at attractive levels. We find the downside for energy and aluminium well protected at current levels, for example.

Published on  Tue, Sep 30 2008, 16:49 GMT

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It's the economy, stupid!

Fri, Sep 5 2008, 15:32 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


Weak economies can bring down presidents, and can certainly bring down commodity prices. The commodity market has, broadly speaking, experienced a six-year-long boom driven by supply disruptions and galloping demand. Hence, the past couple of months have been a rude awakening for the market. Oil prices have collapsed by close to USD 40 from the peak and major base metals like copper and aluminium have seen their 2008 gains more or less erased in two months. Many commentators have pointed to speculators as the reason for the initial boom and subsequent decline in commodity prices this year. As we wrote in our July edition, we think speculative activity was a contributing factor to pushing oil prices above USD 145 a barrel and was the reason why aluminium rose strongly in July. Hence, subsequent profit-taking and squaring out of long positions might have contributed to lower prices. But we think the 'blame it on the speculators' approach is too simplistic. Oil prices and other commodities actually rose in the spring due to several signs of a market tightening very quickly despite obvious weakness in the US economy. However, over the summer, it became clear that the weakness in the US economy could not be contained in the US. The widespread belief that the rest of the global economy would power ahead fuelled by Asian demand and 'de-couple' from the US was wrong. Over the past couple of months we have seen a series of weak numbers from Europe and Asia. There are growing signs that fixed asset investments are slowing down in China, and in Europe even the last man standing Germany is showing clear signs of weakness. Commodities are simply under pressure due to a more bleak global growth outlook. We are not out of the woods yet with regards to global growth and the pressure on commodity prices might very well continue for a while.

However, from a forecast view, the question is whether enough weakness is now priced into commodities. Our view is that some of the 'automatic stabilisers' should start to work. OPEC might slash oil production next week; aluminium, zinc and nickel prices are trading close to marginal costs; and the dollar strength should start to slow down. Copper supply is still struggling to keep up with demand. Hence, we maintain our medium-term positive view of the commodity market, but certainly recommend caution given the economic business cycle outlook. The correction could very well continue during September. We might also see more positioning for downside risk over the next couple of weeks. We have just seen the closure of a major commodity hedge fund which could lead to further liquidation of long commodity positions in the coming weeks.

Published on  Fri, Sep 5 2008, 15:32 GMT

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Bear market to continue or just a correction?

Tue, Aug 5 2008, 14:07 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


The commodity market experienced one of its biggest corrections since 1980 in July. Once again the commodity complex is taking its cue from the oil market, where a shift in sentiment seems to have occurred. The obvious question now is if this is the beginning of the end of the commodity bull run, or just a normal correction exaggerated by fund and speculative money exiting commodities?

We have earlier written about how US demand for oil and corn (input to ethanol) has coming under pressure in the past couple of months due to the cyclical weakness in the US economy and the elevated prices for energy (see, eg, the July issue of Commodity Monthly). This price/demand effect that apparently did not become visible until the oil price went above USD 120 a barrel is often referred to as .demand destruction.. In our view this is exactly what is happening at the moment. US gasoline demand in the past four weeks was 3% below the level seen a year ago, and in May total driven mileage in the US dropped 3.7% y/y. One would have to go back to the second oil crisis to see such a steep drop in mileage. On top of this comes a steady stream of news about airlines grounding planes and the weakness in the US economy apparently spreading to Europe. Previously held beliefs that Europe and Asia could decouple from the US downturn clearly seem wrong now.

The question is, of course, whether this is a seismic shift in sentiment that could spell significantly more downside for commodities. Is this the start of a long-lasting bear market, or is it just a correction that could provide the opportunity to hedge commodity exposure or invest in commodities. There is a clear possibility that increased pessimism on global growth in the next couple of months could drive commodity prices lower, so we would certainly recommend caution. However, as we have elaborated several times, we very much believe that the commodity bull run has been fuelled by fundamentals. And while the June peak in oil prices might have been an exaggeration, we have to remember that non-OPEC oil supply problems, OPEC.s hawkish stance and strong oil demand in Asia and the Middle East remain intact. Supply problems are also growing in base metals, and the costs push in agricultural is evident. That said, given the shift in market sentiment, with focus on demand destruction, weaker global activity numbers and the stronger USD, we have revised down most of our commodity forecasts for Q3 and Q4, while we have left our 2009 forecast more or less unchanged.

Published on  Tue, Aug 5 2008, 14:07 GMT

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Where are the psychical stocks?

Wed, Jul 9 2008, 08:08 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


The question of whether food and energy prices have been pushed higher by fundamentals or by speculation has fuelled an intense debate lately. Currently, no less than nine bills are on their way through the US Congress aimed at cracking down on speculation. Three proposals from independent Connecticut Senator Joe Liebermann, who sees 'excessive market speculation', have attracted the most attention. The most drastic would prohibit pension funds from investing in energy and food commodities. However, he also proposes stricter rules on the total share of commodity markets held by financial investors, and new rules on speculative OTC derivatives trading and hedging by investment banks in the futures market.

We certainly agree that speculative and pension fund money can increase commodity market volatility from day to day, week to week and even month to month. But such money does not, in our view, decide the longer-term trends in commodity prices - that is down to fundamentals. One should also remember that speculative money secures liquidity for global commodity markets. Abundant liquidity allows commercial buyers and sellers to hedge future commitments on a large scale and at a very low cost. Nevertheless, are speculators to blame for the long rally in, for example, oil prices, or the latest spike in grain prices? Are speculators and pension funds inflating commodities? Are we seeing a commodity bubble?

Increasing inventories due to falling demand or rising supply alongside increasing prices would suggest a bubble. Any freshman in economics knows that when prices are too high for demand to equal supply then stocks grow due to excess supply. This is exactly what happened in the US housing market a few years ago, and a bubble ensued. The problem in energy and agricultural is, however, that there is simply no build-up in stocks – demand continues to power ahead despite higher prices. Hence, we do not share the view that commodity prices are speculatively driven. Of course, this does not rule out lower prices going forward. In fact, we expect to see oil prices soften later this year, as the fundamental picture has, in our view, weakened significantly in the past two months. We believe the market has failed to correctly anticipate the consequences of such high prices on demand. Hence, when spare capacity and probably also non-OPEC supply rise later this year, prices will come under pressure. But this has nothing to do with speculation. It is just the market realising that 'demand destruction' is stronger than forecast. However, should oil prices soften we would not at all be surprised to hear Senator Joe Lieberman claim victory over the speculators - but that is another story.

Published on  Wed, Jul 9 2008, 08:08 GMT

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Divergent picture

Wed, Jun 4 2008, 08:10 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


Price developments have been very divergent across the commodity market in May. Base metals like zinc, nickel and lead have been under severe price pressure during May. Nickel prices are now down 44% y/y and the metal fell by more than 22% in May. Nickel prices are under pressure due to lower demand from the stainless steel sector. On the other hand, oil prices continued to surge in May and ended the month more than 10% higher. Crude oil prices have almost doubled in a year.

In the Energy section, we take a closer look at the outlook for oil prices. Basically, we now believe that prices will trade at the current level for the rest of 2008 and ease slightly in 2009 compared to today’s price. Hence, we do not share the “oil at USD 200 a barrel” scenario. Rather we would like to point to the fact that we are now starting to see some effect on the demand side. We see Asian countries scaling back on gasoline subsidies and the US consumer is buying less gasoline now compared to 2007. It seems that people, including states, are now finally acting as if high oil prices are sustained for the foreseeable future. However, in our view it is still a very tight situation in the oil market. But not tight enough to push oil significantly higher.

The spike in the oil price during the spring has once again fuelled an old but nonetheless very relevant discussion if commodities are pulled higher by speculation and investor flows or by fundamentals. In the last issue of “Commodity Monthly” we wrote that in our view “fundamentals are at play”. However, one has to remember that fundamentals work in both directions. Nickel prices are under pressure due to waning demand and wheat, due to higher planting. Oil prices are high due to a tight market balance.

If we take a look at the IMM positions in crude at NYMEX it is hard to find any arguments for a speculative bubble in oil. The number of speculative net-long positions is at a very modest level of 24,500 and halved in the week when the oil price touched USD 135 a barrel. The same applies to open interest in Brent crude. The number is more or less at the same level as two years ago. In other words, it seems that prices have changed due to new information among the participants in the market, not due to speculative flows. But it does not rule out a lower oil price in the future. If fundamentals change or the perception of fundamentals changes to the negative the price will drop and vice versa.

Published on  Wed, Jun 4 2008, 08:10 GMT

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Fundamentals at play

Tue, May 6 2008, 14:28 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


Market confidence that the worst may be over with regard to the US and hence the global economy increased in the past month. Equities have rallied and credit market spreads have tightened. Furthermore, it seems that the apparently unstoppable rally in EUR/USD has come to a halt. The one thing still bugging the financial market is the continuing problems in the money market – as represented by the very high money market fixings.

When the commodity rally kicked off earlier this year, speculative interest, asset re-allocation into commodities – from other assets that were under pressure – and dollar weakness were blamed for the higher prices. Hence, the obvious question to ask now, when optimism is bubbling and USD has regained some strength, is if the fallout will be a bloodbath in commodities.

There seems to be is no clear answer to the question, however. Energy prices are trading close to all-time highs, with Brent oil up more than 22% on the year. Copper and aluminium prices are up 26% and 21%, respectively, on the year. In contrast, some commodity prices are under pressure. Gold has fallen almost 15% from its peak, as investors abandoned this traditional safe-haven metal for other asset classes as optimism returned to the markets. The abrupt comeback of the dollar has also pushed gold lower. Some grains have also suffered. Wheat is down almost 50% from its absolute peak in March, and up just 5.4% when looking at the CBOT price since January 1st. On the other hand, corn prices have continued to climb, reaching an all-time at the beginning of May.

Our long-held view is that commodities are primarily being driven by fundamentals. This is why wheat prices are under pressure and corn prices are skyrocketing – farmers are planting a lot of wheat this year at the expense of corn. Meanwhile, oil prices have been immune to the apparent stabilisation of the dollar and the optimism in other markets, and we, in fact, foresee an even tighter oil market for the rest of 2008. We have therefore revised our oil price forecast higher for 2008 and 2009. We now expect the current elevated price to hold for the rest of 2008, and see a growing risk that oil prices might spike even higher. We are starting to see some signs of stabilisation in the US economy, which will most likely avoid an outright recession. If the commodities market moves away from its general expectation that US gasoline demand will fall in 2008, the driving season could be a very hot time in the oil market this year. The pain of the global consumer with respect to energy prices might not have peaked just yet.


Published on  Tue, May 6 2008, 14:28 GMT

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The commodity correction is over for now

Wed, Apr 2 2008, 15:15 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


It has been a volatile first quarter in the commodity markets. The violent spike in prices in January and February was followed by a deep correction in March. Maybe a welcome eye opener for those who thought there was only one way for commodity prices, and for those that had forgotten that volatility and commodities are two of a kind at the moment. Maybe also a eye-opener if one should have forgotten that fundamentals in the end decide the price of commodities – not speculators.

Most commodity prices are now below the level a month ago, but we think the current correction is about to come to an end. The big question now is whether this was a normal correction that we will see in commodities from time to time, which should be considered as a buying opportunity, or a timely warning that the current price level is not sustainable given the poor state of the US economy.

We think the answer is somewhere in between. Growth and commodity demand are under pressure in the US, but this is hardly breaking news. As discussed before, the correction in commodities in the autumn of 2007 was an early reaction to a weaker US economy, but what is new to the market is the apparent resilience of emerging markets’ demand, the surprisingly strong European economy and the ongoing supply problems across the commodity university. What is also new is the strong investor demand for commodities in the wake of the weak dollar and the global jump in inflation over the last couple of months.

Agricultural prices are less dependent on the business cycle, in stead it is a more a structural case taking place. In the agricultural section we take a closer look at the new USDA report for grains plantings in the USA that we think will set the direction for prices in April. We especially stay positive to corn, whereas the drop in wheat and soybean price is justified given the step-up in plantings of these grains.

In general We think commodity prices will climb higher in April as the fundamental story is still quite strong. In other words, we think the March correction does pose some interesting investment and hedging opportunities going forward. We are especially positive on agriculturals and precious metals – not least after the latest correction in prices..

Our FX research team now expects EUR/USD to hit 160 in three months’ time and we expect the stormy weather to continue in the financial markets despite the current optimism in these days in financial markets. When the outlook for other assets gets cloudy gold will still shine. The latter should be able once again to push gold prices above USD 1,000 an ounce during the next couple of months. Base metals on the other hand are the commodity class that is most exposed to a sharp slowdown in the US economy. That said, prices are well supported by ongoing supply problems and strong Asia demand. We still see upside for copper and aluminium prices, whereas the smaller LME metals continue to look vulnerable. Oil prices are expected to stay at the current level during the summer.

Published on  Wed, Apr 2 2008, 15:15 GMT

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Inflation fears spark new commodity run

Tue, Mar 4 2008, 15:54 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S


Welcome to the first issue of our new monthly research update on the commodity markets. The report gives an overview of global commodity markets and the themes driving the different markets. It also presents forecasts on several base metals, oil, gold and selected agricultural products.

Commodity markets have been through a period of phenomenal growth the last six years in both prices and interest, and the last couple of months certainly have not been an exception with oil prices above USD 100 a barrel, gold prices close to USD 1,000 oz and grain prices going through the roof. But for how long can the party go on? The fundamental outlook for the next one or two quarters looks challenging. The US is flirting with recession and Euroland feels the headwind from the weaker US economy. On the other hand, China and other emerging markets continue to consume everything from grain to oil at a staggering speed. The Chinese economy and other emerging markets seem immune to the colder US winds.

On top of that the investor community has been hoarding commodities. Investors are buying commodities to hedge against inflation and a further weakening of the US dollar. When it comes to hedging against inflation agricultural products and oil stand out, as they play a pivotal role in headline inflation and inflation expectations. When it comes to hedging against a weaker dollar, gold and other precious metals are the chosen ones, but oil has also been a good pick lately.

We think prices in general will continue higher in March due to the strong interest in commodities as a dollar/inflation hedge. The oil price seems a bit stretched at the moment, but history shows that this is no guarantee for lower prices short term. Gold and agricultural prices might very well continue higher as fear of inflation and a weaker dollar continues to spook financial markets. Base metals seem to stabilise at an elevated level with a risk on the upside in the next couple of months.

Published on  Tue, Mar 4 2008, 15:54 GMT


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