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Commodity Monthly

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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.

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Published on  Thu, Mar 5 2009, 14:17 GMT