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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.

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Published on  Wed, Sep 23 2009, 16:20 GMT