The China scare: market worries over stimuli withdrawal

Sat, Jan 30 2010, 00:46 GMT
by Danske Research Team


The short view: Soft patch in sight as tighter policy draws closer

The first signs of policy tightening in China have scared the market at the start of 2010,
and mounting debt trouble in a range of countries have further added to risk aversion.
We now see the risk of a soft patch for commodities drawing closer and have updated our
projections for this year. We also introduce 2011 forecasts. Overall, we still see some
limited upside potential in the commodities complex.

Energy: OPEC sets a new price-range

A tighter oil-market balance during 2010, in our view, offers OPEC a choice: the cartel
can use improved fundamentals to step up production or opt for higher prices by keeping
production in check. We think the latter option will be preferred by the member countries
and thus that OPEC’s preferred price range will edge higher during 2010.

Base metals: Divergence becomes more pronounced

Metals are highly sensitive to “the China scare” as both the search for yield and fiscal
initiatives have been supportive for the sector in the past year. While aluminium
continues to look vulnerable to a soft patch in global growth, strong fundamentals are in
place for copper; we look for a correction in the former in H1 but forecast that the latter
could hit USD8,000 towards the end of this year as the manufacturing sector eventually
proves resilient to stimuli withdrawal.

Aluminium: Watch for level change and curve flattening

Copper: The leader of the pack

Grains: Structural shifts could support corn and soybeans

Wheat remains haunted by an unhealthy stocks-to-use ratio which should limit price rises
in the near term. In contrast, soybeans see a relatively tight market and corn could
receive support from rising demand for the grain for use in ethanol production.