The latest Commodity Companion from the team at RBS has recently been released. This is a hefty tome, redolent with figures and forecasts, covers not only the base and precious metals, but important steel components and the major elements of the energy complex. The study highlights how many commodities in 2010 enjoyed their strongest consumption growth in decades as a result of the synchronised recovery in world growth. Driven further by “acute investor attention”, prices of many commodities hit records, giving many producers high operating volumes and strong cash positions; the expectation is that many commodities will enjoy robust growth in supply from now through to 2014.
This supply surge, coupled with the unhappy turn of events in the world so far this year, will lead commodity prices to consolidate this year and next, before renewed gains in 2013. On a view through to 2014, the bank favours aluminium, copper, platinum and palladium, while arguing that “gold, silver, coal and iron ore are now richly priced and set to fade”. Overall, over this period, RBS is neutral with respect to gold, and the “least preferred” are the bulk commodities, crude oil, and silver.
The view differs slightly on a one-year view, and while the PGMs remain in favour, the base metal outlook is mixed, with aluminium and copper ranking the highest. Silver is the least preferred metal.
A brief summary of some of the fundamental analysis:
Aluminium is viewed as having an attractive risk:reward profile, and although the price has been trading at more than two-year highs, RBS forecasts that this metal still offers one of the most attractive risk:reward commodity plays. Demand is at a record of more than 41M tonnes, following a frenetic 20% growth in demand in 2010. This is distorted by the ravages of 2008 and more particularly 2009, however; the average rate of growth in demand from 2007-2010 inclusive was much more moderate, at 2.6% per annum. This rate of growth almost trebles, however, from 2010 through to 2014 and RBS notes that the market is realising that the worst of aluminium’s troubles may now be abating, with massive supply surpluses at last diminishing, with prices likely to hit a cycle peak in 2013.
Copper is described as a “producer’ paradise”, a great market, but richly priced. Here, too, demand was at a record in 2010 at almost 19M tonnes. This was a 9% year-on-year growth, although annual growth from 2007-2010 inclusive was only just over 1%. RBS is looking for annual average growth in demand of over 4% from 2010 to 2014 and with a constrained supply profile stemming from a range of different factors, the market is likely to be subject to “inventory-draining” deficits before some relief in 2014. With a massive price differential between aluminium and copper, RBS describes how “copper rationing and demand destruction” is underway. Here, too, the price is expected to peak in 2013.
On the other side of the coin, RBS describes the start-up of the “Big Five” nickel producers (plus many smaller operations), projecting that in 2010-2011 the metal faces the biggest supply growth in decades, as the heavy cutbacks of 2008/09 are reversed. Refined nickel production in 2010 is estimated at almost the same level as 2007 – but from now onwards the rate of growth is substantial. On the demand side stainless steel, which accounts for 65% of refined nickel demand (and which is subject to wide swings in growth, due in part to stocking and de-stocking cycles), rebounded strongly in 2010. Growth in 2011 is expected to be more modest, although on a four-year view, the average rate of growth in nickel consumption is expected to exceed 5% per annum.
Zinc, meanwhile, is described as having a strong price but weak fundamentals. It remains the bank’s least preferred base metal, with high inventories likely to be swollen again this year and next, and with the market not moving into deficit until 12013. The longer-term outlook, however, is much more encouraging as ore exhaustion at some key mines will constrain the mine production growth rate to only just over 3% per annum from 2010 to 2014. Refined consumption will grow at more than twice this rate, but from a lower base than production in a market that has been in surplus since at least 2007. That said, inventory levels were very low in 2007 and had recovered to more manageable levels by 2010. RBS notes that zinc’s swing from surplus to deficit may occur rapidly but the implication behind the current supply-demand mis-match is that genuine tightness is unlikely before 2014.
RBS’ study avers that “handsome operating margins bring into focus the next stage of the cycle- the supply response” involving producer intention, by assorted means, to “pump up the volume”. The supply-side patterns of the next few years will indeed be interesting to watch.