Quarterly Commodity Outlook

Quarterly Commodity Outlook
ABN AMRO Group Economics
Commodity Research
October 2014
2015: weakness in energy and gold prices, but strength in base metals
In our view, the financial markets are far too gloomy about the global economy. We anticipate that better economic data releases will lift this
downbeat sentiment and to support cyclical commodities with a relatively tight supply and demand balance. For example, we expect base metals,
which are also relatively resilient to developments in the US dollar, to do well. Still, oversupply will remain a challenge for energy markets and we
therefore expect oil prices to remain depressed in 2015. Moreover, a rise in the US dollar will also be a negative for oil and gold prices next year.
And oversupply remains an issue for grains as well as for a possible lower (over-)supply for soft commodities like coffee and sugar. Meanwhile, a
possible spread of Ebola to Ivory Coast and Ghana could threaten the export of (well supplied) cocoa.
ABN AMRO Price Outlook Q4-2014
3-month view
l
WTI
Nat. gas (HH)
l
l
l
Nat. gas (TTF)
l
Brent
i
n
k
long-term view
h
k
i
k
i
k
h
h
h
h
i
Energy: Finally, fundamentals outweigh geopolitical tensions
Fundamentals have started to outweigh the effects of geopolitical tensions. The
downscaling of demand expectations, lingering oversupply and the stronger US dollar
pushed oil prices towards the lowest level in four years. Market expectations are that
an OPEC oil production cut will trigger less oversupply. However, non-OPEC
production will continue to increase, outbalancing the effects of rising demand due to
global economic growth. Higher yields and a stronger US dollar will continue to add
pressure to oil prices on top of persisting overproduction.
Precious metals: More weakness ahead
Gold
i
Silver
i
Platinum
i
Palladium
i
k
i
h
l
k
i
n
k
h
k
h
i
l
n
h
h
For the coming three months, we see price weakness continuing in precious metals.
This is mainly because we expect a higher US dollar and higher US interest rate
expectations to lead to further investor positions’ liquidation. We also remain negative
on gold in 2015 for the same reasons. However, it is likely that fundamentals for the
other precious metals will improve in 2015 and 2016. In general, we are less negative
on the global economy than current market consensus. This overall positive outlook
will support jewellery, car sales and industrial demand for platinum, palladium and
silver in 2015 and 2016.
Base metals: Fundamentals to support base metals
k
Aluminium
Copper
l
Nickel
n
k
h
i
n
k
h
i
k
h
Zinc
Steel (HRC)
Iron ore
i
Coking coal
Wheat
i
Corn
i
Soybeans
i
Sugar
h
l
n
l
n
l
n
l
l
n
k
k
h
i
l
k
i
l
k
i
Ferrous metals: ‘The tolling of the iron bell’
n
h
k
h
k
k
h
k
l
k
h
k
i
l
k h
i
Arabica Coffee
i
l
k
i
Cocoa
i
l
n
n
h
h
h
i
Base metal prices softened on a loss of confidence in global economic growth. The
uncertainty was triggered by weak macro-economic data over the last two months.
However, enough indicators still point towards a moderate economic recovery
scenario, which should also support demand for base metals going forward. Conditions
in the base metals markets also remain favourable from a fundamental perspective. In
2015 we will still witness some surpluses, but their level will be relatively small.
Demand is expected to outpace supply in 2016 and the balance for most metals will be
negative. These deficits support stronger metal prices in the long term.
The weak price environment for steel and steelmaking raw materials lingers on and at
this stage, the bell tolls for those ferrous companies positioned high on the cost curve.
In all ferrous metal markets, supply is still outpacing underlying demand, which has
caused the weakness in prices. Steel demand is also relatively weak, economic
uncertainties have increased and there is limited producer discipline for capacity cuts.
Hopes are up for economic stimulus measures (China and Europe), which would
increase demand for steel (and steelmaking raw materials).
Agriculturals: Mixed feelings
Agricultural commodities are showing a mixed picture. The market expects multi-year
record production levels for all grains. These auspicious forecasts will lead to high
levels of end-stocks, with a large price decrease as a result. The harvest season for all
grains is currently underway. The market is waiting to see if the harvest will be done in
time to avoid weather issues from raising doubts. For cacao, the market is dominated
by fears of a possible Ebola outbreak in one of the main producing countries and this is
now pushing up prices. The effects of the record 2013/14 production and healthy
forecasts for 2015 will only be seen in the course of 2015 itself. For both coffee and
sugar, the market is focusing on weather forecasts in Brazil.
decrease by 11% or more
i
l
i
l
k
decrease betw een 5% and 10%
n
price movement betw een -4% and +4%
k
increase betw een 5% and 10%
h
increase by 11% or more
- Short term: our three month outlook versus spot rate on October 28nd.
- Long term: 2016 average forecast price versus 2014 forecast price.
2
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
ABN AMRO forecasts
ABN AMRO Commodity Price Forecasts
Spot rate
28 October
Average
price Q32014
3m
6m
12m
(end of
Jan. 2015)
(end of
Apr. 2015)
(end of
Oct.15)
2014
2015
2016
(yr avg)
(yr avg)
(yr avg)
85.49
102.05
90
95
85
105
90
85
81.36
97.73
85
90
80
95
85
80
3.52
3.94
4.00
4.25
4.50
4.25
4.50
4.75
22.68
18.94
21
20
18
21
19
17
1,229.21
1,281.80
1,100
1,000
850
1,250
925
950
17.21
19.72
16.0
17.0
17.5
19.0
17.2
19
1,265.00
1,434.48
1,150
1,200
1,300
1,370
1,250
1,450
792.00
863.14
700
750
725
800
720
775
1,988.91
2,095
1,990
2,050
1,860
2,050
2,200
Energy:
- Brent
(USD/barrel)
- WTI
(USD/barrel)
- Gas HH
(USD/mmBtu)
- Gas TTF
(EUR/MWh)
Precious metals:
- Gold
(USD/oz)
- Silver
(USD/oz)
- Platinum
(USD/oz)
- Palladium
(USD/oz)
Base metals:
- Aluminium
(USD/t)
1,995.25
0.91
(USD/lb)
- Copper
(USD/t)
6,869.50
(USD/t)
3.17
15,484.00
18,593.08
7.02
8.43
(USD/lb)
- Zinc
2,258.00
(USD/t)
6,998.96
3.12
(USD/lb)
- Nickel
0.90
1.02
(USD/lb)
2,310.80
0.95
6,950
0.90
7,000
3.15
15,500
1.05
7,100
3.18
17,750
7.03
2,375
0.93
1.08
6,900
3.22
18,200
8.05
2,220
0.84
1.00
7,100
3.13
17,100
8.26
2,250
0.93
1.02
7,200
3.22
18,000
7.76
2,190
1.00
3.27
18,000
8.16
2,250
0.99
8.16
2,400
1.02
1.09
Ferrous metals:
- Steel (global)
(HRC; USD/t)
- Iron ore
(fines, USD/t)
- Coking coal
(USD/t)
561.05
577.12
568
565
565
570
565
575
79.22
90.51
82
81
85
99
92
90
111.00
106.79
111
118
125
114
123
129
464.50
549.56
515
570
-
545
575
-
326.50
364.91
350
365
-
405
450
-
981.00
1,087.58
950
980
-
1,210
1,235
-
16.33
17.70
17.50
18.50
-
18.00
18.00
-
162.31
185.35
190
180
-
180
170
-
3,017.01
3,163.05
3,250
2,900
-
3,100
2,750
-
Agricultural:
- Wheat
(USDc/bu)
- Corn
(USDc/bu)
- Soybean
(USDc/bu)
- Sugar
(USDc/lb)
- Arabica
coffee
(USDc/lb)
- Cocoa
(USD/t)
3
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Table of contents
Macro-economic
4
Commodity top down
5
Energy
6
Precious metals
8
Base metals
10
Ferrous metals
12
Agriculturals
14
Macroeconomic indicators
18
Historic commodity prices
19
Contributors
21
Disclaimer
22
4
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Macro-economics
Nick Kounis, tel. +31 (0)20 343 56 16
Pessimism is overdone

The gloom on the global economic outlook is exaggerated

US economic growth is picking up momentum

Policymakers in other large economies are supporting growth
IMF still expects global growth to accelerate
3.9
3.8
3.7
3.6
3.5
3.4
3.3
3.2
3.1
3
2012
2013
2014
2015
Source: IMF
Manufacturing PMI surveys
65
Gloomy talk from the IMF, but it still expects a pick-up
Financial market concerns about the global economic
outlook have grown over recent weeks. The IMF published
its new outlook, which is a big event in the economic
calendar. The commentary from the fund was so
downbeat, you would think that the world was in the midst
of major slump. The IMF admitted that a recovery was
underway but noted that it was ‘weak’ and ‘uneven’ with
‘downside risks’. These included geopolitical tensions and
the possibility that markets were too optimistic and that risk
spread compression would reverse. The commentary was
certainly more negative than its actual economic forecasts.
Its global economic growth projection has been revised
down by 0.1 percentage point in 2014 and 0.2 percentage
points in 2015, compared to its last update in July. This is
hardly dramatic. In addition, the IMF still expects a
noticeable acceleration in global economic growth next
year, from 3.3% in 2014 to 3.8% in 2015. Given that
average global economic growth since 1980 is 3.5%, this
outcome would not be too bad at all.
60
55
50
45
40
35
30
08
09
10
11
Eurozone
12
US
13
14
China
Source: Thomson Reuters Datastream
ABN AMRO GDP forecasts (% yoy)
2012
2013
2014
2015
China
7.7
7.7
7.5
7.0
US
2.3
2.2
2.2
3.8
Eurozone
-0.6
-0.4
0.9
1.7
World
3.2
3.2
3.3
3.9
EM Asia
6.1
6.1
6.1
6.1
EM Europe
2.3
1.7
1.3
2.2
Latin America
2.8
2.4
1.1
2.7
US likely to lead the way
Like the IMF, we expect an acceleration in global
economic growth next year. This should be driven by
strong growth in the US lifting other countries around the
world, with world trade and global GDP growth rising as a
result. US private sector balance sheets are in rude health
and companies are well placed to hire more and step up
investment. China’s authorities are focused on laying the
foundations for more sustainable, yet slower growth. But at
7% next year, this is still going to provide significant
support to global demand. Even in the eurozone, we think
the most likely scenario is one of moderate recovery. The
fall in the euro should boost net exports from current low
levels. Stronger global demand should also help. Domestic
drags are also easing. House prices are bottoming out,
bank lending conditions have started to ease, while
unemployment has been edging down. The hit to
confidence from the Ukraine crisis is also likely to ebb. In
the eurozone as well as Japan, monetary policy is easing
further. A final positive on the global level is the fall in the
price of oil and other commodities. It is essentially a
transfer of wealth from net commodity exporters to net
commodity importers, which are more likely to spend the
windfall.
Source: ABN AMRO Group Economics
Upside risks to our forecast:
Downside risks to our forecast:




Fed keeps rates on hold longer than anticipated
Stronger-than-forecast Chinese economic performance
Stronger return of confidence


Increased risk aversion due to abrupt Fed exit
Weaker-than-expected Chinese economic growth
Geo-political tensions
5
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Commodity top down
Georgette Boele, tel. +31 (0)20 629 77 89
Growth to prevail

Most commodities were aggressively sold off in Q3

2015 to bring more energy and gold price weakness…

…but base metals with tight supply and demand balance to do well
Performance individual commodities Q3 vs YTD
42.6%
Nat. Gas (TTF)
15.5%
Coffee
Zinc
4.7%
Cocoa
4.6%
Aluminium
4.0%
Coking coal
2.8%
-1.5%
Global steel (HRC)
-4.5%
Copper
-6.5%
Nat. Gas (HH)
Palladium
-8.1%
Gold
-8.3%
Platinum
-12.0%
Oil-WTI
-13.5%
Sugar
-14.1%
Oil-Brent
-14.3%
-14.7%
Nickel
-16.8%
Iron ore
Wheat
-17.6%
Silver
-18.7%
-22.9%
Corn
-31.2%
Soybeans
-60% -40% -20%
0%
Q3
20%
40%
60%
Q2
Source: Thomson Reuters Datastream
Commodity indices
2010
2011
2012
2013
28 Oct.
2014
332.80
305.30
295.01
280.17
272.09
3,896
3,627
3,700
3,534
3,200
CRB:
- index
RICI:
- index
Source: Bloomberg
Most commodities aggressively sold off in Q3
In the third quarter of 2014, commodity price weakness was
one of the most dominant themes in financial markets. Most
commodities in our coverage were not able to withstand this
strong down trend. The CRB index lost almost 10% and
more than erased this year’s gains. The significant
weakness in oil prices got most attention, because its direct
impact on inflation expectations and therefore on central
bank policies. Oil prices dropped because of ample supply,
concerns about the demand outlook and a higher US dollar.
However, the sell-off in grains was even more brutal, where
oversupply remains a serious issue. Soybeans were the
worst performing commodity with a decline of more than
30% in the third quarter. Precious metals were also hit
hard. Silver was the worst performing precious metal, while
gold was the best performing one, while still losing 8%.
Base metals, except nickel, did relatively well, because of a
lower sensitivity to the US dollar and a less substantial
supply overhang. In addition, coffee prices rallied by around
15%, because fears of the impact of drought in Brazil on
supply.
2015 to bring more energy and gold weakness but base
metal strength
Commodity supply, the global growth outlook and the US
dollar, will continue to play dominant roles in the coming
three months and in 2015. For starters, oversupply will
remain a challenge for energy markets. This will continue to
depress oil prices in 2015, in our view. However, it is likely
that in the next three months they will recover somewhat
after the brutal sell-off in Q3. Moreover, a rise in the US
dollar will also be a negative for oil and gold prices next
year. As noted in the previous page, we think that financial
markets are far too gloomy about the global economy. We
expect better economic data releases to lift this downbeat
sentiment and to support cyclical commodities with a
relatively tight supply and demand balance. For example,
we expect base metals to do well. In addition, base metals
are also relatively resilient to developments in the US dollar.
For cyclical precious metals the more optimistic global
growth outlook will start to dominate the picture once
investor positions are reduced. Oversupply remains an
issue for grains, while soft commodities could recover on an
improvement in economic outlook. The spreading of Ebola
to Ivory Coast and Chana could threaten cocoa supply and
push up prices.
Upside risks to our forecast:
Downside risks to our forecast:




Stronger global economic growth
Supply disruptions/(geo) political risks
Adverse weather conditions


Hard landing in China and/or weaker global growth
More aggressive rate hikes by the Fed
An even stronger US dollar rally.
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Energy: Brent, WTI, Henry Hub, TTF
Hans van Cleef, tel. +31 20 343 46 79
Supply-driven energy markets

Oil prices plunged after fundamentals finally outweighed geopolitical tensions

Near-term support for oil and gas prices seems likely…

…but more pressure can be expected in 2015 and 2016
Price index oil 2014
115
110
index (1 Jan 2014 = 100)
105
100
95
90
85
80
75
70
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Oil: WTI
Oil: Brent
Source: Thomson Reuters Datastream
Price index gas 2014
index (1 Jan 2014 = 100)
200
150
100
50
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Gas: Henry Hub
Gas: TTF
Source: Thomson Reuters Datastream
World oil supply and demand
93
91
89
87
mb/d
6
85
83
2008
Source: IEA
2009 2010
Demand
2011
2012
2013 2014
Supply
All pieces of the puzzle fell into place: oil prices down
While Q3 was marked by large swings in energy prices,
the reasons for the swings were different. The most
obvious and most debated price move was the huge drop
in oil prices. From the 2014 high of USD 115.62/bbl in
June, Brent oil prices plunged to a low of USD 82.60/bbl in
just a few weeks. WTI crude showed a similar
performance based on the same drivers. The main
reasons for the sudden price declines were: 1) the ongoing
rise in oil supply (both OPEC and non-OPEC), resulting in
a lingering oversupply. This oversupply has already been
in place since 2012, despite geopolitical tensions among
oil producing countries; 2) the disappointing economic data
releases in major oil consuming regions, which triggered
downward revisions of oil demand expectations; 3) the
stronger US dollar, which weighed on commodity prices; 4)
easing geopolitical tensions in the Middle East, which led
to a lower risk premium. We have been forecasting lower
oil prices based on fundamentals for quite some time. In
fact, a test of the lower band of the wide USD 80-120/bbl
trading range was our base case scenario. However,
although the rapid decline was triggered by most of the
arguments we mentioned, we believe that the market may
have somewhat overreacted.
Gas prices also experienced large swings. US Henry Hub
prices declined more than 10% in October on inventory
building following an extended period of mild weather. And
after tensions eased regarding gas flows from Russia to
Europe, TTF gas prices fell under pressure as well,
resulting in nearly four-year lows for 2015 and 2016.
Near-term outlook appears somewhat supportive
In the coming weeks, the main focus for oil will be on the
OPEC meeting scheduled for 27 November. During this
meeting, the OPEC will decide on its production quota for
the coming months. Some signals of direction may already
have been given in its World Oil Outlook (6 November).
The crucial question is whether the OPEC countries
(particularly Saudi Arabia) will decide to cut oil production
in order to trigger higher prices. Since oversupply is
substantial, OPEC would need to cut oil production by a
large share of its quota to trigger a lasting effect. However,
with rising fiscal budget needs, this doesn’t seem very
realistic. In fact, Saudi Arabia is facing its first fiscal deficit
in many years. As long as OPEC fails to respond to market
assumptions of a lingering oversupply, a further downside
in oil prices cannot be excluded and a serious test of the
USD 75-80/bbl range is possible. Nevertheless, a
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Energy: Brent, WTI, Henry Hub, TTF
Spread TTF gas and Brent oil 1st vs 30th contract futures
130
combination of the OPEC quota outcome, the closures of
short positions and the rise in seasonal demand could
trigger some near-term support. We have adjusted our
2014 year-end target to USD 95/bbl (down from a forecast
of 105 in our June 2014 Quarterly). That would result in a
2014 average of USD 105/bbl for Brent and USD 95/bbl for
WTI crude.
34
120
29
110
24
19
USD/bbl
90
80
Jan-13
14
Jul-13
Jan-14
Eur/Mwh
100
Jul-14
Brent oil 1st contract (lha)
Brent oil 30th contract (lha)
TTF 1st contract (rha)
TTF 30th contract (rha)
Source: Thomson Reuters Datastream
ABN AMRO price forecast (Index)
250
forecast
ABN
AMRO
200
150
index (2005=100)
7
100
50
0
05 06 07 08 09 10 11 12 13 14 15 16
Oil: WTI
Oil: Brent
Gas: Henry Hub
Gas: TTF
Source: Thomson Reuters Datastream, ABN AMRO
ABN AMRO price forecast table
3m
6m
12m
(end of
Jan.’15)
(end of
Apr.’15)
(end of
Oct. ‘15)
90
95
85
2014
avg
2015
avg
85
105
90
90
80
95
85
4.00
4.25
4.50
4.25
4.50
21
20
18
21
19
Brent:
- USD/barrel
WTI:
- USD/barrel
Gas HH:
- USD/mmBtu
Seasonal demand for natural gas will increase in Q4,
setting the tone for the last quarter of the year. US gas
inventories are still at the lower end of the longer term
averages following the steep decline triggered by the cold
spell in February 2014. This means that gas inventories,
and thus gas prices, are particularly vulnerable to extreme
cold scenarios. Support for Henry Hub prices can be
expected, with a rally of more than 10% to levels above
USD 4.00/mmBtu. In Europe, TTF prices for 2015 remain
under pressure as inventories are well-filled. This forms a
good starting point for the coming winter season.
Assuming a normal winter, inventories should be large
enough to prevent any deficits and offer strong support for
TTF gas prices in the coming quarter.
Oversupply will continue to cap the upside in 2015/16
Our macro-economic outlook is based on a further
recovery of global economic growth. This will automatically
lead to higher demand for oil, especially in Asia. We
believe that this increase can easily met by the rise in
(non-OPEC) oil production. Technological developments
result in a higher efficiency rate and cost prices are
declining rapidly. On top of that, the OPEC producers also
compete to increase their output within the OPEC quota.
This indicates that the reserve capacity, or production
potential, will continue to increase in the coming years. As
a result, the risk premium will continue to fall, even if
geopolitical tensions linger in the Middle East.
Furthermore, our forecast of higher global economic
growth also includes higher yields and a further
appreciation of the US dollar. Both are seen as negative
for commodities, including oil. This base case scenario
implies no change in geopolitical tensions. An increase in
tensions could be absorbed as long as oil production is not
affected. Easing geopolitical tensions would only add more
pressure to oil prices. We expect the moderate decline in
oil prices to continue in 2015 and 2016, reaching USD
90/bbl and USD 85/bbl respectively. WTI will continue to
trade at a small discount to Brent.
Gas TTF:
- EUR/MWh
Source: ABN AMRO Group Economics
Meanwhile, TTF gas prices will remain under pressure in
2015 and 2016 as a result of the further decoupling of oil
and gas prices. Furthermore, efficiency and substitution
could cap gas demand, especially if coal and carbon
emissions remain too cheap to be replaced by natural gas.
Upside risks to our forecast:
Downside risks to our forecast:




Geopolitical risks escalate, resulting in supply disruptions
among major oil producing countries
Weather-related events lead to lower supply
Faster-than-expected economic recovery boosts demand


OPEC price war as a result of an uncontrolled rise in oil
production
USD rallies and/or yields rise faster/more than expected
Economic growth (demand) fails market expectations
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Precious metals: gold, silver, platinum, palladium
Georgette Boele, tel. +31 20 629 77 89
Investor behaviour remains dominant

Dreadful third quarter with sharp price falls for all precious metals

Investor behaviour remains crucial, given still large precious metal ETF positions

Once excessive investor positions have been cleared, fundamentals take over for the cyclical metals
Dreadful third quarter for precious metals
Price index precious metals 2014
The third quarter of 2014 saw significant weakness in
130
precious metal prices with silver prices dropping by 19%,
while palladium prices dropped by ‘only’ 8%. Such
120
index (1 Jan 2014 = 100)
substantial moves are not uncommon in precious metal
110
markets. At the start of Q3, we expected significant price
weakness. Except for gold, prices in platinum, palladium
100
and silver even undershot our end of September targets of
1,400, 800 and 18 USD per ounce, respectively.
90
Meanwhile, gold prices closed Q3 at 1,208 USD per ounce
80
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Gold
Platinum
Silver
Palladium
just above our target of 1,200. According to Metal Bulletin
our average third quarter precious metal forecasts were
the most accurate with a accuracy of 98.39%.
Source: Thomson Reuters Datastream
Why have precious metal prices weakened so much?
For starters, the rally in the US dollar was one of the
Gold price and US inflation expectations
driving forces behind this weakness. Precious metal prices
1400
2.6
1350
2.4
1300
2.2
1250
2
1200
1.8
1150
1.6
have a tendency to weaken in an environment of a
stronger US dollar (see below). Moreover, the drop in oil
prices since mid-June pushed inflation expectations
substantially lower. As a result, fewer investors bought
gold on the basis of an inflation fear. Therefore, gold prices
USD/troy ounce
8
are usually negatively affected when oil prices move lower.
In addition, weaker than expected economic data releases,
14
Gold price (lhs)
5y US inflation expectations (rhs)
Source: Bloomberg, ABN AMRO
especially in the eurozone, resulted in growth fears. This
resulted
in
a
downward
adjustment
in
demand
expectations for platinum, palladium and silver. This came
at a time that platinum mining companies ramped up
production at a high pace, while
concerns of lower
palladium exports eased.
Correlation precious metal prices vs US dollar
1.0
Stronger US dollar to remain a headwind…
Precious metal prices are very sensitive to the fortunes of
the US dollar (see graph on left). Why? Because the
0.5
outlook of the US dollar and US interest rates are crucial
for overall investment decisions. A higher US dollar and
0.0
higher US rates make precious metals a less attractive
investment, because they don’t offer income and they are
-0.5
mainly quoted in US dollars. It is likely that in an
-1.0
environment of a higher US dollar and US interest rates,
investors will move out of precious metals. For the
-1.5
12
13
Gold vs USD
Platinum vs USD
14
Silver vs USD
Palladium vs USD
remainder of this year, the US dollar rally has further to go.
This is because the market has yet to price in the extent of
rate hikes signalled by the Fed. We expect even more rate
Source: Bloomberg, ABN AMRO
hikes than the Fed is currently signalling. Therefore, it is
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Precious metals: gold, silver, platinum, palladium
likely that precious metal prices will fall.
Total known ETF positions platinum and palladium
…with overcrowded ETF positions
3,500,000
Investor positions in precious metals are currently
3,000,000
substantial, especially the ETF (Exchange Traded Funds)
positions in silver, platinum and palladium. Last year, the
2,500,000
significant liquidation in gold investment positions drove
2,000,000
prices lower. We have examined the details of the
1,500,000
changes in overall investment positions and the behaviour
of the prices. We have found that gold and silver prices are
1,000,000
more sensitive to changes in overall positions than
platinum and palladium are. For example, on average
500,000
(since 2007) a 10% change in gold positions (non-
0
07
09
11
Platinum
commercial positions and ETF positions) coincides with a
13
4% change in prices in the same direction. In 2013, when
Palladium
a 47% drop in outstanding positions resulted in a 28%
drop in gold prices this relationship was somewhat
Source: Bloomberg
stronger.
Meanwhile, for silver prices there is no clear
relationship apart from the fact that position liquidation
coincides with weakness in prices. For, platinum and
ABN AMRO price forecast (index)
palladium, however, the relationship is more stable. On
average, a 10% reduction in investor positions goes hand
800
forecast
ABN
AMRO
700
600
index (1999=100)
9
in hand with a 3% reduction in platinum and palladium
prices. Going forward, if investor positions in platinum and
500
palladium were to be reduced by 30% in the coming
400
months, prices could easily drop by another 10%.
300
200
Fundamentals to take over at some point in time
100
In the near-term, investor position liquidation remains the
0
most substantial risk. However, if we look more at the
99
01
03
05
07
09
Gold
Platinum
11
13
15
Silver
Palladium
longer-term picture, it is likely that fundamentals will
improve. We remain constructive on the growth outlook for
China and India (albeit at consensus). In addition, we
continue to have an above consensus economic view on
Source: Thomson Reuters Datastream, ABN AMRO
the US economy (for 2015), which is an important market
for these precious metals. We are also less negative than
ABN AMRO price forecast table
current market consensus on the eurozone economy. This
3m
6m
12m
(end of
Jan. ‘15)
(end of
Apr. ‘15)
1,100
(end of
Oct.’15)
2014
avg
2015
avg
1,000
850
1,250
925
16.0
17.0
17.5
19.0
17.2
1,150
1,200
1,300
1,370
1,250
700
750
725
800
720
Gold:
- USD/oz
Palladium:
- USD/oz
demand may continue to hurt prices, it will unlikely prevent
a recovery in silver, platinum and palladium prices in 2015
and 2016. For gold, the outlook for 2015 remains negative.
Platinum:
- USD/oz
and industrial demand for precious metals in 2015 and
2016. Although, a higher US dollar and lower investment
Silver:
- USD/oz
overall constructive outlook will support jewellery, car sales
This is because the higher US dollar, higher US interest
rates and lower investment demand will continue to affect
Source: ABN AMRO Group Economics
prices negatively, mainly because gold has a relatively low
industrial demand component. For 2016 we expect that
lower prices will have led to the closure of unprofitable
mines resulting in lower supply. It is likely that this will
support gold prices in 2016.
Upside risks to our forecast:
Downside risks to our forecast:




(Geo) political events trigger risk-aversion
Fed on hold for longer, supporting precious metals
Further supply disruption in platinum and palladium


More aggressive rate hikes by the Fed
Weaker global economy hurts platinum and palladium
Larger-than-expected mine supply
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Base metals: aluminium, copper, nickel, zinc
Casper Burgering, tel. +31 20 383 26 93
Fundamentals to support base metals

Base metals prices softened on loss of confidence in global economic growth

However, from a fundamental perspective, conditions in base metals markets remain favourable

We expect the Chinese economy to stay resilient, which is supportive for base metals demand
Price index base metals 2014
160
index (1 Jan 2014 = 100)
150
140
130
120
110
100
90
80
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Aluminium
Copper
Nickel
Zinc
Source: Thomson Reuters Datastream
Base metals balance until 2016
1,500
'000 tonnes
1,000
500
0
Base metals prices down on global economic jitters
Although macro-economic headwinds have muted base
metals market conditions, the base metals complex is still
one of the best performing commodity classes. From the
start of 2014 until October, prices for aluminium, nickel and
zinc increased, mainly due to tighter fundamentals. In the
aluminium sector, prices gained in strength on falling LME
stocks and an improved demand outlook. Nickel and zinc
prices increased primarily on future supply concerns. For
nickel, the Indonesian export ban on unprocessed
materials was the main trigger, while in zinc the planned
closure of mines fuelled speculation. Copper was the only
exception in the base metals complex, with a price decline
of more than 10% since 1 January. Throughout the year,
the copper price was strongly influenced by economic
developments in the main copper consuming countries
and major one-off events in China, such as the bond
default of Chaori Solar and the Qingdao probe. More
recently, however, investor jitters increased and price
pressure mounted for all base metals. The uncertainty was
triggered by weak macro-economic data over the last two
months. As a result, base metals prices have decreased
since September as confidence in global economic growth
fell, and the US dollar strengthened.
-500
-1,000
-1,500
2012
2013
Aluminium balance
2014
Nickel balance
2015
2016
Copper balance
Zinc balance
Source: Metal Bulletin
Base metals stocks in weeks of consumption until 2016
35
30
weeks of consumption
10
25
20
15
7.6
7.2
8.0
7.6
7.2
10.4
10.1
10.8
9.9
3.4
2.9
2.4
2.4
2.3
12.0
12.0
11.8
12.0
12.0
9.2
10
5
0
2012
2013
Aluminium stocks
Nickel stocks
Source: Metal Bulletin
2014
2015
2016
Copper stocks
Zinc stocks
Fundamentals favour price strength
There are currently several forces at play in the base
metals complex. External factors, fundamentals and the
release of macro-economic data have their grip on base
metals markets and at this stage, can send prices in either
direction. External factors – such as the drop in oil prices
and the strengthening of the US dollar – have already left
their mark on the base metals complex. But perhaps more
important are the global economic growth worries. The
scenario of a further slowdown in the global economy is
currently affecting the base metals complex, and is not
only increasing metals market sentiment jitters, but also
metals price volatility. Metals prices dropped throughout
September and October on the prospect of weaker future
demand. We think, however, that the market reaction is
overstated and that the global recovery story still appears
intact. Enough indicators still point towards a moderate
economic recovery scenario, which should also support
demand for base metals going forward. Conditions in base
metals markets also remain favourable from a fundamental
perspective. Demand is expected to outpace supply in
2016 and the balance for most metals is then negative.
These deficits support long term stronger metals prices.
Meanwhile, stocks at LME warehouses are also
significantly down this year, except for nickel. It remains to
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Base metals: aluminium, copper, nickel, zinc
be seen, however, if the stock withdrawal is due to
buoyant end-user demand, or that these stocks were
simply relocated. On balance, stocks measured in weeks
of consumption will remain stable in the period 2014-2016.
China base metal balance until 2016
'000 tonnes
2,000
1,000
0
-1,000
-2,000
-3,000
-4,000
-5,000
2012
2013
2014
2015
2016
Aluminium balance China
Copper balance China
Nickel balance China
Zinc balance China
Source: Metal Bulletin
ABN AMRO price forecast (index)
700
forecast
ABN
AMRO
600
500
400
index (1999=100)
11
Demand for metals from China to continue
Going forward, base metals price trends will highly depend
on economic developments in emerging Asia, especially
China. Metals demand is primarily driven by consumption
of cars, electrical devices, industrial machinery, but also
urban developments. And the good news is that emerging
Asia is expected to do relatively well. Indeed, the base
metals balance for China is seen remaining in negative
territory until 2016. This indicates that import demand for
industrial materials will probably stay high. But risks have
increased for the Chinese economy, where uncertainties
are focused in the property and shadow banking sectors.
And if the scenario of a significant cooling down of the
Chinese economy becomes reality, base metals demand
will also soften. In this event, metals traders will react
instantly by cutting down orders and postponing payments
of outstanding debt. Our base scenario remains that the
official Chinese growth target will be met this year and that
China will take supportive measures if economic data
continues to disappoint.
300
200
100
0
99
01
03
05
Aluminium
07
09
Copper
11
13
15
Nickel
Zinc
Source: Thomson Reuters Datastream, ABN AMRO
ABN AMRO price forecast (actual)
3m
6m
12m
(end of
Jan. ‘15)
(end of
Apr. ‘15)
(end of
Oct. ‘15)
2014
avg
2015
avg
2,095
1,990
2,050
1,860
2,050
0.95
0.90
0.93
0.84
0.93
6,950
7,000
7,100
6,900
7,100
3.15
3.18
3.22
1.13
3.22
15,500
17,750
18,200
17,100
18,000
7.03
8.05
8.26
7.76
8.16
2,375
2,220
2,250
2,190
2,250
1.08
1.00
1.02
0.99
1.02
Aluminium:
- USD/tonne
- USD/lb
Copper:
- USD/tonne
- USD/lb
Nickel:
- USD/tonne
- USD/lb
Zinc:
- USD/tonne
- USD/lb
Source: ABN AMRO Group Economics
Base metals prices should improve on global
economy
Until August, base metals were on track to finish the year
higher than their starting level on 1 January. But because
of increased economic unrest from September onward,
price performance was relatively weak. For this reason, we
have adjusted our base metals price forecasts downward.
Nevertheless, we are still convinced that prices should
strengthen slowly during the last two months of this year
on a further improving global economy. Moreover, the
fundamental outlook for most metals markets is still
promising for coming years. In aluminium, LME stocks are
lower and the demand outlook is good, which means longterm prospects are positive. In the copper market, prices
are still hovering around USD 6,650/t. Copper prices are
waiting for supportive economic data from major copper
consuming countries. The expected surplus in 2015 is
negligible and will only represent 0.2% of consumption. In
nickel, the Indonesian ban and the prospect of supply
deficits explains the current high nickel prices. Despite the
mismatch between the relatively high prices and current
fundamentals, we expect prices to maintain their current
level. Nickel stocks are increasing and additional capacity
is entering the market. The supply/demand outlook for zinc
suggests a tighter market in the long run. We anticipate on
more strength in zinc prices going forward. In general, we
expect that the Chinese economy will remain resilient, with
improving conditions in end-using sectors. In light of this,
demand for base metals will remain positive.
Upside risks to our forecast:
Downside risks to our forecast:




Geopolitical tensions increase
Stronger-than-forecast Chinese economic performance
Significant cutbacks in capacity (China)


Weaker-than-expected growth in Chinese economy
Funds scaling back interest for base metals
Limited producers discipline: oversupply in markets
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Ferrous metals: steel (global, HRC), iron ore, coking coal
Casper Burgering, tel. +31 20 383 26 93
‘The tolling of the iron bell’

The weak price environment for steel and steelmaking raw materials lingers on

At this stage, the bell is tolling for those mining companies positioned high on the cost curve

Conditions are expected to remain relatively weak and hopes are now up for stimulus measures
Price index ferrous metals 2014
110
100
index (1 Jan 2014)
90
80
70
60
50
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Global steel (HRC, avg.)
Iron ore (fines)
Prime coking coal (Australia)
Source: Thomson Reuters Datastream
Regional steel production growth & world trade
15%
10%
yoy %
5%
0%
-5%
-10%
-15%
2013
US
Conditions in ferrous metals markets remain poor
The state of the global ferrous industry remains
depressed. The global average steel price has lost 5.5%
since the start of 2014 and steel prices in most regions
have weakened. In Europe and China, prices have
depreciated by 6% since 1 January, while gaining over 6%
in the US. In CIS and Latin America, prices softened
modestly. Overcapacity is the biggest concern for the
global steel industry, and the main cause of the current
weak price environment. In 2013, global overcapacity was
more than 6%. In Europe, the figure was even more
severe and production outpaced consumption by 17% on
average. Estimates are that this year, overcapacity in
Europe could run up to 25-30% of production. China is not
far behind Europe, with approximately 10% overcapacity
in steel. This is also the central theme in the iron ore
market. But the impact on prices has been even worse
with a decline of almost 40% since 1 January. This strong
drop in prices is not without consequences, and at this
stage the bell is tolling for those mining companies
positioned high on the cost curve. Conditions are relatively
better for coking coal. At the moment, supply continues to
outpace underlying demand, which has caused weakness
in coking coal prices until Q3. But supply cuts have started
to kick in and prices are starting to rebound slowly but
surely. Still, so far this year the coking coal price has
declined over 20% and it will take quite some time to make
up for this loss.
2014
China
Europe
World trade
Source: Thomson Reuters Datastream, CPB, WSA
Chinese imports iron ore & steel production
40%
30%
20%
10%
yoy %
12
0%
-10%
-20%
2013
2014
China import iron ore
China steel production
Source: Thomson Reuters Datastream, WSA
Challenges remain for the steel industry
From January until September, global crude steel
production was up by 3.4%, despite the overcapacity. In
China, general sentiment in the steel industry is expected
to remain weak, with rising inventories, relative low
manufacturing PMI indicators and a further softening in
domestic steel demand. Conditions are not much better in
Europe, where demand is also relatively weak, economic
uncertainties have increased and there is limited producer
discipline to cut capacity. Hopes are up for economic
stimulus measures (China and Europe), which would
increase demand for steel (and steelmaking raw
materials). At this stage, the market conditions in the US
are more promising. As the US economy continues to
expand, steel end-user and buying activity is expected to
remain solid. End-user demand will increase, driven by the
positive economic data, the outlook on car sales and the
recovery of the construction sector. Meanwhile, economic
conditions in many other international steel markets will
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Ferrous metals: steel (global, HRC), iron ore, coking coal
continue to be driven by uncertainty. For the next three
months, supply pressures in the global steel industry will
persist and prices will remain soft.
Coking coal price & import by country
250%
10%
200%
0%
Iron ore market woes persist
Weak iron ore prices increased the risk of default among
private Chinese iron ore producers, who are positioned at
the end of the iron ore cost curve. In order to survive the
challenging market dynamics and remain competitive,
high-cost miners must significantly cut their outlays.
However, we expect that a portion of the high-cost
suppliers in China will be forced to stop production this
year. But the level of cuts will most likely not be sufficient
to balance the iron ore market. State-owned mines (in
most cases highly integrated with domestic, state-owned
steel mills) will continue to operate, even when iron ore
prices fall below their cost base. In the short term, we do
not expect a revival in market conditions. We think that,
given the ample supply and relatively high level of
inventories (at ports, mills and mine sites), iron ore prices
will stay soft this year and next. In addition, there are still
new iron ore mining projects in the pipeline, which will
come on stream in the next few years. On top of this, large
miners seem to have little intention of scaling back further
planned expansions. In light of this, the large supply
overhang will continue to weigh on fundamentals and
prices are expected to remain weak until 2015.
yoy %
150%
100%
-10%
50%
-20%
0%
-30%
-50%
-100%
-40%
2013
2014
Import China
Import Japan
Import S. Korea
Coking coal price (rha)
Source: Thomson Reuters Datastream, Clarksons
ABN AMRO price forecast (index)
300
forecast
ABN
AMRO
250
200
150
index (2006=100)
13
100
Coking coal market experiences some stability
Given low spot prices and relatively weak underlying
demand, a substantial number of coking coal producers
have trouble staying financially healthy. Margins for coking
coal miners came are under pressure during the first half
of this year due to the falling coal prices. Buying interest
for coking coal among mills and traders was low. As a
natural defence, miners adopted survival techniques such
as severe cost cutting via job cuts. Unfortunately, such
drastic measures were inevitable. The continued coking
coal price decline not only forced producers to intervene in
the mine cost structure, but in some instances to shut
down capacity. A long-term price recovery will require
further mine closures, (significant) capacity cuts in the
coking coal markets and a revival in the steel sector. One
direct result of the low prices was the recent measure
taken by the Chinese government to implement an import
tax on coal from mid-October. The move was meant to
help the domestic coking coal market tackle rising costs.
This will likely lead to a drop in imports in the coming
months. But since 1 October, coking coal prices are
showing some stability. Indeed, early indications of
contract negotiations for long-term deliveries point towards
price stability in Q4. Two years from now, we expect the
market to be fairly balanced and that the outlook for prices
will therefore be more favourable.
50
0
99
01
03
05
Steel
07
09
Iron ore
11
13
15
Coking coal
Source: Thomson Reuters Datastream, ABN AMRO
ABN AMRO price forecast (actual)
Steel
(global, HRC):
3m
6m
12m
(end of
Jan. ‘15)
(end of
Apr. ‘15)
(end of
Oct. ‘15)
568
565
82
111
2014
avg
2015
avg
565
570
565
81
85
99
92
118
125
114
123
- USD/tonne
Iron ore:
- USD/tonne
Coking coal:
- USD/tonne
Source: ABN AMRO Group Economics
Upside risks to our forecast:
Downside risks to our forecast:




Stronger-than-expected Chinese economic growth
Severe supply disruptions due to unfavourable weather
Stockpiling strategies by governments


Weaker-than-expected Chinese economic growth
New capacity entering the market
Limited producer discipline, oversupply lingers on
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Agriculturals: wheat, corn, soybeans
Frank Rijkers, tel. +31 (0)20 628 64 37
‘Bumper crops’ create pressure on grain prices

Significant upgrades in grain and soybean production in recent months

Good prospects for corn and soybean growing stocks leads to further price declines

World food prices will decline
Price index agriculturals 2014
150
140
index (1 Jan 2014 = 100)
130
120
110
100
90
80
70
60
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Wheat
Corn
Soybean
Source: Thomson Reuters Datastream
GOI index
290
index (1 Jan 2000 = 100)
270
250
230
210
190
170
150
GOI
Wheat
Corn
Soybean
Abundance signals further price pressure
Since mid-May, grain prices have been decreasing across
the board due to favourable crop production forecasts. In
the third quarter, prices fell further, reaching the lowest
point in five years for both corn and soybeans. Wheat,
prices reached the lowest point in four years at 446
USDc/bushel (No. 2 Hard (Kansas)). The average price of
grains has fallen 17% since the beginning of the season
on 1 July, according to the International Grain Council’s
Grain and Oilseeds Index (GOI). The underlying subindices show that world corn prices (-21%) and soybean
prices (-22%) fell particularly sharply since the start of the
season. World wheat prices dropped by 6% during this
period while in Europe, prices declined by 19%. The
relatively strong price decline in Europe is due to good
weather conditions during the growth period. European
farmers experienced a record harvest of 154 mt (metric
tonnes). Still, the quality of the high amount of European
wheat is an issue. Almost half of the French crop doesn’t
meet the quality standard of milling wheat and is now used
for cattle feed. This is a windfall for livestock farmers and
grain consumers and could ultimately lead to lower food
prices (bread, pasta, etc.), because the yields are at a
record high level
Great prospects for crop production
In its latest market report, the International Grain Council
(IGC) once again lifted the output projection for all grains
at a level of 1.983 mt (instead of 1.976 mt a month earlier).
Similarly, the crop projections for all grains, of the United
States Department of Agriculture (USDA), are at a multiyear high of 2.023 mt.
Source: IGC
Total grains: production versus consumption
2500
2000
x 1 million mt
14
1500
1000
500
0
production
Source: IGC
consumption
For 2014/2015, the IGC expects wheat production to reach
717 mt: a new all-time high. World production is now
expected to be 1% above that of last season, with
improvements in the EU, Russia, Ukraine, Latin America,
China and India. Wheat consumption is forecast at a level
of 709 mt, an increase of 2% compared with last year. The
demand for feed wheat will likely continue to be capped by
attractively-priced corn. And direct use for human food
continues to drive most of the annual gain in world wheat
demand.
The outlook for corn production is also positive for the
2014/2015 season. Production is projected at 974 mt, 1%
lower than last season’s record but 8% higher than the
five-year average of 905 mt. Improved projections in the
US due to beneficial rains in the Midwest led to higher crop
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Agriculturals: wheat, corn, soybeans
condition ratings, which remained unseasonably high.
Corn consumption is seen reaching an all time record high
of 959 mt. An important reason for this is the expectation
of increased feed and industrial consumption in light of the
low prices. Corn is also complementary to wheat. So when
wheat prices are at a relatively higher level, traders buy
corn. Demand for corn for human consumption is expected
to remain at the same level worldwide.
Stocks-to-use-ratio
35%
30%
25%
20%
According to the USDA, the soybean production outlook
for the 2014/2015 season is tentatively projected to
expand by 8.5% year-on-year, reaching a record of 311
mt. The expansion exceeds the prior five-year average
and is underpinned by prospects for bumper and record
outturns in the northern and southern hemispheres. The
projections for global consumption are at a record of 300
mt. In China as well as in the United States, the demand
for soybeans increased by 5% y-o-y and 9% y-o-y
respectively.
15%
10%
2005/06
2007/08
2009/10
Wheat
2011/12
Corn
2013/14
Soybean
Source: USDA/IGC, ABN AMRO Group Economics
ABN AMRO price forecast (index)
400
forecast
ABN
AMRO
350
300
250
200
index (1999=100)
15
150
Stocks-to-use ratio
An important indicator for price developments in the
coming months is the so called stocks-to-use-ratio. This is
the relationship between the end stocks and the use of the
grains. Huge stocks cause price levels to ease because
there is sufficient buffering in the event of disappointing
harvest periods. According to IGC projections, the stocksto-use-ratio for the end of this season is around 22% on
average for all grains. This is the highest level since
2009/2010.
100
50
0
99
01
03
05
Wheat
07
Corn
09
11
13
15
Soybean
Source: Thomson Reuters Datastream, ABN AMRO
ABN AMRO price forecast
3m
6m
(end of
Jan)
(end of
May)
2014
avg
2015
avg
515
570
545
575
350
365
405
450
950
980
1,210
1,235
Wheat:
- USDc/bu
Corn:
- USDc/bu
Soybeans:
- USDc/bu
Source: ABN AMRO Group Economics
The highest underlying stock is seen in wheat, with a
stock-to-use-ratio of 27.5%. In fact, wheat stocks are
expanding by 4% this year to a level of 195 mt. For corn,
the end-stocks will reach a level of 191 mt, up 8.5% yearon-year. Soybean end-stocks will be 90 mt, according to
the latest USDA projections. This means soybeans will
show the greatest annual increase at 26.3%. These high
end-stocks will support the lower grain prices.
Price forecasts
With the market anticipating a further increase in corn
production and a slight decrease in soybean consumption
according to the latest WASDE report, prices of these
crops will decline further over the next three months. The
production rates for wheat have also further increased to
record levels. This higher production is more than offset by
greater world feed and food consumption. In addition, US
exports are helping the global wheat price to stabilise.
Over the coming months, the price of wheat will ease to a
level of USDc 515/bushel while corn and soybean prices
will further decrease, reaching levels of USDc 350/bushel
for corn and USDc 950/bushel for soybeans. With this
further decline in grain prices, the expectation is that global
food prices will also further decrease.
Upside risks to our forecast:
Downside risks to our forecast:




Production risks due to adverse weather in production areas
Less availability of alternative feed grains than expected
Geopolitical tensions will effect crop exports


Decline in demand, due to lower growth in China
Decrease in the use of biofuels
More favourable weather conditions in production areas
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Agriculturals: sugar, coffee, cocoa
Hans van Cleef, tel. +31 20 343 46 79
Supply concerns have resulted in multi-year records

Mixed signals for soft commodities

Brazilian drivers crucial for price direction sugar and coffee

Near-term support possible, but downside risks still lurking
Price index agriculturals 2014
180
170
index (1 Jan 2014 = 100)
160
150
140
130
120
110
100
90
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Sugar
Coffee
Cocoa
Source: Thomson Reuters Datastream
200,000
150,000
contract
CFTC non-commercial net positions (suplementary)
100,000
50,000
0
-50,000
-100,000
-150,000
2010
2011
Sugar
2012
Coffee
2013
2014
Source: Thomson Reuters Datastream
Coffee and sugar production vs consumption
200
180
160
140
120
100
80
2002/03
2005/06
2008/09
Sugar production
Sugar consumption
Ebola fears dominate cocoa direction
Cocoa rose more than 20% and even reached a 3.5-year
high in September, fuelled by fears of the Ebola virus
infiltrating West Africa’s major cocoa growing countries as
their main harvests approach. If Ebola spreads into the two
major producers, Ivory Coast and Ghana, the impact on
cocoa prices will be substantial. After all, while Ebola would
not damage the actual cocoa crop, the disease would lead
to a loss of lives and seriously undermine the internal
infrastructure of these countries. Embargoes could be
imposed, workers could be unable to move around the
country, domestic transport could be disrupted and cocoa
beans potentially delayed in reaching the ports for export.
Fundamentally, without the Ebola threat, cocoa prices
should be facing a downtrend. Healthy supply numbers for
2013/14 and beneficial conditions during this season’s
crucial growing phase bode well. Ivory Coast saw a record
1.741 million mt port arrivals number up from 1.449 million
mt. Meanwhile, the ICCO estimates that Ghana will be
close to 920,000 mt for 2013/14, up 85,000 mt year-onyear. Demand remains constant, despite a 1.5% drop in
European grindings and a 4.6% increase in US grindings in
Q3. The uncertainty about Ebola spreading into the major
cocoa producers will remain at least until the end of the
year. Nevertheless, assuming Ebola does not reach these
countries, the effects of the record 2013/14 production and
healthy forecasts for 2015 will only be seen in the course of
2015 itself.
Cocoa
Mt
16
2011/12
2014/15
Coffee production
Coffee consumption
Multi-year records reached after mixed signals
ICE Sugar11 reached a four-year low of USDc 13.32 in
September as the market struggled to absorb the prompt
overhang in supplies that had been building over the
previous four years of surpluses. Meanwhile, coffee and
cocoa have been among the best performing commodities
in the year to date. Arabica (or New York) coffee in
particular, which reached its highest level of USDc
229.10/lb since January 2012, found strong support due to
persistent weather and supply concerns. Robusta coffee
could be viewed as the odd man out in our soft commodity
midst, as it has a better balanced supply and demand
outlook, keeping Robusta prices capped at around USD
2,200/tonne.
For coffee and sugar near-term focus will be on Brazil
Although worries about the possible development of an El
Niño have completely diminished, the focus will remain on
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Agriculturals: sugar, coffee, cocoa
Source: ISO, USDA
Robusta vs Arabica coffee price (2
nd
contract)
3,000
350
2,500
300
250
2,000
200
1,500
USD/t
100
500
50
0
2009
USDc/lbs
150
1,000
0
2010
2011
2012
2013
Robusta coffee (lha)
2014
Arabica coffee (rha)
Source: Thomson Reuters Datastream
ABN AMRO price forecast (index)
index (1999=100)
17
450
400
350
300
250
200
150
100
50
0
forecast
ABN
AMRO
99
01
03
05
Sugar
07
09
11
Coffee
13
Cocoa
Source: Thomson Reuters Datastream, ABN AMRO
ABN AMRO price forecast
3m
6m
(end of
Jan. ‘15)
(end of
Apr. ‘15)
17.50
2014
avg
2015
avg
18.50
18.00
18.00
190
180
180
170
2,100
2,150
2,050
1,900
3,250
2,900
3,100
2,750
Sugar:
- USDc/lb
Arabica Coffee:
- USDc/lb
Robusta Coffee:
- USD/tonne
Cocoa:
- USD/tonne
Source: ABN AMRO Group Economics
15
potential supply concerns for coffee, and a possible
tightening of the sugar surplus. In recent weeks, Brazilian
weather forecasts have been the focus of many investors
and hedgers, strongly influencing speculative opinion and
therefore positional direction. For coffee, the main focus is
on rain expectations as the flowering season for the
2015/16 crop advances. Nevertheless, the actual impact on
the 2015/16 crop of the unprecedented hot, dry spell in
January and February 2014 and the current lack of rainfall
will only emerge in the weeks ahead, following the
flowering. But a good rainfall during this period could stir
hopes of a lower negative impact. For sugar, we are at the
tail end of the Brazilian crop. Market expectations indicate
that, due to the drought, the cane harvest may have
dropped by roughly 10% from last year’s record crop and
expectations for 2015/16 are for little to no recovery in CS
Brazil. Therefore, speculators may be looking for the right
time to buy as the spot prices may have dropped too low.
The cane industry will be hoping that next year a new
government of President Rousseff will bring a change to the
gasoline subsidy regime that undermined the viability of the
hydrous ethanol market. The picture is further complicated
by falling world energy prices, which now allow for profitable
gasoline imports and the need to keep a lid on inflation.
The longer term outlook is less rosy for Arabica
For all soft commodities, the upside for the medium to
longer-term outlook remains limited. With a bumper
Vietnam Robusta crop expected in the upcoming 2014/15
crop year, and improved production in Indonesia, the
Robusta coffee market will be well supplied. This, in turn,
will have a dampening effect on upside price prospects. An
extended stall in price may well threaten the speculative
longs and lead to a further correction. The big unknown for
Arabica coffee will remain the effects of the 2014 drought
on the 2015/2016 Brazilian crop. Nevertheless, given that
the market is long, anticipating the worst outcome, signs of
significant rainfall and/or an improving outlook for the
Brazilian crop could result in a dip in the unwinding of these
speculative long positions.
Buy the sugar dip into 2015
Most of the bad sugar news for 2015 appears to be already
priced in. Nevertheless, it is hard to see any upside in the
coming months, unless concerns about an El Niño reemerge. Therefore, sugar prices will remain under pressure
as a result of the lingering oversupply. In the longer term,
the impact of the drought and fires, as well as the aging
canes and decreased husbandry could hurt sugar
production even further. For the current crop, the Brazil
cane crush is already 8.5% below last year’s record crop.
More tightening of the global production surplus may result
in a future deficit, leading to rising sugar prices.
Upside risks to our forecast:
Downside risks to our forecast:




Upcoming crops suffered more damage than expected
Ebola confirmed in either Ivory Coast or Ghana
Asian demand for cocoa rises faster than expected


Rainfall dampens supply fears
Ebola does not spread into Ivory Coast or Ghana
Funds scale back interest in cocoa and sugar
18
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Macro-economic indicators
Macro-economic Forecasts ABN AMRO Group Economics (per 16 October 2014)
GDP growth (% y-o-y)
US
China
Japan
EU
UK
Germany
World
Inflation (CPI, % y-o-y avg)
2012
2013
2014e
2015e
2012
2013
2014e
2015e
GDP per cap USD
2013
2.3%
2.2%
2.2%
3.8%
2.1%
1.5%
2.0%
2.2%
53,101
7.7%
7.7%
7.5%
7.0%
2.6%
2.6%
2.0%
2.9%
9,844
1.5%
1.5%
1.5%
1.4%
0.0%
0.4%
2.5%
1.7%
36,899
-0.6%
-0.4%
0.9%
1.7%
2.5%
1.3%
0.5%
1.0%
31,571*
0.3%
1.9%
3.0%
2.8%
2.8%
2.5%
1.6%
1.7%
37,307
0.6%
0.2%
1.7%
2.2%
2.0%
1.5%
1.0%
1.5%
40,007
3.2%
3.2%
3.3%
3.9%
4.1%
4.0%
4.0%
4.0%
11,964*
* = 2012
Regional Manufacturing PMIs
Consumer prices per region (CPI, % yoy)
World trade (volume index) and yoy % change
Commodity Indices
Consulted sources for this publication: Economic forecasts & insights from ABN AMRO Group Economics, Metal Bulletin, CRU, Mining Journal,
Bloomberg, IGC, WSA (IISI), ISSB, NBS, IGC, IEA, Baker Hughes, ICCO, ICO, USDA, China Mining, Clarkson Research Services, ABARE, AME, Thomson
Reuters Datastream, Thomson Reuters Eikon, World bank, ECB, Eurostat, IMF, CPB
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Historical commodity price developments
Oil: Brent and WTI
Gas: Henry Hub & Title Transfer Facility
160
18
140
16
120
14
12
100
10
80
8
60
6
USD/mmBt
USD/bbl
40
20
0
00
02
04
06
08
10
12
4
2
0
05
14
Crude Oil-Brent
Crude Oil-WTI Spot Cushing
06
07
08
09
Henry Hub Gas
Precious metals: Gold
10
11
12
13
14
TTF Gas
Precious metals: Silver
2000
6000
1800
5000
1600
1400
4000
1200
3000
800
USDc/troy ounce
USD/troy ounce
1000
600
400
200
0
00
02
04
06
08
10
12
2000
1000
0
14
00
02
04
Gold Bullion
06
08
10
12
14
08
10
12
14
08
10
12
14
Silver
Precious metals: Platinum
Precious metals: Palladium
1200
2500
1000
2000
800
1500
USD/troy ounce
USD/troy ounce
600
1000
500
0
00
02
04
06
08
10
12
400
200
0
00
14
02
Platinum
04
06
Palladium
Base metals: Aluminium
Base metals: Copper
3500
12000
3000
10000
2500
8000
2000
6000
1500
4000
1000
500
USD/t
USD/t
19
0
00
02
04
06
08
LME-Aluminium 99.7% Cash
10
12
14
2000
0
00
02
04
06
LME-Copper Grade A
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Historical commodity price developments
Base metals: Nickel
Base metals: Zinc
60000
50000
40000
30000
10000
USD/t
USD/t
20000
0
00
02
04
06
08
10
12
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
00
14
LME-Nickel Cash
02
04
06
08
10
12
14
LME-SHG Zinc 99.995% Cash
Ferrous metals: Global steel prices (HRC)
Ferrous metals: Iron ore & Coking coal
1200
1000
350
800
300
250
600
200
400
200
100
0
00
02
04
06
08
10
12
14
50
USD/t
USD/t
150
0
Global steel price
06
07
08
09
10
11
12
13
14
Iron Ore Fines (63.5%)
Prime Coking Coal (Aus)
Agriculturals: Grains (wheat, corn, soybeans)
Agriculturals: Sugar
2000
35
30
25
20
1000
15
500
10
0
00
02
04 06 08 10 12 14
Wheat, 2nd future contract
Corn 2nd future contract
Soybeans 2nd future contract
Agriculturals: Cocoa
USDc/lb
USDcents/bushel
1500
5
0
00
02
04
06
08
10
12
14
12
14
Sugar, 2nd future contract
Agriculturals: Coffee
4000
350
3500
300
3000
250
2500
200
2000
150
1500
100
USDc/lb
1000
USD/t
20
500
0
00
02
04
06
08
10
Cocoa, 2nd future contract
12
14
50
0
00
02
04
06
08
Coffee, 2nd future contract
10
21
Quarterly Commodity Outlook | 30 October 2014
Historical commodity price developments
ABN AMRO Group Economics
21
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Contributors & Disclaimer
All text and forecasts in this document have been finalised on 28 October 2014.
Group Economics:
Contact information ABN AMRO | Group Economics (in order of appearance):
Primary area of expertise:
Phone:
E-mail:
- Marijke Zewuster
Head Emerging Markets & Commodities
+31 20 383 05 18
[email protected]
- Georgette Boele
Precious Metals, top down
+31 20 629 77 89
[email protected]
- Hans van Cleef
Energy, sugar, cocoa, coffee
+31 20 343 46 79
[email protected]
- Casper Burgering
Ferrous and Non-ferrous metals
+31 20 383 26 93
[email protected]
- Frank Rijkers
Grains (wheat, corn, soybeans)
+31 20 628 64 37
[email protected]
- Theo de Kort
Information specialist
+31 20 628 04 89
[email protected]
E-mailbox of Group Economics: [email protected]
More information:
Websites Group Economics
-
Internet Group Economics (Macro Research and theme
reports, including commodities):
English: insights.abnamro.nl/en/
Dutch: insights.abnamro.nl/
All publications of ABN AMRO on macro-economics, commodity and sector developments can be found on:
insights.abnamro.nl/en. Follow Group Economics on Twitter: https://twitter.com/sectoreconomen
Other commodity research products of ABN AMRO Group Economics:
22
Quarterly Commodity Outlook | 30 October 2014
ABN AMRO Group Economics
Contributors & Disclaimer
Disclaimer & further information
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