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Commodity Bulletin

Commodity Bulletin — The supply side is balancing the market

China's reforms are strengthening prices
Commodity prices have risen significantly. This time it is the supply side of the price equation which is driving the recovery, rather than demand. At present, the oil market is benefiting from strong demand, falling inventory levels and production which is still high, but no longer increasing. Industrial metal prices are rising now that China has started to reduce production levels to improve air quality.

Expectations of stronger performance in China ahead of the Party Congress on 18 October mean that some commodity prices might have risen a little more, but we believe that the production reforms being seen in China are a long-term factor which justifies higher equilibrium prices for several commodities.

The reductions are here to stay
By reducing over-production of some commodities, China can kill two birds with one stone: profitability increases for producers who remain and air quality improves, which benefits everyone.

Iron ore and coal are the commodities which have increased most; they are also the ones where China has cut production the most. Steel and aluminium have also been driven by the same phenomenon. The production cuts in aluminium have had their effect, and the growth rate in aluminium production in China is now negative.

Martin Jansson, Strategist |

Commodity Bulletin — Turbulent first six months

Too late to sell by midsummer
Between New Year and midsummer, the price of Brent oil fell by almost 25%. Most base metals are still showing gains during the year, although increases have petered out. At the same time, gold - the traditional form of risk insurance - has increased by 10% during the first six months of the year. What has happened? The global self-fulfilling global recovery has petered out.

Short-term Trump euphoria
The optimism since the US election in November last year has generally been regarded as a "Trump trade." Initially, the US produced better economic statistics, but this was largely due to an increasing oil price, an upswing in China and QE, rather than Trump. Together, these three driving forces have been strong enough to lift the economy and growth expectations, but the effects have now subsided, and it will probably be difficult for President Trump to compensate for this. The US economic climate has been quite strongly linked to changes in the oil price since the shale boom of 2010. Thus, the downturn in the oil price will weigh heavily on US statistics during the second half of the year.

Low level of confidence in OPEC
The half-yearly OPEC meeting in Vienna was a show of strength from the growing cartel. A broader agree-ment has never previously been reached - 24 countries are taking part. However, the fact that the US - the growing producer - remains outside the cartel does not help. Stocks are not falling in the way that OPEC would like, and we retain our year-end oil price forecast of USD 40.

Base metals to follow China's mini-cycle
China's recovery seemed solid during the first quarter of the year, but macro data for April and May demonstrate that the growth peak for this cycle is behind us.

Martin Jansson, Strategist |

Commodity Bulletin — At the peak of a mini-cycle

Optimism is growing
Global optimism, coupled with strong economic data, has spilt over into an expectation of a self-fulfilling global recovery. We see three driving forces behind the pick-up in global economic activity since last au-tumn. The first two relate to stimuli from central banks' monetary policy and the expansive policy in China. The third is the recovery on the commodity markets - particularly for the price of oil. The optimism since the US election in November last year has generally been regarded as a "Trump trade". We believe, however, that the stronger economic sta-tistics are largely an effect of the three factors men-tioned above, rather than of President Trump. Togeth-er, these three driving forces have been strong enough to lift the economy and growth expectations, but the effect will subside later in 2017, and it will probably be difficult for President Trump to compen-sate for this.

OPEC to extend the agreement?
The half-yearly OPEC meeting in Vienna was a show of strength from the slumbering cartel. No sooner have the fuel pumps been cut off than the focus is on the group extending the agreement at the next meeting on May 25. The market expects an extension, but we argue that a surprise departure from the agreement is actually not that unlikely. We believe that the oil price will approach USD 40, regardless of the outcome of the OPEC meeting.

Base metals to follow China's mini-cycle
It looks as if China's 2016 recovery will be further maintained. The latest data harvest points to at least another six months of strong activity.

Martin Jansson, Strategist |

Commodity Bulletin — The Holy Trinity for 2017?

China, Trump and OPEC
In 2016, three strong driving forces have emerged and pushed up commodities to the best asset class, with the index up by 30% in USD terms. For 2017, we be-lieve that only one of these will be able to exceed ex-pectations, and that is not Trump or China, but OPEC.

OPEC exceeded expectations
The bi-annual OPEC meeting in Vienna was a show of strength from the slumbering cartel. A package com-prising three strong components was presented: pro-duction quotas for each member country, a produc-tion ceiling for Iran and an agreement with non-OPEC producers, with Russia accounting for the largest re-duction. The market doubts its implementation; histor-ically OPEC has delivered about 80% of its agreed production cuts. On this occasion, we have confi-dence in OPEC and envisage a good equilibrium in the oil market during the second half of the year. This will lead to an average oil price of USD 60 for 2017, a significant increase from the previous forecast of USD 40.

China + Trump = base metals
The recovery seen by China this year originated in the focused stimulus measures toward the property mar-ket and infrastructure in 2015 - a tried-and-tested method that consumes a lot of industrial metals. China is now taking steps to cool the property market and this will lead to lower growth rates in investments and infrastructure in 2017. Trump's inauguration as Presi-dent will probably increase expectations still further during Q1, but there is then a risk of disappointment both in the US and China. Zinc and nickel are well placed in the supply side of the price equation, while copper and aluminium will be weighed down by high production. Compared with 2016, we see higher prices for all base metals in 2017 but consider the spot pric-es to be too high for all metals except nickel.

Martin Jansson, Strategist |

Commodity Bulletin — Support from China and OPEC

OPEC changes strategy
Not since the intense financial crisis of 2008 has OPEC agreed to reduce the production of crude oil. The decision at the extra meeting in Algiers in September to move from two years of deliberately low prices to an attempt to cut production came as a total surprise. Given the change in Saudi Arabia's rhetoric prior to the meeting, it was clear that something was going to happen. The country has come under increasing pressure after two years of budget deficits. The power struggle ended with Iran gaining the upper hand and Saudi Arabia finally deciding to make a U-turn. Now there is a great deal to prove. In the past, implementation has always been more difficult than decisions for OPEC, but we believe that the discussions will be enough to provide oil with support of around USD 10. We raise our year-end price expectation from USD 40 to USD 50.

China's "mini-cycle" becoming a "medium cycle"

As a group, base metal prices have now gained for three successive quarters. That has not happened since the re-covery after the financial crisis in late 2010/early 2011. China's recovery this year stems from stimuli targeting the property market and infrastructure, a tried and tested method that consumes a substantial amount of industrial metals. We previously believed that the cycle would start to slow in the middle of H2, but incoming data is still quite strong, so we expect base metal prices to continue rising.

Will the Fed make its move in December?

The most recent wave of bank-related turmoil in Europe, centred on Deutsche Bank, has not awakened investors' needs for a safe haven in gold in the same way as previ-ously. Following a sharp climb after the Brexit referendum, gold has come under a certain amount of pressure. We believe that market expectations of a Fed hike in December are creating a temporary aversion to gold. After a hike, we see new opportunities for gold and silver, but the current situation for this year is weaker, as only one rate hike has been signalled for 2017.

Martin Jansson, Strategist |

Commodity Bulletin — Political games to decide commodity prices in second half of the year

Supply disruptions balance the oil market
The oil price has risen substantially since March, when we believed that its next movement would be down. Increased activity in the shale oil fields, which we expected then, is beginning to show now, nearly three months later. This shows what pressure shale oil producers have been under. At the same time, supply disruptions have rapidly improved the market balance. As far as the second half of the year is concerned, it will be particularly difficult to assess how Nigeria's and Venezuela's complex production will develop. We still think prices will drop somewhat, but not as much as in March, and we see a clearly increased upside risk in our price assumption, with Brent at around USD 40/bbl by year-end.

Base metal prices diverge
Of our key cases this year, zinc prices have taken off, rising by 30% year-to-date. However, nickel has remained still, even though the market balance looks increasingly strained. After the zinc increase, we see nickel as the main commodity with a chance of a 15% price increase by year-end, with USD 10,600/t as our target price. We keep our year-end forecast for zinc at USD 2,200/t and lower our copper forecast from USD 5,000/t to USD 4,500/t, as mining companies continue to increase production and China is not meeting growing demand.

Fed indecisive and Brexit looms
Fed Chairwoman Janet Yellen recently stuck to her earlier statement of two rate increases this year. The strong correlation of gold and precious metal prices to whether the Fed raises rates creates a downside risk for precious metals, as two increases have not been priced into the market. On the other side of the scale is this week's outcome of the UK referendum. We believe that a clear "leave the EU" outcome, say 60-40, will spark a new sustainable increase in the gold price, where the upcoming elections in Spain, Belgium and the Netherlands may stimulate an increased interest in gold as a safe haven.

Martin Jansson, Strategist |