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Commodity Bulletin

Commodity Bulletin — Trump against the world

Trump against Europe undermines diplomacy
President Trump’s negotiating strategy (pursuing many high-stakes negotiations with little possibility of winning them all) may have been a recipe for success in business, but running US foreign policy with the same methods has disrupted the world order as we have known it since WWII. Europe’s leaders appear to have decided they can no longer rely on the US for a helping hand and are now trying to fight fire with fire.

Trump against China fuels commodities inflation
The trade war with China has shifted back and forth but has now entered a phase with a clear strategy. The “shot in Sarajevo” will be fired on July 6 when tariffs are imposed, which does not leave much time for a breakthrough. The US has its sights on China’s ambitions of climbing the value chain, while China is aiming at US commodities exports. With tariffs on everything from soybeans and beef to cars, there will be inflation on both commodities and consumer goods.

Trump against Iran fuels the price of oil
After 18 months of production cuts, OPEC changed tack during the year’s first meeting in Vienna. The expanded group, OPEC+, is returning to its target of 1.8 Mbpd. In practice, this means that the strong countries will have to increase production and compensate for the weak countries involuntarily having to cut more than the agreed production. Saudi Arabia has therefore prepared
the way for it to be able to capture Iran’s market share when US sanctions are re-imposed in November. The oil price rose on the details of when OPEC’s reserve capacity will decline further.

Trump against NAFTA fuels agricultural goods
Trump’s tough rhetoric against the US’s neighbours and his scorn for Canada after the G7 meeting have the potential to lead to NAFTA’s demise, and countermoves from Mexico and Canada in the form of soy and corn tariffs, would lay the foundation for food price inflation.

Martin Jansson, Strategist |

Commodity Bulletin — Politics take over commodities market

Trump, Xi and MBS
Following a two-year rise in prices, fully in line with the global economic expansion, with the strongest synchronised growth in years, politics now appear to be taking over. President Trump is introducing tariffs on steel and aluminium in the world's strongest economy. Xi Jinping will likely be president for the rest of his life, leaving him free to pursue his priorities in what is the world's largest producer and consumer of commodities. Meanwhile, Crown Prince Mohammed Bin Salman has outmanoeuvred his opponents in Riyadh and is ruling OPEC with an iron fist. If the economic climate drove commodities to this point, politics will have a greater influence moving forward.

China's decline deferred
Although the expectations of China's performance in 2018 have been low, the data has proved a pleasant surprise so far. There was uncertainty regarding the growth target since Xi has focused less on this lately. However, the growth target of "around 6.5%," remains in place, compared with the target of "around 6.5% or higher if possible" that was stated in 2017. The significance of the growth target has been played down, but the fact that it remains means that China will continue to steer its economy toward this target moving forward, probably until 2020, we believe.

OPEC gets a free ride due to Venezuela's collapse
Adherence to the agreement on production curbs by OPEC rose to 147% in February, the highest since the agreement was introduced in January 2017. The crisis in Venezuela is accelerating and reducing oil production so much that the oil market may approach a market balance deficit during the year. Venezuela is the reason that OPEC's adherence is nearly 50% higher than agreed. Even though we still think the oil price is on its way down, we raise our forecast for year-end 2018 from USD 50 to USD 55.

Martin Jansson, Strategist |

Commodity Bulletin — Turbulence in China as 2018 approaches

China and OPEC fever were the stories in 2017
Commodity prices have increased significantly in 2017. It is mainly the base metal complex that is trading around 20% higher as a result of China's economy having performed strongly in the wake of stimulus from 2015 and 2016. The price of oil has also risen, and while it has only increased 8% over the year as a whole, it has jumped 35% since its low in June. Falling global inventories have been decisive for oil; the market's huge surplus is gradually declining and equilibrium is approaching. OPEC has been given all of the credit, and the extension of the OPEC agreement was hailed by the market.

Turbulence in China during 2018
We believe that China's ongoing production reform will be a more long-term, structural change in the commodities market than was originally announced. By reducing overproduction of some commodities, China can kill two birds with one stone: profitability will increase for producers who remain, and air quality will improve to the benefit of everyone.

Despite this, the first half of 2018 looks critical for China. Stimulus measures have stopped working, the rise in housing prices has levelled off in major cities and both state-owned and private company investments are lower. More stimulus measures will surely follow, but we expect that things will need to get worse first. This means that the next wave of stimulus measures is not expected until the second half of the year. Until then, we see a risk of a temporary dip in base metal prices.

Setback in the desert
We argue that the oil price is also set to drop when the seasonal pattern of decreasing inventories changes direction and starts to rise during the first quarter. Shale oil also faces increased activity after a period of escalated oil prices, starting with more rigs in the fields. We forecast an oil price of USD 51/bbl for 2018.

Martin Jansson, Strategist |

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 |