Quarterly Commodity Outlook

Transcription

1 Quarterly Commodity Outlook ABN AMRO Group Economics Commodity Research October : 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 215. 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 Q month view WTI l n k h i k Brent i l k i k h l Nat. gas (HH) l h h Nat. gas (TTF) l h i long-term view 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 k i k Silver i h i n h Platinum i l k k h Palladium i h i l n 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 215 for the same reasons. However, it is likely that fundamentals for the other precious metals will improve in 215 and 216. 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 215 and 216. Base metals: Fundamentals to support base metals Aluminium k h Copper n k h i l n k Nickel l n k h i k h Zinc k h h 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 215 we will still witness some surpluses, but their level will be relatively small. Demand is expected to outpace supply in 216 and the balance for most metals will be negative. These deficits support stronger metal prices in the long term. Steel (HRC) l n i l n Iron ore i l n k i l Coking coal l n k i h Wheat i l k h k Corn i n k h k Soybeans i l k h k Sugar i l k h i Arabica Coffee i l n k h i Cocoa i l h i decrease by 11% or more i l k decrease betw een 5% and 1% i l n price movement betw een -4% and +4% k increase betw een 5% and 1% h increase by 11% or more Ferrous metals: The tolling of the iron bell 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 213/14 production and healthy forecasts for 215 will only be seen in the course of 215 itself. For both coffee and sugar, the market is focusing on weather forecasts in Brazil. - Short term: our three month outlook versus spot rate on October 28 nd. - Long term: 216 average forecast price versus 214 forecast price.

2 2 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics ABN AMRO forecasts Energy: - Brent (USD/barrel) - WTI (USD/barrel) - Gas HH (USD/mmBtu) - Gas TTF (EUR/MWh) Spot rate 28 October Precious metals: - Gold (USD/oz) - Silver (USD/oz) - Platinum (USD/oz) - Palladium (USD/oz) - Aluminium (USD/t) - Copper (USD/t) - Nickel (USD/t) - Zinc (USD/t) Base metals: Average price Q m Jan. 215) ABN AMRO Commodity Price Forecasts 6m Apr. 215) 12m Oct.15) 214 (yr ) 215 (yr ) (yr ) , , ,1 1, 85 1, ,265. 1, ,15 1,2 1,3 1,37 1,25 1, , , ,95 1,99 2,5 1,86 2,5 2,2 (USD/lb) , , ,95 7, 7,1 6,9 7,1 7,2 (USD/lb) , , ,5 17,75 18,2 17,1 18, 18, (USD/lb) ,258. 2,31.8 2,375 2,22 2,25 2,19 2,25 2,4 (USD/lb) Ferrous metals: - Steel (global) (HRC; USD/t) - Iron ore (fines, USD/t) - Coking coal (USD/t) - Wheat (USDc/bu) - Corn (USDc/bu) - Soybean (USDc/bu) - Sugar (USDc/lb) - Arabica coffee (USDc/lb) - Cocoa (USD/t) Agricultural: , ,21 1, ,17.1 3, ,25 2,9-3,1 2,75 -

3 3 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Table of contents Macro-economic 4 Commodity top down 5 Energy 6 Precious metals 8 Base metals 1 Ferrous metals 12 Agriculturals 14 Macroeconomic indicators 18 Historic commodity prices 19 Contributors 21 Disclaimer 22

4 4 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Macro-economics Nick Kounis, tel. +31 () 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 Source: IMF Manufacturing PMI surveys Eurozone US China ABN AMRO GDP forecasts (% yoy) China US Eurozone World EM Asia EM Europe Latin America Source: ABN AMRO Group Economics 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.1 percentage point in 214 and.2 percentage points in 215, 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 214 to 3.8% in 215. Given that average global economic growth since 198 is 3.5%, this outcome would not be too bad at all. 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. Upside risks to our forecast: Downside risks to our forecast: Fed keeps rates on hold longer than anticipated Increased risk aversion due to abrupt Fed exit Stronger-than-forecast Chinese economic performance Weaker-than-expected Chinese economic growth Stronger return of confidence Geo-political tensions

5 5 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Commodity top down Georgette Boele, tel. +31 () Growth to prevail Most commodities were aggressively sold off in Q3 215 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 Commodity indices CRB: Oct index RICI: Nat. Gas (TTF) Coffee Zinc Cocoa Aluminium Coking coal Global steel (HRC) Copper Nat. Gas (HH) Palladium Gold Platinum Oil-WTI Sugar Oil-Brent Nickel Iron ore Wheat Silver Corn Soybeans - index 3,896 3,627 3,7 3,534 3,2 Source: Bloomberg -22.9% -31.2% -12.% -13.5% -14.1% -14.3% -14.7% -16.8% -17.6% -18.7% -1.5% -4.5% -6.5% -8.1% -8.3% 4.7% 4.6% 4.% 2.8% 15.5% 42.6% -6% -4% -2% % 2% 4% 6% Q3 Q2 Most commodities aggressively sold off in Q3 In the third quarter of 214, 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 1% 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 3% 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. 215 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 215. For starters, oversupply will remain a challenge for energy markets. This will continue to depress oil prices in 215, 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 Hard landing in China and/or weaker global growth Supply disruptions/(geo) political risks More aggressive rate hikes by the Fed Adverse weather conditions An even stronger US dollar rally.

6 mb/d index (1 Jan 214 = 1) index (1 Jan 214 = 1) 6 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Energy: Brent, WTI, Henry Hub, TTF Hans van Cleef, tel 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 215 and 216 Price index oil Jan Feb Mar Apr May Jun Jul Aug Sep Oct Oil: WTI Oil: Brent Price index gas 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 214 high of USD /bbl in June, Brent oil prices plunged to a low of USD 82.6/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 212, 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 8-12/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. 5 World oil supply and demand Source: IEA Jan Feb Mar Apr May Jun Jul Aug Sep Oct Gas: Henry Hub Gas: TTF Demand Supply Gas prices also experienced large swings. US Henry Hub prices declined more than 1% 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 215 and 216. 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 75-8/bbl range is possible. Nevertheless, a

7 index (25=1) USD/bbl Eur/Mwh 7 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Energy: Brent, WTI, Henry Hub, TTF Spread TTF gas and Brent oil 1 st vs 3 th contract futures ABN AMRO price forecast (Index), ABN AMRO ABN AMRO price forecast table Brent: 3m Jan. 15) 6m Apr. 15) 12m Oct. 15) USD/barrel WTI: Jan-13 Jul-13 Jan-14 Jul USD/barrel Gas HH: - USD/mmBtu Gas TTF: Brent oil 1st contract (lha) TTF 1st contract (rha) - EUR/MWh Source: ABN AMRO Group Economics Brent oil 3th contract (lha) TTF 3th contract (rha) forecast ABN AMRO Oil: WTI Oil: Brent Gas: Henry Hub Gas: TTF 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 214 year-end target to USD 95/bbl (down from a forecast of 15 in our June 214 Quarterly). That would result in a 214 average of USD 15/bbl for Brent and USD 95/bbl for WTI crude. 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 214. 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 1% to levels above USD 4./mmBtu. In Europe, TTF prices for 215 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 215/16 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 215 and 216, reaching USD 9/bbl and USD 85/bbl respectively. WTI will continue to trade at a small discount to Brent. Meanwhile, TTF gas prices will remain under pressure in 215 and 216 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 OPEC price war as a result of an uncontrolled rise in oil production Weather-related events lead to lower supply USD rallies and/or yields rise faster/more than expected Faster-than-expected economic recovery boosts demand Economic growth (demand) fails market expectations

8 USD/troy ounce index (1 Jan 214 = 1) 8 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Precious metals: gold, silver, platinum, palladium Investor behaviour remains dominant Georgette Boele, tel 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 Price index precious metals Jan Feb Mar Apr May Jun Jul Aug Sep Oct Gold Silver Platinum Palladium Dreadful third quarter for precious metals The third quarter of 214 saw significant weakness in precious metal prices with silver prices dropping by 19%, while palladium prices dropped by only 8%. Such substantial moves are not uncommon in precious metal markets. At the start of Q3, we expected significant price weakness. Except for gold, prices in platinum, palladium and silver even undershot our end of September targets of 1,4, 8 and 18 USD per ounce, respectively. Meanwhile, gold prices closed Q3 at 1,28 USD per ounce just above our target of 1,2. According to Metal Bulletin our average third quarter precious metal forecasts were the most accurate with a accuracy of 98.39%. Gold price and US inflation expectations Gold price (lhs) 5y US inflation expectations (rhs) Source: Bloomberg, ABN AMRO Why have precious metal prices weakened so much? For starters, the rally in the US dollar was one of the driving forces behind this weakness. Precious metal prices 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 are usually negatively affected when oil prices move lower. In addition, weaker than expected economic data releases, 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 Gold vs USD Silver vs USD Platinum vs USD Palladium vs USD Source: Bloomberg, ABN AMRO 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 outlook of the US dollar and US interest rates are crucial for overall investment decisions. A higher US dollar and higher US rates make precious metals a less attractive investment, because they don t offer income and they are mainly quoted in US dollars. It is likely that in an environment of a higher US dollar and US interest rates, investors will move out of precious metals. For the 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 hikes than the Fed is currently signalling. Therefore, it is

9 index (1999=1) 9 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Precious metals: gold, silver, platinum, palladium likely that precious metal prices will fall. Total known ETF positions platinum and palladium 3,5, 3,, 2,5, 2,, 1,5, 1,, 5, Source: Bloomberg ABN AMRO price forecast (index), ABN AMRO ABN AMRO price forecast table Gold: 3m Jan. 15) 6m Apr. 15) 12m Oct. 15) USD/oz 1,1 1, 85 1, Silver: USD/oz Platinum: - USD/oz 1,15 1,2 1,3 1,37 1,25 Palladium: Platinum Palladium Gold Platinum - USD/oz Source: ABN AMRO Group Economics Silver Palladium forecast ABN AMRO with overcrowded ETF positions Investor positions in precious metals are currently substantial, especially the ETF (Exchange Traded Funds) positions in silver, platinum and palladium. Last year, the significant liquidation in gold investment positions drove prices lower. We have examined the details of the changes in overall investment positions and the behaviour of the prices. We have found that gold and silver prices are more sensitive to changes in overall positions than platinum and palladium are. For example, on average (since 27) a 1% change in gold positions (noncommercial positions and ETF positions) coincides with a 4% change in prices in the same direction. In 213, when a 47% drop in outstanding positions resulted in a 28% drop in gold prices this relationship was somewhat 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 palladium, however, the relationship is more stable. On average, a 1% reduction in investor positions goes hand in hand with a 3% reduction in platinum and palladium prices. Going forward, if investor positions in platinum and palladium were to be reduced by 3% in the coming months, prices could easily drop by another 1%. Fundamentals to take over at some point in time In the near-term, investor position liquidation remains the most substantial risk. However, if we look more at the 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 the US economy (for 215), which is an important market for these precious metals. We are also less negative than current market consensus on the eurozone economy. This overall constructive outlook will support jewellery, car sales and industrial demand for precious metals in 215 and 216. Although, a higher US dollar and lower investment demand may continue to hurt prices, it will unlikely prevent a recovery in silver, platinum and palladium prices in 215 and 216. For gold, the outlook for 215 remains negative. This is because the higher US dollar, higher US interest rates and lower investment demand will continue to affect prices negatively, mainly because gold has a relatively low industrial demand component. For 216 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 216. Upside risks to our forecast: Downside risks to our forecast: (Geo) political events trigger risk-aversion More aggressive rate hikes by the Fed Fed on hold for longer, supporting precious metals Weaker global economy hurts platinum and palladium Further supply disruption in platinum and palladium Larger-than-expected mine supply

10 1 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Base metals: aluminium, copper, nickel, zinc Fundamentals to support base metals Casper Burgering, tel 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 214 index (1 Jan 214 = 1) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Aluminium Copper Nickel Zinc Base metals balance until 216 ' tonnes -1, -1,5 Source: Metal Bulletin Base metals stocks in weeks of consumption until 216 weeks of consumption 1,5 1, Source: Metal Bulletin Aluminium balance Copper balance Nickel balance Zinc balance Aluminium stocks Nickel stocks Copper stocks Zinc stocks 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 214 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 1% 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. 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 216 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

11 11 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Base metals: aluminium, copper, nickel, zinc China base metal balance until 216 ' tonnes Source: Metal Bulletin ABN AMRO price forecast (index) index (1999=1), ABN AMRO ABN AMRO price forecast (actual) Aluminium: 3m Jan. 15) 6m Apr. 15) 12m Oct. 15) USD/tonne 2,95 1,99 2,5 1,86 2,5 - USD/lb Copper: - USD/tonne 6,95 7, 7,1 6,9 7,1 - USD/lb Nickel: - USD/tonne 15,5 17,75 18,2 17,1 18, - USD/lb Zinc: 2, 1, -1, -2, -3, -4, -5, Aluminium balance China Nickel balance China - USD/tonne 2,375 2,22 2,25 2,19 2,25 - USD/lb Source: ABN AMRO Group Economics Copper balance China Zinc balance China forecast ABN AMRO 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 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 216. 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. 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 6,65/t. Copper prices are waiting for supportive economic data from major copper consuming countries. The expected surplus in 215 is negligible and will only represent.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 Weaker-than-expected growth in Chinese economy Stronger-than-forecast Chinese economic performance Funds scaling back interest for base metals Significant cutbacks in capacity (China) Limited producers discipline: oversupply in markets

12 yoy % yoy % index (1 Jan 214) 12 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Ferrous metals: steel (global, HRC), iron ore, coking coal Casper Burgering, tel 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 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Global steel (HRC,.) Iron ore (fines) Prime coking coal (Australia) Regional steel production growth & world trade 15% 1% 5% % -5% -1% -15% US China Europe World trade, CPB, WSA Chinese imports iron ore & steel production 4% 3% 2% 1% % -1% -2% China import iron ore, WSA China steel production 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 214 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 213, 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 25-3% of production. China is not far behind Europe, with approximately 1% 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 4% 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 2% and it will take quite some time to make up for this loss. 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

13 index (26=1) yoy % 13 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Ferrous metals: steel (global, HRC), iron ore, coking coal Coking coal price & import by country 25% 2% 15% 1% 5% -5% -1% , Clarksons ABN AMRO price forecast (index) % Import China Import S. Korea Import Japan 1% % -1% -2% -3% -4% Coking coal price (rha) forecast ABN AMRO 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. 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 , ABN AMRO ABN AMRO price forecast (actual) Steel (global, HRC): - USD/tonne 3m Jan. 15) 6m Apr. 15) 12m Oct. 15) Iron ore: USD/tonne Coking coal: USD/tonne Steel Iron ore Coking coal Source: ABN AMRO Group Economics 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. Upside risks to our forecast: Downside risks to our forecast: Stronger-than-expected Chinese economic growth Weaker-than-expected Chinese economic growth Severe supply disruptions due to unfavourable weather New capacity entering the market Stockpiling strategies by governments Limited producer discipline, oversupply lingers on

14 x 1 million mt index (1 Jan 2 = 1) index (1 Jan 214 = 1) 14 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Agriculturals: wheat, corn, soybeans Frank Rijkers, tel. +31 () 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 GOI index Source: IGC Jan Feb Mar Apr May Jun Jul Aug Sep Oct Wheat Corn Soybean Total grains: production versus consumption 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 mt (instead of 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 2.23 mt. For 214/215, 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 79 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. Source: IGC production consumption The outlook for corn production is also positive for the 214/215 season. Production is projected at 974 mt, 1% lower than last season s record but 8% higher than the five-year average of 95 mt. Improved projections in the US due to beneficial rains in the Midwest led to higher crop

15 index (1999=1) 15 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Agriculturals: wheat, corn, soybeans Stocks-to-use-ratio 35% 3% 25% 2% 15% 1% 25/6 27/8 29/1 211/12 213/14 Wheat Corn Soybean Source: USDA/IGC, ABN AMRO Group Economics 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. According to the USDA, the soybean production outlook for the 214/215 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 3 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. ABN AMRO price forecast (index) Wheat Corn Soybean, ABN AMRO forecast ABN AMRO 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 29/21. 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 9 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. ABN AMRO price forecast Wheat: 3m Jan) 6m May) USDc/bu Corn: - USDc/bu Soybeans: - USDc/bu ,21 1,235 Source: ABN AMRO Group Economics 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 35/bushel for corn and USDc 95/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 Decline in demand, due to lower growth in China Less availability of alternative feed grains than expected Decrease in the use of biofuels Geopolitical tensions will effect crop exports More favourable weather conditions in production areas

16 Mt contract index (1 Jan 214 = 1) 16 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Agriculturals: sugar, coffee, cocoa Hans van Cleef, tel 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 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Sugar Coffee Cocoa CFTC non-commercial net positions (suplementary) 2, 15, 1, 5, -5, -1, -15, Sugar Coffee Cocoa Coffee and sugar production vs consumption /3 25/6 28/9 211/12 214/15 Sugar production Coffee production Sugar consumption Coffee consumption Ebola fears dominate cocoa direction Cocoa rose more than 2% 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 213/14 and beneficial conditions during this season s crucial growing phase bode well. Ivory Coast saw a record million mt port arrivals number up from million mt. Meanwhile, the ICCO estimates that Ghana will be close to 92, mt for 213/14, up 85, 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 213/14 production and healthy forecasts for 215 will only be seen in the course of 215 itself. Multi-year records reached after mixed signals ICE Sugar11 reached a four-year low of USDc 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 229.1/lb since January 212, 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 2,2/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

17 index (1999=1) USD/t USDc/lbs 17 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Agriculturals: sugar, coffee, cocoa Source: ISO, USDA Robusta vs Arabica coffee price (2 nd contract) 3, 2,5 2, 1,5 1, 5 ABN AMRO price forecast (index) , ABN AMRO ABN AMRO price forecast Sugar: 3m Jan. 15) 6m Apr. 15) USDc/lb Arabica Coffee: - USDc/lb Robusta Coffee: - USD/tonne 2,1 2,15 2,5 1,9 Cocoa: Robusta coffee (lha) - USD/tonne 3,25 2,9 3,1 2,75 Source: ABN AMRO Group Economics Arabica coffee (rha) Sugar Coffee Cocoa forecast ABN AMRO 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 215/16 crop advances. Nevertheless, the actual impact on the 215/16 crop of the unprecedented hot, dry spell in January and February 214 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 1% from last year s record crop and expectations for 215/16 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 214/15 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 214 drought on the 215/216 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 215 Most of the bad sugar news for 215 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 Rainfall dampens supply fears Ebola confirmed in either Ivory Coast or Ghana Ebola does not spread into Ivory Coast or Ghana Asian demand for cocoa rises faster than expected Funds scale back interest in cocoa and sugar

18 18 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Macro-economic indicators Macro-economic Forecasts ABN AMRO Group Economics (per 16 October 214) GDP growth (% y-o-y) Inflation (CPI, % y-o-y ) GDP per cap USD e 215e e 215e 213 US 2.3% 2.2% 2.2% 3.8% 2.1% 1.5% 2.% 2.2% 53,11 China 7.7% 7.7% 7.5% 7.% 2.6% 2.6% 2.% 2.9% 9,844 Japan 1.5% 1.5% 1.5% 1.4%.%.4% 2.5% 1.7% 36,899 EU -.6% -.4%.9% 1.7% 2.5% 1.3%.5% 1.% 31,571* UK.3% 1.9% 3.% 2.8% 2.8% 2.5% 1.6% 1.7% 37,37 Germany.6%.2% 1.7% 2.2% 2.% 1.5% 1.% 1.5% 4,7 World 3.2% 3.2% 3.3% 3.9% 4.1% 4.% 4.% 4.% 11,964* * = 212 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

19 USD/t USD/t USD/troy ounce USD/troy ounce USD/troy ounce USDc/troy ounce USD/bbl USD/mmBt 19 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Historical commodity price developments Oil: Brent and WTI Crude Oil-Brent Crude Oil-WTI Spot Cushing Precious metals: Gold Gold Bullion Precious metals: Platinum Gas: Henry Hub & Title Transfer Facility Henry Hub Gas TTF Gas Precious metals: Silver Silver Precious metals: Palladium Platinum Base metals: Aluminium Palladium Base metals: Copper LME-Aluminium 99.7% Cash LME-Copper Grade A

20 USD/t USDc/lb USDc/lb USDcents/bushel USD/t USD/t USD/t USD/t 2 Quarterly Commodity Outlook 3 October 214 ABN AMRO Group Economics Historical commodity price developments Base metals: Nickel LME-Nickel Cash Ferrous metals: Global steel prices (HRC) Global steel price Agriculturals: Grains (wheat, corn, soybeans) Base metals: Zinc LME-SHG Zinc % Cash Ferrous metals: Iron ore & Coking coal Iron Ore Fines (63.5%) Prime Coking Coal (Aus) Agriculturals: Sugar Wheat, 2nd future contract Corn 2nd future contract Soybeans 2nd future contract Agriculturals: Cocoa Cocoa, 2nd future contract Sugar, 2nd future contract Agriculturals: Coffee Coffee, 2nd future contract