Itaú BBA - China’s hawks undermine metal prices

Commodities Monthly Report

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China’s hawks undermine metal prices

March 9, 2017

Metals back down with China´s tightening concerns and commodities pay back part of February’s gains.

For the full report, see enclosed file

• Commodity prices extended their 4Q16 gains through mid-February but have declined since then, dragged down by lower metal prices and concerns over China’s hawkish tilt.

• We expect our commodity index to fall by 5% from current levels in the course of 2017 due to a slowdown in China (which should become more evident by mid-year) and supply responses to current prices, particularly for oil (U.S. shale producers) and iron ore. 

The Itaú Commodity Index (ICI) gained 2.5% in the first half of February but has declined by 3.8% since then, with both moves driven by metal prices. First, metal prices rose on supply-related issues for iron ore and copper and optimism on China. Then a more hawkish tilt in China – the government lowered its growth target for 2017 – started to pull metal prices back down.

We continue to expect iron ore prices to decline to USD 55/ton by year-end (a more than 30% drop from current levels), mainly driven by a slowdown in China in 2H17.

Nonetheless, the outlook for copper prices has improved. We have raised our 2017YE forecast to USD 5,600/ton from USD 4,800/ton. Despite the likelihood of a slowdown in China, planned grid projects should sustain strong copper demand. Supply, meanwhile, is likely to be constrained by an abnormal amount of weather-related mine stoppages and/or wage negotiations and strikes throughout 2017 (the current strike at the Escondida mine in Chile is an example, but not the only one).

Oil-related prices traded within a narrow range in February, and the ICI-agricultural rose slightly. The latter increase reflects the rollover of active corn/wheat contracts and some supply bottlenecks in Brazil (where roads have been blocked by excessive rainfall) and Argentina (strike at Rosario port). Our scenarios for both commodity groups remain unchanged.

Looking ahead, we expect the ICI to decline by 5% from its current level by the end of 2017. According to our forecasts, the decline will mainly stem from lower metal prices (despite the upward revision in our copper price estimates).

Grains: Fundamentals unchanged despite recent developments

Corn, soybean and wheat prices have risen by 6%, 5% and 2%, respectively, since late December. Nonetheless, prices have continued to follow the pattern seen since mid-September, with corn and wheat trading within a narrow range and soybean prices trending upward.

Our base-case scenario remains unchanged; we expect the summer crop to be stronger than in 2016, particularly in Brazil. We assume that the recent developments in Brazil (roads blocked by excessive rainfall affecting soybean supply) and Argentina (the strike at the Rosario port) will not affect the supply outlook for the year.

Our scenario is that prices for these three commodities will remain range-bound and close to current levels until year-end. Our YE17 forecasts are:

  • Corn: USD 3.6/bushel               (+2.3% yoy)
  • Soybeans: USD 10/bushel         (+0.4% yoy)
  • Wheat: USD 4.4/bushel             (+7.8% yoy)

Our scenario assumes that Pacific Ocean conditions remain neutral until 3Q17, followed by an El Niño pattern. The shift of the base-case scenario from neutral (no El Niño, or a La Niña pattern) to an El Niño in 2H17 implies a lower risk of frost, with a greater risk of excessive rainfall (possibly delaying harvest) for the next crop in the Northern Hemisphere and of additional rainfall for the winter corn crop in Brazil.

Sugar/Coffee: Prices back in the 4Q16 range

International contracts for raw sugar have fallen in price while coffee contract prices have risen since the end of 2016. In general, prices are back to the range seen in 4Q16, with no clear moves over the period.

Sugar prices have fallen by 2%, to USD 0.192/lb. Falling ethanol prices in Brazil, greater output in Indonesia, and an increased risk that India will restrict imports may be the drivers behind the move.

Meanwhile, coffee prices have risen by 2% over the same period, to USD 1.40/lb, possibly driven by weather-related supply issues both in Vietnam (near‑term) and in Brazil (long-term).

We forecast coffee prices at USD 1.40/lb by YE17 and sugar prices averaging USD 0.1980/lb in 2017.


Artur Manoel Passos, CFA


For the full report, see enclosed file


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