Itaú BBA - Falling commodity prices are not a sign of global weakness

Commodities Monthly Report

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Falling commodity prices are not a sign of global weakness

April 12, 2017

Commodity prices fell in March, but this movement is related to specific factors and not a sign of a weak global economy.

For the full report, see enclosed file

• Commodity prices fell in March, but this movement is related to specific factors and not a sign of a weak global economy.

• We lowered our price forecasts for soybeans (stronger crops in U.S. in 2017) and sugar (weaker demand from India).

• We expect our commodity index to fall by 4.0% from current levels in the course of 2017 due to a slowdown in China that will lead to lower metal prices. Note, however, that even with this drop the ICI will still be 9% above the average of the last couple of years. 

The Itaú Commodity Index (ICI) has fallen by 3.1% since the end of February. 

Agriculture prices were down 4.3% due to a stronger soybeans crop in the U.S. and weaker sugar demand from India. We lowered our price forecasts for both commodities. However, we raised our price forecasts for corn and wheat due to lower harvests in the U.S. and the higher probability of an El Niño anomaly in the Pacific Ocean from 2Q17.

Our ICI-Metal index dropped 7.4%, with a 15.4% drop in iron ore prices. At the moment, we believe this decline reflects high iron ore inventories instead of weak global demand. Our index of metal-related activity in China likely remained at a solid level in March (see chart). Still, we continue to expect iron ore prices to fall to USD 55/ton by year-end (implying a more than 25% drop from current levels), mainly driven by a slowdown in China in 2H17.

The ICI-Energy component declined by 2.6% in March but has gained 4.1% since then, with both moves driven by oil prices. Despite the decline seen in early March, prices have returned to the range of USD 50 to 55/bbl with almost full compliance of the OPEC deal, in line with our scenario.

Looking forward, we expect the ICI to decline by 4.0% 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 of our agriculture price estimates).

Metals: Recent decline of iron ore prices related to sector-specific factors

Iron ore prices declined 15.4% since the end of February, but this movement might reflect sector-specific factors. Indeed, iron ore inventories in China are at high levels and might explain the fall in iron ore prices.

Looking ahead, we expect a slowdown in China in 2H17 to continue to impact metals prices. We also expect supply increases in 2017, from both big producers and non-traditional players, in response to the current higher-price scenario (vs. the average for 2016).

We forecast a 15% decline in the ICI Metals from its current level. In particular, we see iron ore prices falling to USD 55/mt by the end of the year.

Oil: Prices in line with fundamentals

Despite the decline seen in early March, prices have returned to the USD 50 to 55/bbl range with almost full compliance of the deal, in line with our scenario. 

Supply cuts are still proceeding in line with OPEC’s announcement. Current estimates put OPEC’s supply around 31.93 mbd in March, in line with the supply target. All eyes are now turning to the May 25th meeting where a possible extension of the November 2016 agreement will be discussed. Some kind of rollover is required to support prices at current levels.

The reason is that U.S. shale producers are increasing drilling activity with growing stocks at the same time, reinforcing the view of a rebound in U.S. crude production when prices stand above the USD 50/bbl break-even.

We maintain our YE17 Brent forecast of USD 54/bbl (WTI: USD 52/bbl), a level that would allow for additional production by U.S. producers to partly offset the measures taken by the cartel.

Grains: Soybeans on a downward trend

Soybean, corn and wheat prices have dropped by 8.1%, 2.0% and 0.2%, respectively, since late February. Soybean prices are trending downward, close to the early September levels, while corn and wheat are still trading within a narrow range.

Our base-case scenario has changed. We expect the soybean crop to be stronger than in 2016, particularly in the U.S. We also expect the wheat crop to be weaker.

Our scenario is that prices will remain range-bound and close to current levels for soybeans and corn until year-end. On the other hand, we expect wheat prices to rise around 1.5% per month to YE17. Our YE17 forecasts are:

  • Soybeans: USD 9.5/bushel        (-4.7% yoy)
  • Corn: USD 3.75/bushel              (+6.5% yoy)
  • Wheat: USD 4.8/bushel             (+17.6% yoy)

Our scenario assumes that El Niño will come again in 2h17. This implies a lower risk of frost but a greater risk of excessive rainfall (possibly delaying the harvest) for the next crop in the Northern Hemisphere and of additional rainfall for the winter corn crop in Brazil.

Sugar/Coffee: Lower prices forsugar

International contracts for raw sugar have fallen more than 10%, while coffee contract prices have remained broadly stable since the end of February. Sugar prices fell sharply (13.2% to USD 0.1677/lb) and are back to the range seen in 1H16, with a down trend. Coffee prices plummeted 0.5%, to USD 1.40/lb.

The sugar price decrease may be the consequence of weaker imports from India and the technical sell-off that led the speculative funds to reduce their long position to 36.8 lots from 161.84 lots at the beginning of February.

We maintain our coffee price forecast at USD 1.40/lb for E17, and we expect sugar prices averaging USD 0.18/lb in 2017.


Paula Yamaguti

Laura Pitta


For the full report, see enclosed file



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