Itaú BBA - Higher metal prices

Commodities Monthly Report

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Higher metal prices

August 7, 2017

We now expect iron ore prices of USD 60/mt and copper prices of USD 5700/t by year-end.

For the full report, see enclosed file

• Commodity prices rebounded in July, due to good global demand and a weaker dollar.

• We now expect iron ore prices of USD 60/mt (USD 55/mt previously) and copper prices of USD 5700/t (USD 5600/t, previously) by year-end.

• However, we still expect a 5.8% drop in the ICI from its current level by year-end, led by metal and energy prices.

The Itaú Commodity Index recovered 4.3% in July with good global demand and a weaker dollar. Metals and Energy increased 7.5% and 6.0%, respectively. The agriculture index remained broadly stable over the same period.

Oil recovered from recent lows, but we maintain our year-end forecasts of USD 45 (WTI) for both 2017 and 2018. The recent rally was explained by stronger stock draws and some stabilization in investment in the shale industry in the U.S. 

We increased our price forecasts for base metals due to better growth in China. We now expect iron ore prices at USD 60/mt (USD 55/mt, previously) and copper prices at USD 5700/t (USD 5600/t, previously) by the end of the year.

We also raised our price forecasts for soybeans, wheat and corn. Adverse weather conditions reduced the grains’ productivity in the U.S. 

Our new ICI forecast is 6.3% above our previous scenario. Despite the revision, our year-end ICI forecast is 5.8% below its current level, due to lower metal and energy prices.

Metals: Higher prices helped by China

Metals had a strong rally in July, with copper up 5% and iron ore up 17%. This price movement was driven by better macroeconomic conditions in China and a weaker dollar. Copper prices also benefited from news of supply disruption.

We raised our price forecast for base metals due to our higher growth scenario for China. We now expect an iron ore price of USD 60/mt (USD 55/mt previously) and copper price of USD 5700/t (USD 5600/t previously) by year-end.

Oil: A temporary recovery

Oil recovered from its recent lows, but we maintain our year-end WTI forecast of USD 45/barrel for both 2017 and 2018 and our year-end Brent price forecast of USD 47/barrel for both years. The recent rally was driven by stronger stock draws and some stabilization in investment in the shale industry in the US. 

Grains: Weather Conditions generate price volatility

Wheat prices have dropped by 7.1% since the end of June, while soybean and corn prices have risen by 5.5% and 0.1%, respectively, in the same period.

The drier, warmer weather in the U.S. has affected the crop conditions, which are now below the historical average. Adverse weather conditions in the U.S. led to expectations of lower productivity for wheat, corn and soybean. The uncertainties regarding production led to higher volatility in grain prices. However, we expect these uncertainties to ease as the crop progresses. Furthermore, the still-high stock-to-use ratios should limit the price increases.  

We raised our YE17 price forecasts for corn (USD 3.85/bushel), soybeans (USD 10.0/bushel) and wheat (USD 5.0/bushel).

Sugar/Coffee: Price recovery

International contracts for coffee and raw sugar have risen by 12.3% and 9.0%, respectively, since the end of June.

The recent rise in sugar prices may be explained by the increase in oil prices. With oil prices on the rise, gasoline prices in Brazil also increased, boosting the demand for ethanol. As Brazilian millers can shift their production from sugar to ethanol, mills start producing more ethanol when demand for the commodity rises, leading sugar prices to adjust upward.

The increase in ethanol prices should be limited by higher ethanol imports. Ethanol imports increased significantly this year, mainly in the North and Northeast regions. This has led to a still-tight ethanol market in Brazil, pressuring prices downward and limiting sugar price increases.

Our sugar price forecast for YE17 is unchanged, at USD 0.146/lb, but we lowered our coffee price estimate for YE17 to USD 1.35/lb.


 

Paula Yamaguti
Laura Pitta


 

For the full report, see enclosed file

 



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