Itaú BBA - Metals rally unlikely to last

Commodities Monthly Report

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Metals rally unlikely to last

September 4, 2017

Commodity prices dropped in August, due to agricultural and energy prices. Metal rally will fade as China decelerates in 2H17.

For the full report, see enclosed file

• Commodity prices dropped in August, as the rally in metal prices was offset by drops in agricultural and energy prices.

• In our view, the metal rally will fade as the Chinese economy decelerates in 2H17. We forecast iron ore prices at USD 60/mt and copper prices at USD 5700/t by the end of the year.

• We expect a 4.8% drop in the ICI from its current level by year-end, led by metal and energy prices.

The Itaú Commodity Index dropped 1% in August, as the rally in metal prices was offset by drops in agricultural and energy prices. In this period, the energy ICI has dropped 1%, the agricultural ICI has fallen by 7.3% and the metals ICI has risen by 6.7%.

Metals rally is unlikely to last. In our view, the rally will fade as the Chinese economy decelerates in 2H17. We forecast iron ore prices at USD 60/mt and copper prices at USD 5700/t by the end of the year.

Oil prices fell with arrival of Hurricane Harvey in the Texas Gulf Coast. The oil-demand impact tends to outweigh the supply-side impacts, as the refineries were affected more than the production area. We maintain our year-end forecasts of USD 45 (WTI) for both 2017 and 2018.

We lowered our price forecasts for soybeans and wheat. An improvement in weather conditions reduced uncertainty about grain productivity in the U.S.

We expect the ICI to drop 4.8% from its current level by year-end, due to lower metal and energy prices.

Metals: Temporary rally

Metals continued its rally in August, with copper up 6.6% and iron ore up 2.3% over the period. This price movement was explained by stronger macroeconomic conditions in China and the weaker global dollar. In the case of copper, the price continued to be boosted by news of supply disruption.

In our view, this rally is unlikely to last, as the Chinese economy decelerates in the 2H17. We expect iron ore prices at USD 60/mt and copper prices at USD 5700/t by the end of the year.

Oil: Hit by the hurricane

Oil prices decreased in the end of the month, affected by the arrival of Hurricane Harvey in the Texas West Coast. The total impact of the hurricane is still uncertain, but the oil-demand impact tends to outweigh the supply-side impacts, as the refineries were affected more than the Gulf production area.

We maintain our year-end forecasts of USD 45 (WTI) for both 2017 and 2018 and our year-end Brent price forecast of USD 47/barrel for both years.

Grains: Weather-condition normalization diminished price volatility

Wheat, corn and soybean prices have dropped by 15.0%, 11.1% and 7.2%, respectively, since the end of July.

The weather improvement in the U.S. led to a marginal recovery in crop conditions. Hence, the uncertainty about crop productivity was reduced. The normalization of weather conditions in the U.S. diminished the uncertainties regarding productivity and led the grain prices to decrease. Furthermore, the still-high stock-to-use ratios pressure prices down.  

We lowered our YE17 price forecasts for soybeans (USD 9.7/bushel) and wheat (USD 4.6/bushel).

Sugar/Coffee: Price drop

International contracts for coffee and raw sugar have dropped by 8.8% and 6.7%, respectively, since the end of July.

The recent drop in sugar prices may be explained by the decrease in oil prices. With oil prices on the fall, gasoline prices in Brazil (accounting for 20.3% of global output) also dropped, lowering the demand for ethanol. As Brazilian millers can shift their production from sugar to ethanol, mills start producing less ethanol when demand for the commodity declines, leading sugar prices to adjust downward.

On the other hand, the Brazilian government approved an ethanol-import tax of 20% for volumes above 600 million liters. The measure should be implemented in a few days. This resolution aims to diminish ethanol imports, which increased significantly this year and are at 1.35 billion liters year-to-date, exceeding by far the 600-million-liter line. This taxation should drive ethanol prices upward, leading the millers to shift production from sugar to ethanol, boosting sugar prices.

Our sugar and coffee price forecasts for YE17 are unchanged, at USD 0.146/lb and USD 1.35/lb, respectively.


 

Paula Yamaguti
Laura Pitta


 

For the full report, see enclosed file

 



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