Itaú BBA - Reality check for metal prices

Commodities Monthly Report

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Reality check for metal prices

October 4, 2017

Commodity prices increased in September, due to the rise in agricultural and energy. After a two-month rally, metal prices dropped, in line with our scenario.

For the full report, see enclosed file
 

• Commodity prices increased in September, as the rise in agricultural and energy prices compensated for the drop in metal prices.

• Metal prices dropped in September after a two-month rally, in line with our scenario. We forecast an additional decline of 7.7% in ICI Metals, with iron ore prices at USD 60/mt and copper prices at USD 5,900/t by the end of the year.

• We expect a 5.9% drop in the ICI from its current level by year-end, led by metal and energy prices.

The Itaú Commodity Index (ICI) has increased by 1.4% since late August, boosted by its agriculture (3.0%) and energy (8.5%) subcomponents. Metal prices moved in the opposite direction, falling by 8.8%.

Fine-tuning our metal price forecasts. After a two-month rally, metal prices dropped in September, in line with our scenario. We maintain our year-end iron ore price forecast at USD 60/mt. For copper prices, we slightly raised our year-end forecast to USD 5,900/mt (USD 5,700/mt, previously), partially incorporating the recent increase. Nonetheless, we still forecast a 7.7% decline in ICI Metals as the Chinese economy continues to decelerate in 4Q17.

We are also tweaking our Brent and WTI year-end forecasts modestly higher. Oil prices have recovered in September as the effects of Hurricanes Irma and Harvey have dissipated. We still estimate that the WTI range of USD 45-50/bbl can stabilize the U.S. rig count and help to balance the market in 2018. Due to the recent recovery in oil prices, we increased slightly our year-end WTI price forecasts, to USD 47/barrel (from USD 45/bbl), and our year-end Brent forecast, to USD 49/bbl. For 2018, we maintain our forecasts at USD 45/bbl for WTI and at USD 47/bbl. We note that oil stocks remain well above their five-year average, which tends to limit the recent rally in oil prices.

Agricultural prices recovered in September, in line with our scenario, which assumes an increase in the agriculture ICI from its current level by year-end. We therefore maintain our price forecast.

We expect the ICI to drop 5.9% from its current level by year-end due to lower metal and energy prices.

Metals: No relief ahead

After a two-month rally, metal prices dropped in September. Iron ore prices fell to USD 62/ton from USD 76/ton, while copper prices slid to USD 6,437/ton from USD 6,788/ton. On the other hand, prices for aluminum, lead and zinc remained relatively stable. All in, our metals index is up by 3% year to date.

We adjusted our forecasts slightly for metal prices in 2017. We maintain our year-end iron ore price forecast at USD 60/mt. For copper prices, we raised our year-end forecast slightly, to USD 5,900/mt (USD 5,700/mt previously), partially incorporating the recent increase.

Adjusted YE17 forecasts:

- Iron ore: maintained at USD 60/ton
- Copper: rose to USD 5,900 from USD 5,700/ton
- Aluminum: rose to USD 1,900/ton from USD 1,700/ton
- Zinc: rose to USD 2,700 from USD 2,410/ton
- Nickel: maintained at USD 10,200/ton
- Lead: maintained at USD 2,035/ton
- Tin: maintained at USD 19,400/ton

Nonetheless, we still forecast a 7.7% decline in ICI Metals as the Chinese economy continues to decelerate in 4Q17.  

Oil: Small upward revision

Oil prices recovered in September, with WTI close to USD 52/bbl and Brent at USD 57/bbl. We still estimate that the WTI range of USD 45-50/bbl can stabilize the U.S. rig count and help to balance the market in 2018.

Due to the recent recovery in oil prices, we increased our year-end WTI price forecast slightly, to USD 47/barrel (from USD 45/bbl), and our year-end Brent forecast to USD 49/bbl. For 2018, we maintain our forecasts at USD 45/bbl for WTI and at USD 47/bbl for Brent. We note that oil stocks remain well above their five-year average, which tends to limit the recent rally in oil prices.

Grains: Price recovery in September

Wheat, corn and soybean prices have increased by 9.3%, 3.8% and 3.4%, respectively, since the end of August.

The recovery in grain prices is related to the prospects for lower global stock levels, as the U.S. Department of Agriculture (USDA) has revised its projections. However, the still-high stock-to-use ratios should limit further price escalation. 

We maintained our YE17 price forecasts for soybeans (USD 9.7/bushel), corn (USD 3.85/bushel) and wheat (USD 4.6/bushel).

Sugar/Coffee: Price drop again

International contracts for raw sugar have dropped by 6.0% since the end of August. During the same period, coffee prices remained broadly stable (-0.1%).

The fall in sugar prices may be explained by the prospect of a larger surplus in the international market. Sugar production is expected to be stronger for some key players, such as India and Thailand, due to more favorable weather conditions. Furthermore, with the deregulation of the sugar market in the EU, beet root sugar production is expected to rise, increasing the world supply.

On the other hand, the ethanol-import tax, approved by the Brazilian government for volumes above 600 million liters, led ethanol prices upward, above the sugar level. As Brazilian millers can now shift their production from sugar to ethanol, mills should start producing more ethanol, which will boost 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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