Itaú BBA - Stable prices in 2018

Commodities Monthly Report

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Stable prices in 2018

December 7, 2017

Commodities prices continued to increase in November. For 2018, we expect commodities prices to remain broadly stable

For the full report, see enclosed file

• Commodities prices continued to increase in November, boosted by energy and metal subcomponents.

• For 2018, we expect commodities prices to remain broadly stable, as firmer global growth limits the downside risks and the Chinese economy’s growth, led by consumption/services, limits the risk of a commodities boom. 

The Itaú Commodity Index (ICI) has increased by 2.1% since October, boosted by its energy and metals subcomponents. Commodities prices are up by 2.7% year to date.

We expect commodities prices to remain broadly stable in 2018. Firmer global growth limits the downside risks to commodities prices, even with a slowdown in China. However, the Chinese economy’s growth is now more consumption/services driven and less dependent on investment, which limits the risk of a commodities boom.

Energy prices rose 2.6% in November, but we expect a correction from recent highs. Oil prices continued to rally in November, supported by inventory draws and the OPEC agreement to extend its cuts until the end of 2018. However, prices above USD 50/bbl over recent months have started to stimulate shale-oil investment in the U.S. We estimate that the WTI range of USD 45-50/bbl can stabilize the U.S. rig count and helps to balance the market in 2018. For 2018, we maintain our forecasts at USD 45/bbl for WTI and at USD 47/bbl for Brent. 

Stable metal prices in 2018. The Metals ICI increased 3.2% in the past month, due to a strong performance in iron ore. We expect metal prices to stay close to 2017 year-end levels in 2018. We forecast copper prices at USD 6200/mt and iron ore prices at USD 57/mt by the end of the next year.

The Agricultural ICI remained broadly stable in November, as the increases in soybean and sugar prices were offset by drops in other agricultural commodities. 

For 2018, we expect a scenario of stability for agricultural prices. However, risks associated with La Niña for planting regions in Argentina and Southern Brazil has increased, increasing the chances of losses in the grain crops.

Metals: No major changes in 2018

The Metals ICI increased 3.2% in the month, due to a strong performance in iron ore. Iron ore prices rose to USD 68/ton from USD 57/ton, supported by strong steel production in China, while copper prices fell to USD 6,762/ton, coming from USD 6,867/ton at the end of October. Our metals index is up by 3.3% year to date.

We expect metal prices to stay close to year-end 2017 levels in 2018. All in all, supply and demand are more balanced and the Chinese economy is more services/consumption driven, which limits the upside risks for metal prices. We forecast copper prices at USD 6200/mt and iron ore prices at USD 57/mt by the end of next year.  

Oil: Prices still above equilibrium levels

Oil prices continued to rally in November, supported by inventory draws and the OPEC-NOPEC agreement to extend its cuts until the end of 2018. WTI increased 2.8% and Brent rose 5.2% in the month, staying close to USD 58/bbl and USD 63/bbl, respectively. 

However, prices above USD 50/bbl over recent months have started to stimulate shale-oil investment in the U.S., which will be translated into production ahead. We still estimate that the WTI range of USD 45-50/bbl can stabilize the U.S. rig count and helps to balance the market in 2018 (see chart). For 2018, we maintain our forecasts at USD 45/bbl for WTI and at USD 47/bbl for Brent.

Grains: Higher prices in 2018

Wheat and corn prices dropped by 2.2% and 1.2%, respectively, in November. In the meantime, soybean prices have risen 1.2%. 

The weather conditions were extremely favorable for 2016-17 crop development, especially in the Southern Hemisphere, boosting productivity. For the 2017-18 crop we expect a decrease in production, as the planting of the summer crop took place in worse conditions.

We expect the three commodities prices to increase slightly in 2018. Our YE18 forecasts are:

  • Soybeans: USD 10,2/bushel
  • Corn: USD 4.0/bushel
  • Wheat: USD 5.0/bushel

Our scenario assumes an active La Niña in the end of this year that is going to last until the end of 1Q18. As La Niña implies drier weather in the Southern Hemisphere, it may affect the next crop in Brazil and Argentina.

Sugar/Coffee: Prices likely to decrease in 2018

International contracts for raw sugar increased by 2.3% in November. Meanwhile, coffee prices have dropped by 1.8%.

The increase in sugar prices reflects the shift in production from sugar to ethanol. As the current parity between sugar and ethanol is still favorable to the biofuel, Brazilian mills are producing more ethanol, which boosted sugar prices.

We expect sugar prices to average USD 0.147/lb in 2018. We expect a surplus in the 2018-19 and 2019-20 crop years, after two consecutive years of deficit.

Our forecast for 2018 average coffee prices is USD 1.31/lb.


 

Paula Yamaguti
Laura Pitta


 

For the full report, see enclosed file



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