Itaú BBA - Stronger growth, higher commodities prices

Commodities Monthly Report

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Stronger growth, higher commodities prices

February 8, 2018

We increased our energy and metal price forecasts due to the better global environment.

For the full report, see enclosed file
 

• Commodity prices continued to rally in January on strong global growth and dollar weakness.

• In this environment, we increased our energy and metal price forecasts.

The Itaú Commodity Index (ICI) has risen by 1.7% since the end of December – agriculture (1.1%), metals (-0.1%) and energy (3.4%). Strong global economic activity and dollar weakness explain the rally over the last couple of months. 

We increased our energy and metal price forecasts due to the better global environment. We have moved our year-end forecasts to USD 55/bbl (from USD 52/bbl) for WTI and to USD 58/bbl (from USD 55/bbl) for Brent. For metals prices, we raised our year-end estimates for copper prices to USD 6,700/mt (USD 6,500/mt previously) and for iron ore prices to USD 65/mt (USD 60/mt previously).

We decreased our estimate for sugar prices as a result of a higher sugar surplus, which will likely keep prices low for an extended period of time. Our year-end forecast for sugar was changed to USD 0.136/lb, from USD 0.152/lb. For grains we maintained our scenario.

Oil: Higher prices in 2018

Oil prices continued to rally in January, supported by inventory draws, geopolitical risks and strong global growth. WTI and Brent rose 5.6% during the month, staying close to USD 63/bbl and USD 67/bbl, respectively. 

However, prices above USD 50/bbl over recent months are likely 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 45-55/bbl can stabilize the U.S. rig count and help to balance the market in 2018 (see chart). 

We increased our year-end forecasts to USD 55/bbl (from USD 52/bbl) for WTI and to USD 58/bbl (from USD 55/bbl) for Brent due to the better global environment.

Metals: Helped by better growth in China

The Metals ICI remained broadly stable for the month, as the strong performance in iron ore prices was offset by the other commodities. Iron ore prices rose to USD 74/ton from USD 72/ton, supported by strong growth in China, while copper prices moderated to USD 7,169/ton, down from USD 7,247/ton at the end of December. 

We raised our metal price forecasts due to our upward revision in the Chinese outlook. We raised our year-end estimates for copper prices to USD 6,700/mt (USD 6,500/mt previously) and for iron ore prices to USD 65/mt (USD 60/mt previously). Nonetheless, we still see a correction ahead from current price levels. 

Grains: Weather-related risks in 2018

Wheat, soybean and corn prices rose 5.8%, 4.6% and 3.1, respectively, in January.

The increase in grain prices stems from concern over dry weather in Argentina because of La Niña.

We maintained our price scenario for the three commodities. 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 that is going to last until the end of 1Q18. Because La Niña implies drier than usual weather in the Southern Hemisphere, it may affect the next crop in Brazil and Argentina.

Sugar/Coffee: Strong drop in sugar prices

International contracts for raw sugar and coffee decreased in January, as sugar prices dropped 12.7% and coffee declined 3.4%.

The recent decrease in sugar prices reflects the expectation of a surplus in the sugar market. Because some of the main sugar producers, such as India and Thailand, are increasing production due to the favorable weather, the sugar balance is expected to be positive, after two consecutive crop deficits. Additionally, the change in the European market regulation is likely to increase the beetroot sugar supply. In this scenario of sugar oversupply, the commodity price is expected to remain at lower levels for a longer period of time, as the convergence to ethanol is likely to be slower. 

Our coffee price forecast for YE18 is unchanged, at USD 1.31/lb. Nonetheless, we have decreased our YE18 sugar price estimate to USD 0.136/lb from USD 0.152/lb, reflecting the expectation of larger supply.
 

Paula Yamaguti
Laura Pitta

 

For the full report, see enclosed file



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