Take a shine to commodities

PHOTO: Take a shine to commodities

Financial markets are flush with the vast sums of cash unleashed by the United States' stimulus measures.

Emerging economies have big appetites for infrastructure development such as roads, rail and ports.

Put these two elements together and you have quite a bright outlook for commodity prices, analysts said.

Once the US negotiations over a budget deal are settled, and assuming a sensible deal is done to avoid the dreaded "fiscal cliff", Credit Suisse said, the outlook for many industrial commodity prices is likely to be driven by the pace of global growth.

OCBC Treasury Research said: "We remain cautiously optimistic in expectation of a sustained improvement in both global growth and sentiments amid an extended low-interest rate and highly liquid environment at least till 2015, and - barring a fiscal cliff - a recovering US economy in the year to come."

In this scenario, OCBC added, growth-related commodities such as copper and crude oil may see some hints of appreciation, while defensive commodities such as livestock and grains will likely take a back seat.

Oil

Oil prices have been relatively stagnant for the past two years.

Demand and supply remain fairly balanced and global oil consumption continues to hold steady, and analysts say it will likely be more of the same next year unless tensions flare up significantly in the major oil-producing nations of the Middle East.

Barclays analyst Suki Cooper believes this could very well happen, especially in Iran.

"We expect that the catalyst will arrive and that oil will average more than US$111 per barrel," she wrote in her 2013 outlook.

Other analysts have a more sanguine outlook, though they do not rule out an escalation of Middle East tensions.

Standard Chartered analysts, for example, said in their outlook report that they expect the prices of crude oil and oil products to remain close to current levels throughout next year unless there is a further increase in geopolitical tensions in the Middle East, or a weaker-than-expected recovery in the world economy.

Similarly at Credit Suisse, analysts are expecting the oil market to remain unexciting next year unless political winds shift suddenly.

"The price of Brent oil has, for the most part, moved sideways in a large range between US$105 and US$120 over the past two years," they wrote in an outlook report.

"Given that the swing producer Saudi Arabia is likely to continue to target this range, we expect it to persist over much of 2013."

But as global economic growth picks up, the price should move towards the top of the range, they added.

"However, as always, short-term movements are likely to be driven just as much by geopolitical events as by changes in demand."

Indeed, Franklin Equity Group portfolio manager Fred Fromm noted that near-term trends can be confusing to navigate, which is why he primarily focuses on longer-term factors such as per capita consumption.

"Looking forward, demand from developing markets is likely to remain healthy and largely offset efficiency gains in developed countries," he said, adding that many industry experts believe US oil drilling activity and production will stagnate with prices below US$70 per barrel.

"Although oil prices can obviously trade below this level for some time, particularly if the global economy sputters, we believe it is unlikely to remain at low levels for an extended period of time," he added.

Precious metals

Even after rising for 12 straight years, analysts said, gold will continue to shine into a lucky 13th.

The price of gold bullion rose about 6 per cent this year as investors sought refuge in this "safe haven" asset amid economic uncertainties.

Gold prices will remain well supported next year by demand from China, India and emerging market central banks, StanChart said.

OCBC agreed, noting that central banks in emerging markets have been piling up gold as a way to diversify their reserves.

In the past year, for example, Brazil added 17.2 tonnes of gold to its reserves while Russia took on another 7.5 tonnes.

China's demand has increased substantially since the middle of last year, and this trend is likely to persist next year, StanChart added.

India has traditionally been a big gold consumer and StanChart expects that its gold purchases will rise steadily through 2016, with jewellery being the main driver of demand.

Among investors, however, OCBC said the strongest rationale for gold demand is the potential deepening of negative real interest rates in the coming year.

"The fragile yet recovering global economy and central banks' goals in stimulating growth should prevent significant increases in interest rates."

Gold prices tend to correlate strongly with real interest rates - low interest rates tend to mean higher gold prices and vice versa - and under such circumstances, gold should appreciate further next year, OCBC said.

DBS, however, is not as confident about the outlook for gold.

"We are not very bullish on gold and silver as the recent prices have been range-bound," said Ms Leong Chean Wai, managing director of commodity derivatives at DBS Treasury and Markets.

"Holding gold and silver actually incurs a negative 'carry'. The holding does not generate interest and investors still have to pay for the cost of holding, for example, storage and insurance."

And dazzling though gold's returns have been, the metal was outshone this year by platinum, which has appreciated about 10 per cent in the past 12 months.

HSBC expects this lesser-known metal to climb even further in the new year, as growth in demand will likely outstrip a gain in supply.

"Platinum is a necessary component in a range of industrial processes," noted HSBC analysts in an outlook report.

"A recovery in demand, notably from glass manufacturers, should lead to an increase in overall industrial consumption."

HSBC is similarly bullish about palladium, also an industrial metal used in the making of cars and high-end electronic products such as liquid crystal displays (LCDs).

Palladium has gained about 5 per cent this year.

"We anticipate that investors will shift into hard assets, including palladium, in 2013 due to increased economic uncertainty," the analysts wrote.

"More important, we expect that persistent supply-demand deficits based largely on dwindling Russian stockpile sales and declining mine output will lend support to palladium prices."

Base metals

With demand from China showing early signs of improvement and bulk commodity inventories having fallen to multi-month lows, StanChart said it is "mildly bullish" on base and ferrous metals such as iron ore.

"China accounts for about 40 per cent of total global demand for base metals and willcontinue to drive demand growth at the margin," StanChart wrote.

In fact, iron ore has already begun rallying, as analysts predict that China will import a record amount next year as its accelerating economic growth spurs demand for steel.

Although iron ore prices dropped by more than 2 per cent this year, Westpac Banking analyst Justin Smirk believes they will climb as much as 26 per cent to US$170 a tonne by June next year.

China's urbanisation plan is expected to spur 40 trillion yuan (S$7.8 trillion) of investment by 2020, the Chinese Southern Metropolis Daily reported last Tuesday, citing a draft plan by the National Development and Reform Commission.

OCBC noted that copper's prospects next year are also mainly dependent on China's growth.

"We remain bullish on China and expect the Asian dragon to grow by 8.1 per cent next year, amid strong fixed investment growth by at least 20 per cent, (and) domestic consumption reflected by retail sales to grow by 15 per cent," OCBC said.

Thus, it expects copper to appreciate by about 7 per cent to US$8,500 per tonne by the end of next year.

DBS is also bullish on copper on the back of the China recovery story.

"The demand from appliance, infrastructure and car industries is expected to recover to healthy levels, while the growth of copper supply is expected to be very moderate and subject to geopolitical risk in major copper mining sites," said DBS' Ms Leong.

Meanwhile, investors should avoid zinc, nickel and aluminium due to their high inventory and ample supply, she added.

"These three metals have been the favourites for financing trades and financing deals have locked in quite a high tonnage.

"Any reverse of such trades could have a negative impact on prices."

yasminey@sph.com.sg