Contrary to initial apprehensions of a market backlash to anticipated Chinese slowdown, the metals demand growth in the Asian giant has actually surprised to the upside. This has been helped by strong raw material availability. What’s more, absolute demand growth in China is possibly the highest ever in copper and steel providing a solid support base.
At the same time, supply growth has been robust; for example, in aluminium, copper and iron ore. Additionally, inventories are still high, capping the upside potential for prices although over the year, base metals inventories fell, especially aluminium. The current general softness in commodity prices is likely to continue into 2014.
Tapering is likely to squeeze capital from many emerging markets, forcing yields higher, and creating more difficult growth conditions for those nations. Oil and gold particularly were boosted by QE as the money filtered through to emerging markets and the increased liquidity pushed up prices for raw materials.
Gold is likely to be hit by rising interest rates, higher dollar and lower commodity prices. Bank of America Merrill Lynch Global Research sees the metal falling more than 10 per cent to $1,100 next year.
Barclays is advising clients to place relative value trades in precious metals, taking long positions in platinum and palladium while going short gold. Platinum and palladium are due to struggle with potential mine closures amid labour trouble in South Africa while zinc, tin and lead could face regional shortages. “Zinc should continue to see modest deficits with mined supply lagging,” analyst Grant Sporre at Deutsche Bank said in a note. “Based solely on the annual supply-demand balances, we think that zinc and lead remain the most attractive.”
With the commodity supercycle on hold for now due to lower incremental demand from emerging markets, adequate supply in the near term and new techniques that increase natural gas and crude oil availability, direct commodity investments appear somewhat unattractive.
Slight oversupply will hit US natural gas, oil, iron ore and copper specifically, while industrial metals with supply constraints, such as platinum and zinc, could outperform with the modest 3.6 per cent acceleration in global growth.
Key risks are growth disappointments in the US or China, more aggressive than expected Fed tightening, a large negative financial event, or a stronger supply response than current consensus forecasts.
JP Morgan’s Gregson sums it up: “As the old investor adage goes, if you wait for certainty you miss opportunity. This is easier said than done, particularly as investors’ immediate past experience of investing in the sector has been so painful.”