Group Economics [email protected] Quarterly Commodity Outlook ABN AMRO Price Outlook Q1-2014 long term view (until 2016) 3-months view WTI Brent Natural gas 30 January 2014 Energy: Spill-over risks also lingered for longer than expected. As a result, and combined with the delayed appreciation of the US dollar that we expected, we decided to raise our forecast for Brent oil to an average of USD 100/bbl in 2014. Nevertheless, we expect that the declining trend will continue in the following years. Mainly due to US inventory building, the Brent/WTI spread widened. Since an unwinding of the risk premium will have a bigger impact on Brent, we expect the Brent/WTI spread too narrow to USD 5/bbl in the course of the year. US natural gas prices are expected to continue their rally, after an initial correction lower in Q1. As a result, the price difference between Europe and the US should narrow further. Precious metals: Gold Silver Platinum Palladium We continue to expect lower gold prices in 2014 and 2015, driven by more attractive investment opportunities elsewhere, in an environment of rising US interest rates, a higher US dollar, a strong US economy and positive investor appetite. For 2016, we expect the balance between supply and demand to tighten and for gold prices to recover. We expect that the continuation of gold position liquidation will drag down other precious metals in the first half of 2014, mainly because there are large positions that investors can liquidate. Once this liquidation has taken place, silver, platinum and palladium will become more cyclical again and start to recover. And it is a recovery that we expect to continue. Base metals: Aluminium Copper Nickel Zinc Short-term volatility in base metal prices will continue. It will be dominated by ongoing uncertainty over a range of issues, such as the Fed’s tapering (pace and timing), the strength of the Chinese economy, base metal oversupply and the vitality of the eurozone economy. Demand for base metals will, however, remain solid. We expect stronger prices in Q1, due to improving economic conditions and the sound market outlook for base-metal end-using sectors, (such as construction, electronics automotive and machinery). In the long term, we think that demand prospects will keep prices afloat, despite lingering oversupply. Ferrous metals: Steel (HRC) Iron ore Coking coal In the US and Europe, conditions in the steel sector are turning for the better. In China, general sentiment is expected to stay relatively weak, and for the next three months, China will continue to see steel supply pressures. Overcapacity and weak seasonal demand will soften prices. Steel raw-material supply (iron ore and coking coal) will remain sufficient to meet any increase in demand. This will limit any significant price gains. Indeed, we believe that the supply of raw materials will outpace demand and this will add downward pressure on prices until 2016. We therefore expect prices to gradually soften during this period. Wheat Agriculture: Corn Soybeans Sugar Coffee Cocoa Agricultural commodities were hurt badly in 2013. In particular, corn (-40%) and wheat (-30%) prices declined. The main reason for this price pressure was the ample supply of most crops. Some stabilization can be expected, though. With farmers switching from corn to wheat production, substitution risk will reduce in the course of the year. An oversupply in sugar is looming, but Brazilian policy and Indian elections could protect the downside in prices. Only for soybeans can more downside be expected, as an oversupply will exceed the increase in Chinese demand. For cocoa, more upside is possible, due to an expected deficit. decrease by 11% or more decrease bet w een 5 % and 10% price movement betw een -4% and + 4% increase betw een 5% and 10% increase by 11% or more - Short term: our three month outlook versus spot rate on January 28th. - Long term: 2016 average forecast price versus 2014 forecast price. 2 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics FORECASTS Q1-2014 (1) Spot rate 28th Jan Average price Q4-2013 3-months (Q1 exit) 2014 - Brent (USD/barrel) 108.93 109.37 105 100 95 90 - WTI (USD/barrel) 97.48 97.43 100 95 90 85 - Natural gas (USD/mmBtu) 5.23 3.85 4.00 4.25 4.75 5.00 - Gold (USD/oz) 1,253.03 1,272.57 1,150 1,100 900 1,000 - Silver (USD/oz) 19.72 20.77 17.5 17.6 20.1 25 - Platinum (USD/oz) 1,418.00 1,396.09 1,300 1,335 1,550 1,650 - Palladium (USD/oz) 722.00 724.84 640 655 725 725 1,710.25 1,767.51 2015 2016 Energy: Precious metals: Base metals: - Aluminium (USD/t) Aluminium (USD/lb) - Copper (USD/t) 0.78 7,179.00 Copper (USD/lb) - Nickel (USD/t) Nickel (USD/lb) - Zinc (USD/t) 7,166.90 3.26 14,082.00 1,989.25 7,475 13,920.93 7,400 15,000 1,911.77 7,450 15,000 2,140 7,350 16,000 2,150 0.93 3.38 6.80 0.97 2,050 0.95 3.36 6.80 0.87 2,100 0.86 3.39 6.31 0.90 1,900 0.83 3.25 6.39 Zinc (USD/lb) 1,820 0.80 3.33 16,500 7.26 2,250 0.98 7.48 2,300 1.02 1.04 Ferrous metals: - Steel (global, HRC; USD/t) 589.18 576.68 570 560 540 535 - Iron ore (fines, USD/t) 126.50 135.40 130 128 115 115 131.00 145.32 133 135 130 129 - Wheat (USDc/bu) 509.50 605.52 550 550 - - - Corn (USDc/bu) 416.50 414.39 420 430 - - 1,288.50 1,292.89 1,280 1,200 - - - Hard coking coal (USD/t) (2) Agricultural: - Soybean (USDc/bu) - Sugar (USDc/lb) 15.07 17.64 15.50 16.00 - - - Coffee (USDc/lb) 112.13 104.88 120 125 - - 2,955.52 2,770.67 2,950 3,025 - - - Cocoa (USD/t) (1) The 3-months forecasts is the Q1 2014 exit price. Forecasts for 2014, 2015 and 2016 are average year prices. (2) Prime coking coal Australia, CIF 3 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics CONTENTS Macroeconomic developments Macro ------------------------------------------------------------------------------------------------------------------------------------ 4 Commodity Top Down -------------------------------------------------------------------------------------------------------------- 5 Energy Brent ------------------------------------------------------------------------------------------------------------------------------------- 6 WTI --------------------------------------------------------------------------------------------------------------------------------------- 7 Natural Gas ---------------------------------------------------------------------------------------------------------------------------- 8 Precious metals Gold -------------------------------------------------------------------------------------------------------------------------------------- 9 Silver ------------------------------------------------------------------------------------------------------------------------------------ 10 Platinum --------------------------------------------------------------------------------------------------------------------------------- 11 Palladium -------------------------------------------------------------------------------------------------------------------------------- 12 Base metals Aluminium ----------------------------------------------------------------------------------------------------------------------------- 13 Copper ---------------------------------------------------------------------------------------------------------------------------------- 14 Nickel ----------------------------------------------------------------------------------------------------------------------------------- 15 Zinc -------------------------------------------------------------------------------------------------------------------------------------- 16 Ferrous metals Steel (HRC) --------------------------------------------------------------------------------------------------------------------------- 17 Iron ore --------------------------------------------------------------------------------------------------------------------------------- 18 Coking coal --------------------------------------------------------------------------------------------------------------------------- 19 Agriculturals Wheat ----------------------------------------------------------------------------------------------------------------------------------- 20 Corn ------------------------------------------------------------------------------------------------------------------------------------- 21 Soybeans ------------------------------------------------------------------------------------------------------------------------------ 22 Sugar ------------------------------------------------------------------------------------------------------------------------------------ 23 Coffee ----------------------------------------------------------------------------------------------------------------------------------- 24 Cocoa ----------------------------------------------------------------------------------------------------------------------------------- 25 Macroeconomic indicators Facts & Figures ----------------------------------------------------------------------------------------------------------------------- 26 Contributors Analysts and economists ---------------------------------------------------------------------------------------------------------- 27 Disclaimer ----------------------------------------------------------------------------------------------------------------------------- 28 4 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Nick Kounis (+31 20 343 56 16) Marijke Zewuster (+31 20 383 05 18) Macro Global demand is entering a new stronger phase… …led by the advanced economies, which should also lift EM exports China’s transition should be gradual, allowing steady pace of expansion Asia’s exports to selected regions Advanced economies, especially the US, set to firm We think that stronger global growth lies ahead. The global economy has been hit by a number of headwinds that are now abating. Stronger economic growth will be led by the US, where all the lights for above-trend growth have turned green. Private sector balance sheets – from households, to companies, to banks – are looking healthy, setting the scene for stronger investment and consumption, facilitated by easier lending conditions, skyhigh profits, improving job growth, and ebbing uncertainty. In addition, the pace of budget cuts has already dropped sharply, so the fiscal drag should also fade going forward. Meanwhile, the eurozone economy is also slowly getting back on its feet. The pace of budget cuts has also fallen away sharply, while the reduction of uncertainty and financial stress should be supportive of moderate economic growth. Indeed, we are ready seeing an improvement in developed market demand, with US economic growth accelerating to above-trend rates in the second half of last year, and the eurozone moving out of recession, and into a moderate expansion phase. Source: Thomson Reuters Datastream World trade is set to take off Stronger DM demand means stronger EM exports Stronger economic growth in the US and a slow recovery in the eurozone should lift exports around the world. For instance, three-quarters of Asia’s exports outside of the region go to the US and EU. There are already signs of improving exports across the emerging markets, not least in Asia, and this will also have trickle down effects on their domestic economies. Even so, the downward risks continue to outweigh the upward risks for emerging market economies. Investor sentiment has been fragile and this has dampened the inflow of foreign capital. Structural imbalances, together with the lack of necessary reforms and political discontent, will also negatively affect growth. China’s transition likely to be gradual Source: Thomson Reuters Datastream Group Economics GDP forecasts 2012 2013e 2014e 2015e China 7.7 7.5 7.5 7.0 US 2.8 1.7 3.2 3.8 Eurozone -0.6 -0.4 1.3 1.8 World 2.9 2.7 3.7 3.8 1.9 2.3 6.0 6.0 trade The risk of a hard landing in China will continue to loom over the next few years. This reflects the combination of industrial overcapacity, corporate and local government leverage and bad debt that has resulted from the investment boom of the last few years. As the authorities attempt to transform the economy from an investment-led growth model to a consumption-led growth model, to reduce the growth of leverage and allow market forces to determine prices, there is a risk that the slowdown in investment goes too quickly leading to an overall downturn in the economy. Our central scenario is that the authorities will be able to manage the transition smoothly. We think that reforms will be implemented gradually, but given higher volatily and the impact this could assert on credit growth we have lowered our growth forecast from 8% to 7.5% for 2014 We maintain our projection of 7% for next year. Source: ABN AMRO Upside to the forecast: Downside to the forecast: - Stronger return of confidence - Financial market instability related to eventual Fed exit - Pent-up demand larger than expected - Abrupt investment slowdown in China - Accommodative monetary conditions - Rapid capital outflows from emerging markets 5 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Georgette Boele (+31 20 629 7789) Commodity top-down CRB down by only 5% in 2013, as energy prices offset the decline of other commodities We are neutral for 2014… …and despite the economic recovery, we remain neutral for 2015 and 2016 CRB down by only 5% in 2013 CRB Index Source: Thomson Reuters Datastream Energy prices in US$ Commodity prices fell under pressure in 2013; the CRB index lost almost 5%. This was a modest decline given the sharp drops experienced in precious metals (-10 to -36%, excluding palladium), base metals (-7 to -18%), grains (7 to -40%), coffee (-23%) and sugar (-16%). Precious metals fell on the prospect of higher interest rates in the US and investor liquidation. Base metals decreased on weaker economic data (especially in China and Europe) and weak fundamentals. Grains, coffee and sugar were hurt badly by oversupply and large short positions by funds. Neutral to higher energy prices were mainly responsible for the CRB declining by only a modest 5%. What caught investors by surprise was the strong rally in US equities driven by an improvement in the US and global economies, while commodities moved lower. We are neutral in 2014… For 2014, we are neutral on our commodity outlook, represented by the CRB index. There are several reasons for this. For starters, we see a diverging outlook for the various commodity price categories. We remain negative on oil prices, mainly because of the oversupply in the market and an expected lower risk premium. We expect the base metal price outlook to be supported by higher demand, despite the risk of oversupply. So, in fact, we expect higher demand to more than offset higher supply and therefore a tightening of the balance. In ferrous metals, however, oversupply will remain a dominant force pushing prices lower. In precious metals, we expect investor liquidation to continue in the first half of 2014 and for silver, platinum and palladium prices to recover thereafter. We remain negative on gold for both 2014 and 2015. On the agricultural side, we expect grain prices, as well as coffee and sugar prices to stabilize after the large sell-off in 2013, but further downside cannot be excluded. For cocoa, a modest recovery is possible. On the one hand, higher US interest rates and a higher US dollar are negatives for commodities. On the other hand, our aboveconsensus view of US growth for 2014 is a positive. …and remain neutral for 2015 and 2016 Source: ABN AMRO Our longer-term commodity outlook remains neutral. The positives are that we expect the global economy to grow strongly and for there to be tighter supply in some commodities. However, our Chinese growth outlook for 2015 is below market consensus. In China, there is a shift underway from investment-based growth towards more private consumption. There will be winners and losers in this transformation, and it should not immediately be assumed that rebalancing means less consumption. Commodities linked to rising income and changing consumption patterns will fare better than commodities used for construction and infrastructure growth. The negatives are the start of the Fed tightening cycle in the US in 2015, slowing credit growth in China, increasing measures to fight pollution and a higher US dollar. Upside to the forecast: Downside to the forecast: - Large supply disruptions - Ample commodity supply - Stronger-than-expected global growth, including in China - Stronger decline in Chinese demand for commodities - Later Fed rate hikes - Earlier Fed rate hikes 6 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Hans van Cleef (+31 20 343 46 79) Energy | Brent Oil prices have eased, but remain elevated due to spillover risks Volatility possible, based on hopes of rising demand versus confirmation of ample supply Brent oil price forecast adjusted upward, but declining trend remains Significant impact of unrest at non oil producers Historical price Brent News about higher oil inventories and (possible) production disruptions seems constantly changing driving seat by signals of economic growth as the most prominent drivers of oil prices. As a result, oil prices continued to trade in a relatively narrow range. The impact of unrest in the Middle East has dragged on longer than expected. This is remarkable, as the affected oil output was well covered by increased output from non-OPEC regions and by by swing-producer Saudi Arabia. Fears of a possible spillover to major oil producers, however, lingered on. Hopes that Iranian sanctions will be eased and Libyan oil exports resumed in the near term led to some downward pressure at the start of 2014. Swings between demand growth and ample supply Source: Thomson Reuters Datastream Global oil supply and demand (x 1mln bbl) Signals that Russia is close to a deal with Iran to exchange goods for oil could potentially add pressure to oil prices if the intended 500 kb/d of oil actually hits the market. The deal would be worth USD 1.5 billion a month and enable Iran to substantially increase oil exports. There is also a risk, however, that this deal could aggravate the negotiations between Iran and the west, resulting in a reversed reaction of less oil to the market. For the moment, technical support levels are holding, but more testing of these levels and, even, a possible break lower could occur in the next few months. That break, however, would only occur during periods when the market is not focused on positive economic growth data. We expect Brent oil to remain trading above or around USD 100/bbl during the first quarter of the year. Market focus will swing between optimism on signs of increasing demand to confirmation of ample supply and, possibly, even easing geopolitical tensions. Forecast for 2014 Brent oil price raised Source: IEA Group Economics price forecast (USD/barrel) 3-m price end of quarter and year averages Brent 3-month 2014 2015 2016 105 100 95 90 Source: ABN AMRO As the impact of unstable situations in small oil-producing countries, such as Syria and Egypt, is more substantial and taking longer to resolve than foreseen, the decline we expect in oil prices has been postponed. Based on this and the delayed appreciation of the US dollar that we expected, we raised our forecast for Brent oil prices to an average of USD 100/bbl in 2014 (from USD 95/bbl). Iran’s talks with the west regarding its nuclear programme are heading in the right direction and stir hopes of the sanctions being eased even further in the course of 2014. This will add to the already ample supply. In addition, further production increases could occur during the forecast period in Iraq, the US, Canada, Brazil, Saudi Arabia, Libya, and, perhaps, even more oil-producing countries. Volatility will remain, as markets must deal with stronger global economic growth, which will result in periods of support for oil prices. However, we strongly believe that this increase in demand could be easily balanced by an increase in supply. This, combined with our forecast for higher yields (making commodities less interesting as an investment) and a stronger US dollar (negative for US-dollar-denominated assets), results in our forecast for a continuing decline in oil prices over the rest of the forecast period. Upside to the forecast: Downside to the forecast: - Escalation of unrest in Middle-East countries affecting oil output - A higher-than-expected increase in global oil production - A larger-than-expected pickup in economic growth/risk appetite - Faster easing of Iran sanctions - Failure of the US dollar to recover - Economic recovery is slower than expected 7 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Hans van Cleef (+31 20 343 46 79) Energy | WTI (West Texas Intermediate) US Inventory-building resulted in a widening of the Brent/WTI spread Data confirming economic growth will be countered by confirmations of ample supply Non-OPEC oil supply growth will result in a continuation of the downward trend Higher inventories weigh on prices Historical price WTI In the past few months, WTI prices declined due to higher inventories, while Brent continued to trade around USD 110/bbl. As a result, the Brent/WTI spread increased from around zero in the middle of 2013 to almost USD 20/bbl in December. Currently, the spread is lingering around USD 12/bbl. At the start of January, both Brent and WTI declined on hopes that Libya would restart its oil exports. This was remarkable, because WTI is usually less affected by unrest in the Middle East, but this time, it declined even faster than Brent. The frigid cold had a serious effect on US natural gas prices (+34%), but hardly any impact on oil prices. Brent/WTI spread to remain elevated in H1 During the coming quarter, hopes regarding economic growth could result in some support for oil prices. These upswings will be short-lived, however, as confirmation of solid US and Canadian production will most likely cap the upside. Therefore, as easing tensions in the Middle East probably will not immediately result in a lower risk premium, the Brent/WTI spread could remain elevated during the first half of 2014. In the course of the year, US President Obama will decide on the Keystone XL pipeline (from Canada to Gulf Coast refineries). Although the decision is important based on its relevance to US and global policy on carbon reductions, its impact on WTI seems to be limited. The oil that would be transported to the US refineries using the pipeline will be mainly for US consumption. Impact on global market prices will therefore be limited. Source: Thomson Reuters Datastream Oil price spread Brent-WTI Ample supply to outbalance rise in demand Source: Thomson Reuters Datastream Group Economics price forecast (USD/barrel) 3-m price end of quarter and year averages WTI 3-month 2014 2015 2016 100 95 90 85 Source: ABN AMRO The ample supply is expected to last, even despite stronger economic growth over the forecast period. In particular, non-OPEC oil-production growth will result in a redrawing of the energy map. Although Saudi Arabia will remain the only ‘swing-producer’, the extra supply coming from other regions will reduce dependency on Saudi reserve capacity. This, in turn, should make oil – or at least WTI – prices even less affected by possible unrest in the Middle-East region. Production increases are expected in the US and Canada, while other countries, such as Brazil and Venezuela, may surprise w in the coming years. The increase in demand could mainly come from refineries, as a result of increased oil product exports. The US Senate Committee on Energy will probably hold a hearing on 30 January on the possible implications of lifting the crude-oil export ban. We believe that during the forecast period, the US government will decide not to allow crudeoil exports. Although economic growth will lead to an increase in demand, we believe that the upside for WTI is limited. While a large part of increased production is already priced in, WTI may see somewhat less downside potential than Brent. After all, the effects of a stronger US dollar will be reflected in all US-dollar-denominated commodities. We expect the Brent/WTI spread to narrow to, and stabilize at, approximately USD 5/bbl. Upside to the forecast: Downside to the forecast: - Stronger than forecasted global/US economic growth - Increased production of shale oil in non-OPEC regions - Possible escalation of the geopolitical conflicts (Middle East) - Stronger than expected appreciation of the US dollar - More pipelines announced which transport oil to the Gulf Coast - Disappointing economic growth in US 8 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Hans van Cleef (+31 20 343 46 79) Energy | Natural gas While European gas prices were mixed, US prices ballooned Seasonal trend will lead to some pressure, but economic growth will prevent a huge decline The longer-term trend is for higher prices, but the upside is capped Impressive US rally led to narrowing price differential Historical price natural gas In our previous Quarterly Commodity Outlook, we forecast that US natural gas prices (Henry Hub) would rise from the spot price of USD 3.58/mmBtu to USD 4.00/mmBtu before the end of the year. The rally materialized and continued to USD 5.44/mmBtu on 27 January, which was a 4-year high. The reason for this impressive appreciation was a period of frigid cold which boosted heating demand. Afterwards, some profit-taking was seen. European natural gas prices were mixed. Dutch Title Transfer Facility (TTF) gas trade was almost 7% higher compared with our previous Quarterly Commodity Outlook. UK National Balancing Point (NBP) is trading slightly below that level. As a result, the difference between US and European gas prices has narrowed. Easing seasonal demand will result in lower prices Source: Thomson Reuters Datastream The excessive seasonal demand may continue as long as the extremely cold temperatures continue in the US. If weather conditions improve, stocks can be rebuilt and some long positions will be closed. It is therefore likely that corrections will lower US natural gas prices. The amount of pressure on prices will depend on how long it takes for inventories to return to normal levels. Until then, natural gas prices could remain high, especially on rumours that demand could pick up again. For this quarter, we expect some easing of US natural gas prices towards USD 4.00/mmBtu. This will be the result of a normalisation of demand and stock building. In Europe, the weather has been mild. If temperatures drop, heating demand could increase. During the last few years, TTF prices tended to react aggressively on cold weather, but returned to normal levels soon after. We therefore expect TTF prices, on average, to trade around current levels of EUR 27/MWh. Natural gas prices Difference between Europe and US prices to narrow Source: Thomson Reuters Datastream Group Economics price forecast (USD/mmBtu) 3-m price end of quarter and year averages Natural gas 3-month 2014 2015 2016 4.00 4.25 4.75 5.00 Source: ABN AMRO We expect US natural gas prices to continue trending up based on economic growth. This growth will result in increasing refinery and industrial demand. We expect natural gas prices to be capped at around USD 5.50/mmBtu, as existing (shale-) gas production will come back on line when prices go up. Furthermore, if natural gas prices rally too far, other, lower-cost energy sources, such as coal, will again become more interesting. In Europe, the main focus for the coming years will be on the European Committee’s policy on carbon-emission trading. If the policy is changed and carbon emission prices are successfully increased, gas could play a bigger role in the European energy mix, as coal might become too expensive. Another factor to watch is the decoupling of European gas prices from oil prices. We expect that the moderate declining trend in European gas prices will continue, resulting in a further narrowing of the difference between Europe and US prices. Upside to the forecast: Downside to the forecast: - Switch to additional gas-fired power generation - Continued and accelerating unconventional gas output - Extreme weather conditions (longer periods of cold or heat) - Disappointing economic recovery - Decoupling with oil prices goes faster than expected (Europe) 9 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Georgette Boele (+31 20 629 7789) Precious metals | Gold 2013: First negative year since 2000 Five reasons why we remain negative for 2014 & 2015 Supply issues will become more important in 2016 First negative year since 2000 Gold price On the last day of the year, the market came close - in thin trading conditions - to testing the former low of USD 1,180 per ounce. As the market was not strong enough to force a break in the level, prices quickly popped up above USD 1,210 again, closing the year at USD 1,205.65, a loss of 28% over 2013. This was the first negative year since 2000, mainly driven by investor liquidations, lower market/(geo) political uncertainty and reduced jewellery demand from India. The latter was the result of the Indian government taking measures to improve the current account deficit by restricting gold imports. (According to Metal Bulletin, we took the top spot in the 2013 gold-price forecast contest with a year average of USD 1,500 per ounce, actual average price was USD 1,412 per ounce). Source: Thomson Reuters Datastream Five reasons why we remain negative for 2014 & 2015 We remain negative on the gold outlook for 2014 and 2015. Gold prices may have dropped by 28% last year, but this is still small compared to the exponential ascent in the period from 2003 to 2011. We have five reasons for our negative stance: 1. We expect US real yields to increase. This will make US assets more attractive compared to gold. 2. Investor sentiment will likely remain positive in an environment of higher global growth and subdued inflation pressures. This will limit demand for gold as an inflation hedge and as a safe-haven asset. 3. We expect the US dollar to outperform almost all other currencies, driven by our expectations for above-consensus US growth and for more aggressive rate hikes in 2015 (anticipated in 2014). 4. We also expect Indian gold import restrictions, aimed at improving the current account deficit, to remain in place. We expect Chinese demand to grow, although consumer demand from India will likely remain depressed. Chinese growth, however, will not be as impressive as in 2013, and it is unlikely to be strong enough to compensate for the lower demand from India. 5. In 2014 mining companies could start to hedge again. Gold ETF positions Ounces, Supply issues will become more important in 2016 Source: Bloomberg, ABN AMRO Commodity Research price forecast (USD/oz), end of the month and year average 3-month Gold 1,150 2014 1,100 2015 900 Source: ABN AMRO 2016 1,000 Since 1990, mine supply has annually increased, on average, by 1.4%, while scrap supply has risen by 7.5%. Mining conditions continue to be challenging. Previously, the relatively high gold price compensated for most of these issues and made unprofitable operations again profitable. With the efficiency wave taking place in the mining sector and the drop in the gold price, this is no longer the case. Miners have adjusted their strategy, written down unrealistically valued assets and concentrated on their core assets. As a result, unprofitable operations will be closed, which will have an impact on mine supply over time. Moreover, scrap supply will likely fall, because of the lower gold prices. After most investor positions have been cleared in 2013-2015, it is unlikely that there will be indirect supply from this category. As a result, total supply will fall. Total demand, however, will likely grow, driven by increased consumer demand from China and a recovery of demand in India. We therefore expect the balance between supply and demand to tighten in 2016, and for gold prices to recover. Upside to the forecast: Downside to the forecast: - Monetary policy to remain accommodative longer than expected - Central banks running for the exit - US dollar debasement - Strong global growth makes equities & base metals more attractive - Distrust in paper money and inflation fears - Further position liquidation 10 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Georgette Boele (+31 20 629 7789) Precious metals | Silver The worst-performing precious metal of 2013 Silver to disconnect from gold in 2014 More upside in 2015 and 2016 The worst-performing precious metal of 2013 Spot price USD per ounce Silver was the worst performing precious metal for 2013, declining by almost 36%. As a result, silver prices underperformed gold prices by a substantial margin. The main reasons for the sharp sell-off in silver are as follows: When economic data disappointed, silver was punished more substantially than gold. Moreover, investors are still heavily positioned in silver and this makes silver more vulnerable to position liquidation. Investors have sharply reduced their ETF positions in gold, but this is not the case for silver. Last, but not least, silver is being traded as a gold-proxy. Silver has increased its sensitivity to equity volatility and has, in fact, safe-haven attributes similar to gold. In general, it can be said that silver has had a more volatile character and, since 2000, has had more negative years than gold. Silver to disconnect from gold in 2014 Source: Thomson Reuters Datastream We expect the first half of 2014 to be similar to 2013 in silver markets. This implies more price weakness driven by investment liquidation. We expect silver prices to move lower in line with gold prices, driven by reduced safehaven demand, decreased inflation-protection demand and the search for more attractive returns elsewhere. Silver may again be treated as a goldproxy, but it is more than that. Besides the physical properties, there are two main differences between silver and gold. First, in the gold market there is a group of hardcore investors who believe in gold regardless of the price level. In silver, however, you do not typically have such hardcore believers. The other difference is that silver is more linked to the global economic cycle because of industrial demand for the metal. As we expect strong global economic growth in 2014 and 2015, in the course of 2014 this industrial character will again come to the fore. Investor positions are still very substantial, especially total ETF positions, and they need to be reduced. We expect this to materialise in the first half of 2014. If silver becomes more driven by the global economic cycle, its correlation with US equity markets will turn positive and sensitivity to volatility (the VIX) will turn negative. Total silver and gold ETF positions Source: Bloomberg More upside in 2015 and 2016 Group Economics price forecast (USD/oz), 3-m price end of quarter and year averages 3-month Silver 17.5 2014 2015 2016 17.6 20.1 25.0 Source: ABN AMRO For 2015 and 2016, fundamentals will play a larger role compared with sentiment-related investment liquidation. As such, silver will behave more like a cyclical (precious) metal. We expect mine supply to increase by 2 to 3% annually from 2014-2016, around the longer-term average. In addition, we expect scrap supply to decline again, based on lower spot prices. As a result, mine and scrap supply will, at best, stabilize. We expect global demand to increase. Therefore the balance between supply and demand will tighten. The main demand markets for silver are the US, China and Japan. As we remain optimistic about these markets for the forecast period, fundamentals are clearly improving for silver. This and a stabilization of the gold price in 2016 are the main reasons we expect higher silver prices in 2015 and 2016. Upside to the forecast: Downside to the forecast: - Sharp increase in global growth - Long-term investors abandon positions - US dollar debasement - Global recession 11 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Georgette Boele (+31 20 629 7789) Precious metals | Platinum Platinum lost 10% in 2013, but outperformed gold Platinum to become more cyclical in 2014 Underlying dynamics should further improve Platinum lost 10% in 2013, but outperformed gold Spot price platinum Platinum outperformed gold and silver in 2013, declining by “only” 10%. Platinum prices did relatively well, because the economic outlook in major catalytic-converter demand centers, such as the eurozone and Japan, improved. Moreover, Chinese demand for platinum jewellery was also strong. In addition, from time to time, platinum behaved as if it had safehaven attributes. This was reflected by a small positive correlation with US equity market volatility. This is very unusual for a cyclical precious metal. The main reason for this is that the overall sentiment for platinum was negatively affected by the sentiment in the gold market. When an aggressive gold sell-off occurred, as was the case in April, June, November and December, platinum prices also fell under heavy pressure. The result was that in 2013, platinum prices were mainly affected by opposing drivers, namely the sell-off in gold and the improving economic outlook. Source: Thomson Reuters Datastream Platinum to become more cyclical in 2014 Since the start of 2014, platinum prices have regained some of their cyclicality, which was reflected by the correlation between platinum and eurozone equity markets turning positive again. At the same time, platinum lost its safe-haven attributes, because it became more cyclical. However, investor liquidation risk remains significant. Total ETF positions are close to an all-time high. This makes platinum very vulnerable once investor sentiment turns negative. Net speculative positions in the futures market are not excessive, however, which modestly diminishes the liquidation risk. If gold prices fall under heavy pressure again - as we expect - platinum will not likely be able to disconnect. As a result, a part of these total ETF positions will be liquidated. We expect this to happen in the first half of 2014. Once these positions are reduced, the outlook will improve, increasing the potential for prices to rise. We expect platinum prices to recover and to fully regain their characteristic cyclicality in the second half of 2014. ETF positions Source: Bloomberg Underlying dynamics are further improving Commodity Research price forecast (USD/oz), end of the month and year average Platinum 3-month 2014 2015 2016 1,300 1,335 1,550 1,650 Source: ABN AMRO For the forecast period 2014-2016, we expect underlying platinum fundamentals to improve. First, we expect demand to grow in the main platinum markets of the eurozone and Japan. Moreover, increased jewellery demand from China, driven by a growing middle class, will also underpin an overall improvement in the demand outlook. The tightening of emission standards and legislation, such as Euro 6, require a higher platinum content in diesel engines. This trend will continue. Demand for platinum in engines will therefore grow until the moment when these engines are made obsolete. On the supply side, mine supply will likely be stable at best. An efficiency wave in the mining sector continues, and the risk of strikes and labour unrest is not likely to go away any time soon. We expect scrap supply to stabilise. As a result, the supply and demand balance is tightening. This should result in higher platinum prices during our forecast period, after investors have liquidated their positions. Upside to the forecast: Downside to the forecast: - Stronger-than-expected economic recovery in the eurozone - Global recession - Supply disruptions - Investors liquidating positions - Stronger platinum jewellery demand from China - Chinese consumers preferring white gold to platinum 12 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Georgette Boele (+31 20 629 7789) Precious metals | Palladium Palladium outperformed all other precious metals in 2013 Cyclical or not, investor positioning is heavy Fundamentals remain supportive over the longer term Palladium outperformed all other precious metals Spot price palladium (in USD) Palladium outperformed, by a wide margin, all other precious metals in 2013. While other precious metals sold off, palladium managed to move sideways in a range of roughly USD 660-780. It was the only precious metal that managed to outperform the US dollar, which it beat by 2%. This performance is mainly due to characteristics it does not have. For example, it does not have safe-haven attributes, it does not have the potential to hedge inflation risk and it does not compete with gold in jewellery. It is, in fact, the most unpopular precious metal for jewellery. Its most precious attribute is that it is used in catalytic converters in car engines and in industry. It is therefore the precious metal most exposed to the global economic cycle, especially in the US, eurozone and China, which have large markets for gasoline cars. Cyclical or not, investor positioning is heavy Source: Thomson Reuters Datastream, Palladium may be mainly driven by the prospects of the global economy and an expected supply shortage, but this has been widely anticipated by investors. It is manifested in large net-long positions on the futures markets and large total ETF positions. Even though investors have reduced some of these positions, they remain large. Therefore, any rally in palladium prices has been capped. So far, the bottom has not fallen out from under prices, but the trigger is usually a surprise. The longer it takes to come, the larger the move will be in the end. Palladium has disconnected from the behaviour of US equities. Both markets are usually driven by the prospect of the domestic economy. We expect palladium prices to decline in the first half of 2014, based on investor position liquidation in other precious metals spilling over to palladium, a higher US dollar and rising interest rates. Once investors have abandoned their positions, prices can start to recover. Total palladium ETF positions In ounces Fundamentals remain supportive over the longer term Source: Bloomberg Commodity Research price forecast (USD/oz), end of the month and year average Palladium 3-month 2014 2015 2016 640 655 725 725 Source: ABN AMRO Upside to the forecast: Despite the investor positioning risk, fundamentals for palladium remain supportive. Demand for catalytic converters in car engines is expected to increase. We expect the rise in US vehicle sales to continue and demand from China to increase as well. Emission laws in the US and China continue to be tightened. California emission standards, for example, are more stringent than the federal rules. Other states have the choice to either implement the federal standards or to adopt the California requirements. Fourteen states have adopted California’s standards. The state’s Low Emission Standards (LEV) III regulations are being phased in through model years 2015-2025. Chinese emission standards for new passenger cars and light-duty commercial vehicles are based on European regulations. In 2013, the China 5 diesel and gasoline standards were issued. They lay out a roadmap for improving China’s nationwide fuel to world-class quality. We expect Chinese car sales to stabilize over the forecast period, but the tougher standards result in a higher palladium content in gasoline cars. The increased demand for palladium and with supply unlikely to grow means that the undersupply situation will remain in place. Downside to the forecast: - Stronger economies in US and China - Global recession - Supply disruptions - Larger-than-expected Russian stock sales - Risk-seeking environment and/or US-dollar debasement - Larger-than-expected supply 13 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Casper Burgering (+31 20 383 26 93) Base metals | Aluminium During 2013, prices decreased by 5%, while stocks at LME warehouses increased by 2% Physical availability will remain tight in Q1, with the result that premiums are expected to stay firm Demand (especially from car manufacturers) is expected to remain sound in the forecast period Stocks up, price down Historical price Aluminium There are not many reasons to be cheerful about 2013. In the aluminium market, sentiment and business activity were generally weak, based on the 3,500 weak economic growth in China and Europe. In the US, conditions were 3,000 also sluggish. On 9 January, US-based aluminium smelter Alcoa announced a full-year loss of USD 2.3 billion, which was mainly due to impairment and 2,500 other special items. But revenues of the US-based company also decreased 2,000 by 3% yoy, partly because of the low aluminium price. During 2013, aluminium prices decreased by 5%. Stocks at LME warehouses increased 1,500 by 2%. At the end of 2013, total registered stocks represented 11-12 weeks 1,000 04 06 08 10 12 14 LME-Aluminium 99.7% Cash U$/MT of consumption. Most (40%) of the volume of LME stocks is located at the Vlissingen warehouse. Since the start of 2014, sentiment has continued to be weak, and aluminium prices have continued their path downward to Source: Thomson Reuters Datastream reach a four-year low. Physical availability is low Recently, premiums for aluminium have increased significantly in the US. As Supply, demand & stocks a result, premiums also rose in China and Europe. The increase in 16 20% 14 15% premiums was because of tighter availability of physical aluminium for endusers, partly due to weather conditions and capacity cutbacks, which hampered deliveries. In addition, a large part of the current stocks are 12 10 8 6 10% subject to financing deals, and therefore not available for sale to end-using 5% sectors, such as car manufacturing, aerospace, building & construction, 0% 4 2 expected to remain tight, and, as a result, premiums are expected to stay -5% firm during Q1 2014. This does not bode well for the chronically -10% oversupplied aluminium market, which desperately needs some producer 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0 packaging and industrial engineering. Physical availability of aluminium is discipline - with capacity cutbacks - in order to bring the market back into Stocks (weeks of consumption), l.axis World production (% yoy, l.axis) World consumption (% yoy, l.axis) balance. The high premiums paid by end-users for immediate deliveries are not an incentive for aluminium producers to cut capacity. Long term positive outlook for demand New warehousing rules – effective in April 2014 – will increase availability Source: Metal Bulletin for end users, and premiums will drift lower. This will make (high-cost, inefficient) smelters less profitable. This will reduce capacity in the long run and rebalance the market, which will be beneficial for prices. Demand is Group Economics price forecast expected to remain sound in the forecast period. Fuel efficiency and the 3-m price (Q1 exit) and year averages 3-month 2014 2015 2016 Aluminium (USD/t) 1,820 1,900 2,100 2,050 Aluminium (USD/lb) 0.83 0.86 0.95 0.93 Source: ABN AMRO weight of cars are high on the agenda. Car manufacturers must meet governmental environmental policies, and a car with components made of aluminium can be significantly lighter (reducing fuel consumption) than cars made out of steel. If the steel sector does not provide light-weight innovative steel products, car manufacturers are expected to replace steel with aluminium in the future. Inefficient (high-cost) smelters remain at risk in the forecast period, because of high energy prices. Upside to the forecast: Downside to the forecast: - Stronger than expected eurozone recovery - Adoption of new LME warehousing rule by April 2014 - Significant cutbacks in output by smelters in China - Weaker growth Chinese economy than expected - Increased demand as a substitution for copper and steel - New capacity entering the market (India, Middle East) 14 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Casper Burgering (+31 20 383 26 93) Base metals | Copper During H2 2013, macroeconomic data in China and the US created important price-defining moments In Q1, demand for copper will stay strong, due to improving economic conditions We forecast an increase, albeit a slow increase, in copper prices through 2015 Copper stocks have increased Historical price Copper The average London Metal Exchange (LME) cash copper price for 2013 was USD 7,330/t, down by almost 8% compared with 2012. During 2013, copper price was very volatile and moved between a bandwidth of USD 8,267/t (peak level early February) and USD 6,638/t (trough late June). Over the course of 2013, the level of copper LME stocks rose by 14%. The LME stock level reached its peak on the same day that the low in prices was hit (24 June). Afterwards, volumes started to decrease. Stocks registered at both the New York COMEX and the Shanghai SHFE warehouses decreased during 2013. Besides the stock development, numerous other factors caused swings in copper prices. The main contributors were economic developments in China and the US. During H2 2013, the partial US government shutdown, the Fed’s decision about monetary stimulus and the results of the Chinese plenum were important, price-defining moments. Other macroeconomic indicators (such as US job reports, manufacturing data from China and the US, worries over demand prospects and geopolitical tensions (Syria) also gave direction to copper prices. Source: Thomson Reuters Datastream Supply, demand & stocks Short term increase in supply 7 10% 6 8% 6% 5 4% 4 2% 3 0% 2 -2% -4% 0 -6% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1 Stocks (weeks of consumption), l.axis World production (% yoy, r.axis) Period of oversupply from 2014 onward World consumption (% yoy, r.axis) Until 2016, the copper market is expected to remain oversupplied. A fundamentally oversupplied copper market will limit any significant gains in copper prices, but we expect prices to remain at a relatively high level. In 2014 we expect copper prices to improve by 2-3% yoy, based on sound global economic conditions and a better market outlook. We forecast an increase in copper prices through 2015, albeit a slow increase. In the US and Europe (with a respective share of 8% and 18% in world copper consumption) demand is expected to stay robust through 2016, while in China (with a 41% share of world consumption), a lower growth path will ease copper demand. All in all, we think that long-term demand prospects will keep prices afloat. Construction demand will pick-up in the forecast period as well as demand from new end-user growth areas, such as health care, aquaculture and transportation. Source: Metal Bulletin Group Economics price forecast 3-m price (Q1 exit) and year averages Copper (USD/t) Copper (USD/lb) From 26 November until mid-January 2014, copper prices regained strength on improving economic data (especially from the US) and healthy demand prospects. Nevertheless, copper prices remained very volatile. Short-term volatility in copper prices will continue. It will be dominated by on-going uncertainty over issues such as the Fed’s tapering (pace and timing), the strength of the Chinese economy, copper oversupply and the vitality of the eurozone economy. Demand for copper will remain solid. We expect that the Q1 exit price will finish higher, compared to the current spot level. Due to improving economic conditions and the sound market outlook for copper end-using sectors, (such as construction, electronics industries and machinery), copper demand will continue to grow further during 2014. In addition, import demand from China for copper ore will continue. The consensus view, however, is that the market will be oversupplied for the coming year, which should limit any significant further gains in copper price. 3-month 2014 2015 2016 7,475 7,400 7,450 7,350 3.39 3.36 3.38 3.33 Source: ABN AMRO Upside to the forecast: Downside to the forecast: - Recovery in construction (US, EU, China) - Risk aversion and need for liquidity increases - Stronger-than-forecast Chinese economic performance - Weaker growth Chinese economy than expected - Rising Chinese copper import requirements - Funds scaling back their interest in copper as an asset class 15 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Casper Burgering (+31 20 383 26 93) Base metals | Nickel The average price for nickel in 2013, USD 15,023/t, a decline of 14% compared with 2012 We expect that prices will rise in Q1, due to increases in nickel consumption An Indonesian export ban on nickel ore will affect exports in 2014 Volatile nickel prices in 2013 Historical price Nickel Nickel prices moved between a bandwidth of USD 18,662/t (early February) and USD 13,216/t (late November) during 2013. The average price for nickel in 2013 was USD 15,023/t, a decrease of 14% compared with 2012. Melted output by the stainless steel sector (which accounts for 60% of refined nickel demand) decreased, and the orders intake by stainless mills was sluggish. As a result, nickel prices softened. In the first few weeks of 2014, nickel prices have started to recover on the news that Indonesia will ban exports of unprocessed materials, such as nickel ore and bauxite, beginning 12 January. From 1-12 January, nickel prices strengthened by 5%, and reported stocks at LME warehouses stopped increasing. This is in contrast to 2013, when stocks increased by 85%. Short-term prices set to increase Source: Thomson Reuters Datastream Supply, demand & stocks 20 20% 18 15% 16 14 10% 12 10 5% 8 0% 6 4 -5% 2 -10% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0 Stocks (weeks of consumption), l.axis World production (% yoy, r.axis) World consumption (% yoy, r.axis) Source: Metal Bulletin Group Economics price forecast 3-m price (Q1 exit) and year averages Nickel (USD/t) Nickel (USD/lb) 3-month 2014 2015 2016 15,000 15,000 16,000 16,500 6.80 6.80 7.26 7.48 Source: ABN AMRO Indonesia imposed the ban on nickel ore exports to stimulate domestic investments in the industry. China was the biggest customer of nickel ore and Indonesia was the top supplier of (laterite) nickel ore to China (with approximately 50% of its nickel ore volumes delivered to China). The ore was used for the production of nickel pig iron, which, in turn, is used for the production of stainless steel. The export restrictions by Indonesia will affect China’s nickel pig iron production in the short term. For now, China can use its inventories, but it seems most likely that China will also have to source material from other countries. In any case, we expect that the price of refined nickel will increase in the next three months. The market will remain in surplus, which will cap strong increases in prices. Nickel consumption is set to increase strongly during Q1, and demand growth will outpace supply growth. Given the improving outlook for consumer confidence and spending, demand for consumer durables (domestic appliances and white goods) will also increase globally. Long-term strengthening in price Nickel output and demand will remain strong in the forecast period. Both production and usage will continue to grow until 2016. We consider the uptick in demand to be a positive sign for the sector and expect a slow but steady strengthening in prices throughout 2016. The implementation of the Indonesian export ban of nickel ore in 2014 will affect the volume of nickel ore exported. With the imposed ban, availability of (laterite) nickel ore for the production of nickel pig iron (NPI) will decline and prices will strengthen. In the long run, China could start using refined nickel again for producing stainless steel. However, chances are that with upcoming Indonesian elections in April (parliament) and July (presidential), the export ban will return to the agenda. Until that time, nickel ore exports from the Philippines are expected to surge. Shipments from more distant sources (New Caledonia, Australia) are also expected to increase, which will increase shipping costs. We remain confident regarding long-term nickel market developments. Fundamentally, however, the nickel market will be oversupplied in the forecast period, and this will prevent any significant price rally. Upside to the forecast: Downside to the forecast: - Stainless steel output increases on strong demand - Funds scale back their interest in nickel - Supply disruptions and delays in pipeline projects - Weaker growth Chinese economy than expected - Government stimulus spending increases - Substitution by stainless steel industry with lower nickel content 16 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Casper Burgering (+31 20 383 26 93) Base metals | Zinc Zinc prices stabilised during 2013; it was the best performing base metal Indicators show that Q1 market conditions are improving in China and the US Despite a current surplus, forecasts point to a deficit in coming years Stable zinc price in 2013 Historical price Zinc The price of zinc remained fairly stable during 2013 and showed relative mild volatility. In February 2013, zinc prices reached its peak of USD 2,130/t, and touched a low of USD 1,785/t in early May. The average zinc price in 2013 was USD 1,910/t. Zinc price stabilised on 31 December 2013 compared to where it began the year. This is in contrast to aluminium (-14%), copper (7%) and nickel (-19%), which all declined. This made zinc the best performing base metal in 2013. In the same period, zinc stocks at London Metal Exchange (LME) warehouses declined by 24%, while stocks of all other base metals rose. Although the zinc market was oversupplied in 2013, for seven consecutive years demand from major zinc consuming regions has been solid. In 2013, demand in China increased strongly. Also zinc usage in the US managed to increase in 2013, because of a strong revival in construction activity. In Europe, on the other hand, economic conditions for zinc end-using sectors (such as construction and manufacturing) were still difficult. As a result, demand in Europe remained at the 2012 level. Source: Thomson Reuters Datastream Further short term strengthening Supply, demand & stocks 10 20% 9 15% 8 7 10% 6 5 5% 4 0% 3 2 -5% 1 -10% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0 Stocks (weeks of consumption), l.axis World production (% yoy, r.axis) World consumption (% yoy, r.axis) Long term perspectives stay buoyant Source: Metal Bulletin Group Economics price forecast 3-m price (Q1 exit) and year averages Zinc (USD/t) Zinc (USD/lb) Although austerity measures have put a cap on construction & infrastructure spending in most parts of the world, dampening zinc demand, conditions improved during the third quarter of 2013 and into 2014. Manufacturing data from the US and China have improved, construction activity is recovering and stocks at LME warehouses decreased by 5% in the first few weeks of 2014. Demand from China will continue to be the most relevant factor directing the zinc price in the future. We expect China’s monthly refined zinc imports to remain sound in Q1. Other indicators also show that conditions are improving in major zinc consuming sectors, especially in China and the US. Consumption from the galvanised steel sector will improve further. Galvanised steel, which is steel with a coating of zinc, represents approximately 50% of total zinc usage. It is widely used in infrastructure, construction and car manufacturing. Conditions in Europe should also start to turn for the better, and sentiment among galvanisers seems to be improving. This bodes well for zinc end-user demand and price. 3-month 2014 2015 2016 2,140 2,150 2,250 2,300 0.97 0.98 1.02 1.04 Source: ABN AMRO Zinc fundamentals will improve slowly but steadily in the forecast period and as a result, the price of zinc will be trending higher. Although the market is currently in surplus, data and forecasts show that a deficit is very likely in the coming years. There are a number of zinc mines set to be closed, which will add pressure to the future supply and demand balance. Zinc demand is expected to increase further in the forecast period, but the pace will be relatively slow. The output of refined zinc will also grow. The macroeconomic outlook in all major zinc end-using countries is positive until 2016, although the Chinese economy is expected to slow gradually. Despite the rebalancing of the Chinese economy, the level of investments is expected to remain elevated. Upside to the forecast: Downside to the forecast: - Demand recovery in major zinc-consuming countries - Sharper weakening of Chinese housing/construction sector - Rising use of galvanised sheet in China - Substitution of zinc for aluminium in e.g. automotive die-casting - More mine closures than currently foreseen - Weaker growth Chinese economy than expected 17 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Casper Burgering (+31 20 383 26 93) Ferrous metals | Steel (global HRC) In China and Europe, conditions are still challenging with continuing supply-side pressures The steel industry in China will continue to see supply pressures and weak seasonal demand We expect that steel demand in Europe will undergo a revival during 2014 Overcapacity in China en Europe Historical price steel (USD/t) Global steel prices stabilised during 2013. On the first of January, steel prices were USD 581/t and they finished on 31 December at USD 583/t, a gain of only 0.3%. Steel prices in China (-5%) and Europe (-4%) decreased during 2013, while in Latin America, CIS and the US they managed to appreciate. Steel prices increased in the US by more than anywhere else, mainly due to upbeat conditions, strong manufacturing data (Purchasing Managers Index (PMI)) and healthy domestic consumption by service centres and end-users, especially in the automotive and construction industries. But despite increased demand, US crude-steel production decreased by 2.1% through November. As a result, lead times increased and steel inventories fell. In China and Europe, conditions are still challenging with continuing supply-side pressures. In Europe, steel mills reacted to the change in market conditions by cutting capacity. Steel output through November fell by 2.8%. In China, however, there is little evidence of producer discipline. Output through November in China increased by 8.4%. Source: Thomson Reuters Datastream Short-term challenges In China, the general sentiment in the steel industry is expected to stay relatively weak, with increasing inventories, low manufacturing PMI indicators and further softening in domestic steel demand. Conditions in the US, however, will continue to improve. As the US economy continues to expand, steel end-users and steel-buying activity is expected to increase. Not only will end-user demand increase (driven by the solid outlook for car sales and the continued recovery of the construction sector), but also steel purchasers (such as service centres) are expected to source more material in order to avoid future price hikes. Economic conditions in many other international steel markets will continue to be driven by uncertainty. For the next three months, there will continue to be supply pressures in the Chinese steel industry. Overcapacity and weak seasonal demand, based on infrastructural project suspensions because of weather conditions and the holiday season, will soften prices. Conditions in Europe are improving somewhat, with industrial production gaining momentum and sound manufacturing PMI levels. Steel production & world trade (y-o-y % change) 50% 40% 30% 20% 10% 0% -10% 2010 2011 2012 2013 China steel production World (ex. China) steel production World trade Source: IISI, Thomson Reuters Datastream Long term relief Group Economics price forecast (USD/t), 3-m price (Q1 exit) and year averages Steel (HRC, global) 3-month 2014 2015 2016 570 560 540 535 Source: ABN AMRO Market conditions in the US and Latin America are expected to improve further and we expect price strength in these regions. Overcapacity will remain a problem in the forecast period (especially in China and Europe). Although China has a strong interest in tackling its overcapacity problem, we don’t expect any significant changes in 2014. The rebalancing strategy in China – towards consumption instead of investment – will lead to lower GDP growth starting in 2015. A slowdown in economic growth and in government spending on infrastructure and construction will soften demand for steel, but demand will remain relatively high. So far, the capacity cuts by steel mills in Europe have helped to rebalance the market. We expect that European steel demand will revive during 2014, which will result in some price strength in the forecast period. Upside to the forecast: Downside to the forecast: - Economic stimulus packages by governments - Strong decline in steel demand in China - Strong pick-up in steel demand from key sectors - Economic stagnation of EU and Chinese economies - Permanent shutdown of Chinese capacity (small mills) - Continued oversupply of steel and limited producer discipline 18 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Casper Burgering (+31 20 383 26 93) Ferrous metals | Iron ore (fines) Despite strong import demand from China during 2013, iron ore price decreased by 4.6% Market conditions in the steel sector have turned for the better in regions such as the US and Europe We expect that iron ore supply will add to downward price pressure until 2016 Oversupply in 2013 Historical price iron ore (fines, USD/t) In December 2013, China’s imported volumes of iron ore increased by 3% on a yearly basis, but decreased by 6% m-o-m. Over 2013, China’s total imported volumes of iron ore grew by 10% y-o-y. Imports of iron ore from top supplier Australia (56% of all deliveries to China), gained 19% until November, while imports from Brazil (20% of all deliveries to China) declined by 4% in the same period. A new mining law in Brazil (which made iron ore producers wary of significant production increases), caused a drop in export volumes. During 2013, iron ore deliveries from Iran to China increased significantly, by 32% until November. But despite the strong import demand from China, the iron ore price decreased by 4.6% during 2013. On 1 January, the iron ore price stood at USD 141 a ton (/t) and ended at USD 134.5/t on 31 December. Apparently, supply pressures have started to mount during 2013 for the international iron ore market, with enough iron ore available in the market to service any increase in demand. Source: Thomson Reuters Datastream Short term pick-up in price Chinese iron ore import & steel production (10,000 Mt) 9000 8000 7000 6000 5000 4000 3000 2000 1000 Import iron ore 2013 2011 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 0 Steel production Source: Thomson Reuters Datastream, IISI Group Economics price forecast (USD/t), 3-m price (Q1 exit) and year averages Iron ore (fines) 3-month 2014 2015 2016 130 128 115 115 Source: ABN AMRO The iron ore price is expected to stay strong on seasonal factors. Firstly, ahead of the upcoming holiday period in China (the New Year celebration, with seven consecutive days of holiday), we expect some increase in buying activity in China, because mills want to have sufficient supplies and secure deliveries for the period after the holiday season. However, due to credit tightness and high stocks, a significant increase in buying activity – by mills and traders – is not expected. Secondly, during the first few months of each year, top suppliers – such as Australia and Brazil – enter a ‘wet season’ and this will negatively affect export volumes. The weather has already haltered some mining operations and shipments. Lower export volumes will result in relative high prices. On the fundamental side, we also expect a modest revival. Market conditions in the steel sector have turned for the better in regions such as the US and Europe. As a result, steel demand is improving in these regions and leading indicators – for the real estate & construction sector, the car manufacturing sector and the industrial sector – are pointing upwards. However, there will be still enough iron ore supply in the market to meet iron ore demand and this will limit any significant gains in price. Long term pressures from supply-side In the iron ore market, oversupply is a much-discussed topic. According to the United Nations Conference on Trade and Development (UNCTAD), the total iron ore project pipeline consists of 771 metric ton of new production capacity, which is scheduled to come on stream between 2013 and 2015. This increase in supply can be fully absorbed by the steel industry if production increases sufficiently in the coming years. In our view, it seems unlikely that steel production will experience a growth path similar to iron ore in coming years, given the relatively weak steel demand growth projections. Therefore, we expect that supply growth in the iron ore market will outpace steel production growth until 2016. We believe iron ore supply will add to price pressure until 2016 and we therefore expect a gradual softening in prices during this period. Upside to the forecast: Downside to the forecast: - Infrastructural problems, unfavourable weather conditions - Shut-down of steel capacity (small mills in China) - Expansion of government policies limiting total exports - Economic stagnation EU and Chinese economy - Government stockpiling strategies - New mining capacity entering the market 19 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Casper Burgering (+31 20 383 26 93) Ferrous metals | Coking coal Australia exports more coal than any other country; through October exports grew by 18% yoy Chinese steelmakers are becoming more willing to externally source material Import demand from Asian countries will remain firm, but the pace of growth will decline Historical price coking coal Stocks are high Source: Metal Bulletin, Thomson Reuters Datastream Short-term supply remains sufficient Coking coal international trade (y-o-y % change) 100% 200% 150% 50% 100% 50% 0% 0% -50% -50% -100% 2012 Spot coking-coal prices have softened on increased output and subdued buying activity with limited spot market transactions. Coking-coal prices have been in a downtrend since May 2011, losing 57%. At the current (relatively low) level of spot and contract prices for deliveries from Australia, compared with spot rates in China, Chinese steelmakers are more willing to source material externally. The Asian region will remain the key driver of this market, mainly because of the many planned infrastructure and construction projects for which large volumes of steel are needed. China, in particular, is the country that should be followed closely. A further boost of urbanisation initiatives in the near future by the Chinese government seems very likely. But stocks at Chinese ports are still high and credit is tight. Therefore, we expect coking-coal prices to soften further over the next three months. 2013 Long term downward pressure on price Japan import (l.axis) Australia export (l.axis) China import (r.axis) Source: Thomson Reuters Datastream, Clarksons SIN Group Economics price forecast (USD/t), 3-m price (Q1 exit) and year averages Hard coking coal China, the world’s top importer of coking coal, has strongly increased imports on a yearly basis. As a result, Chinese stocks are currently high. Through November 2013, Chinese coking-coal imports have surged by 46% yoy. The monthly pattern over the year has been volatile, with strong monthly swings of -28% yoy (June 2013) to +200% yoy (September 2013). Through October, Japan’s coking-coal imports have increased by 6% yoy. Firm crude-steel output through November (growing by 3% yoy) has supported a recovery in coking-coal imports. Australian exports through October grew by 18% yoy; it remains the highest exporter by volume, followed by the US. Approximately 25% of Australian coking-coal exports is shipped to China. The increase in Australian exports was also the result of improved mining conditions in Australia and infrastructure problems in other coal areas of the world. But despite the strong increase in Australian exports, the price for Australian hard-coking coal has been declining since October 2013, losing 8%. 3-month 2014 2015 2016 133 135 130 129 Source: ABN AMRO Asian countries (especially China) will drive international coking-coal demand and will continue to drive market developments in the long term. The outlook for import demand from Asian countries (for high-quality coking coal) is expected to remain firm until 2016, but the pace of growth will decline. Due to the rebalancing strategy of the Chinese government (towards a more consumption-led growth model), commodities demand growth (including coking coal) will soften. In addition, the substitution of gas for coking coal is expected to continue. The big mining companies in Australia, such as Rio Tinto and Glencore, will continue to increase production in 2014 and further, while in the US, output is expected to contract in the coming years, due to the high costs of mining per tonne and the relative low cash prices per tonne. We expect that downward pressure on hard coking-coal prices will continue through 2016. We expect that future supply growth from pipeline projects will outpace demand growth. Upside to the forecast: Downside to the forecast: - Supply problems (weather-related) in major supplying countries - Stronger decrease in steel demand - Other coal supply difficulties (strikes, export limits, regulations, etc.) - Economic stagnation EU and Chinese economies - Government coal stockpiling strategies - Steel mills switching to (cheaper) alternatives (PCI or gas) 20 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Hans van Cleef (+31 20 343 46 79) Agriculturals | Wheat Wheat prices dropped to a fresh 3.5-year low Situation of ample supply is likely to remain, limiting the upside potential for prices Near-term short covering may result in some support, but pressure will return in H2 2014 Historical price wheat Production surplus looms in 2013/2014 crop year Wheat prices declined by more than 30% in the 2013 calendar year. Among soft commodities, only corn performed worse. Wheat prices dropped to USDc 567/bushel, a 3.5-year low. One of the main reasons for the strong pressure on wheat prices was ‘the corn effect’. That is, corn became so cheap, it dragged down wheat, which also has ample global supplies and partly due to substitute demand from wheat to corn. As a result, US wheat export slowed and this, combined with favourable conditions for the next crop, led to increased pressure on wheat prices. A recent extra purchase by Egypt (295,000 tonnes offered by five different suppliers) was not enough to stop the downtrend. Recent International Grain Council (IGC) data suggest that, for the first time in three years, consumption will not outpace production for the 2013/2014 crop. This is mainly the result of increased production in the US and China. The IGC November update showed an increase of two million tonnes (mt) in both production and consumption. The 2013/2014 forecasts call for 698 mt of production and 692 mt of consumption. The IGC did not change its 2012/2013 crop estimates. According to the US Department of Agriculture (USDA), both production and consumption will be somewhat higher, namely respectively 712.7 mt and 698 mt year-on-year. Source: Thomson Reuters Datastream Wheat production and consumption Wheat prices may recover, but upside is limited Source: IGC Group Economics price forecast (Cts/bu) 3-m price end of quarter and year averages Wheat 3-month 2014 550 550 2015 2016 - - World trade could continue to rise, mainly driven by Chinese demand. Nevertheless, this should be easily balanced by the large stocks. For the coming months, it could be that prices become so low that it triggers some extra import demand. But, we believe that such a revival will be short-lived as the 2014 harvest in the second half of the year may replenish stocks. That would result in new price pressures. Other supportive factors could be Chinese buying and Iranian imports when sanctions are partially lifted. However, wheat demand could also ease somewhat if it is replaced by corn, especially when corn prices become even cheaper. IGC projections show that the upside in global wheat production is limited, due to competition from other crops for available land. If there would be an increase in production, it will most likely be in the Black Sea region. Looking at the current crop year (2013/2014), ample supply will likely remain. This will result in very limited upside potential for prices, unless it is driven by speculative short covering. Assuming normal weather conditions, we expect wheat prices to ease further, resulting in a three-month forecast of USDc 550/bushel. The 2014 average price is set at USDc 550/bushel as well. Source: ABN AMRO Upside to the forecast: Downside to the forecast: - Production risks, due to adverse weather in production areas - Slower growth than expected - Less availability than expected of alternative feed grains - Better weather conditions leading to adjustment in crop outlook 21 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Hans van Cleef (+31 20 343 46 79) Agriculturals | Corn Corn was the worst performing commodity in 2013 Ample supply is likely to continue, but downward pressure will ease Corn prices expected to stabilize around USDc 430/bushel Corn prices stabilized after steep decline Historical price corn Corn was the worst performing commodity of 2013. Corn prices declined by 42% to a low of USDc 414.50/bushel in January. It is currently trading around a 3.5-year low. Nevertheless, by far the biggest part of the decline was seen in the first part of 2013, through August. After that, corn prices stabilized and showed only some moderate pressure. Spot prices even shifted above the 200-day moving average. This may look somewhat surprising, but lower export prices in Argentina and the Black Sea region were countered by higher export prices in the US and Brazil. In January, the US Department of Agriculture (USDA) revised its estimates for the 2013/2014 US corn ending stocks. Owing to lower output and higher demand, the surplus was somewhat cut back. Nevertheless, the USDA still forecasts a US surplus that is twice the size it was in 2012/2013. The same trend is recognized in a report from the International Grains Council (IGC). The IGC expects global production to increase by 10% to a record 950 million tonnes (mt), mainly driven by a rebound of US and Russian production. Production in Argentina and Brazil is expected to decline from last year’s record crops. The IGC believes that stocks will recover due to a faster increase in production. Consumption is also set to increase significantly, bringing it to unchartered territory. IGC expectations are for an increase to a record 922 mt in 2013/2014 from 864 mt in 2012/2013. This is in line with the Economist Intelligence Unit (EIU) forecast. The EIU indicates that the increase in demand can, for a large part, be explained by an increase in meat consumption, which supports corn for feed use. Source: Thomson Reuters Datastream Corn production and consumption Ample supply not pushing corn prices much lower Source: IGC Group Economics price forecast (Cts/bu) 3-m price end of quarter and year averages Corn 3-month 2014 420 430 2015 2016 - - Source: ABN AMRO With corn prices stabilizing, we believe that another steep decline in 2014 is not very likely. Record crops are priced in and also from a speculative viewpoint, the biggest decline seems to be behind us. Nevertheless, this does not automatically mean that corn prices are now set to rally. After all, the effects of a smaller planted area for corn, due to the substitution with better priced soft commodities, will probably not be seen before the next crop year (2014/2015). In fact, some pressure is still in the cards, as more supply will hit the market in the coming months. In addition, according to IGC data, it seems that many farmers are still undersold compared to previous seasons. IGC expects the corn market to remain well supplied over the next five years, with growth in consumption being mostly balanced by the increase in production. As a result, we expect corn prices to trade around current levels with some downside risks, based on the earlier mentioned arguments. Therefore, we set our three-month forecast for corn at around USDc 420/bushel. Our expected 2014 average price is slightly higher, namely USDc 430/bushel. Although upside potential is limited, the reason for the somewhat higher average price is that corn short positions may be cut back somewhat as the current crop year is nearing the end of the harvest. Furthermore, with a lower surplus expected for the next crop year, and looking at current price level, more pressure seems not likely either. Upside to the forecast: Downside to the forecast: - Weather-related problems in the main corn-producing countries - Larger-than-expected production in Latin America - Stronger increase in the use for biofuels 22 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Marijke Zewuster (+31 20 383 05 18) Agriculturals | Soybeans China expects imports to rise by around 10% But production will continue to outpace demand Resulting in rising stocks and lower prices 2012/2013: not a bad production year at all Historical price soybeans The United States Department of Agriculture (USDA) in its 10 January World Agricultural Supply and Demand Estimates (WASDE) report, estimates that world soybean production has risen from 239 million metric tonnes (mt) in 2011/2012 to 268 mt in 2012/2013, an increase of 13%. Production increases in Argentina and Brazil (both up by 23% yoy) and a more than doubling of production in Paraguay, more than compensated for a fall in US production due to adverse weather conditions. Total soybean exports also rose strongly from 92.3 million mt in 2011/2012 to 99.9 million mt in 2012/2013, while the export of soybean meal fell slightly from 58 million mt to 57.2 million mt. Brazil overtook the US as the main exporter of soybeans, with a 42% share of total exports, while Argentina remains the biggest soybean-meal exporter with a share of 41%. Total ending stocks of both soybeans and soybean meal continued to increase, with soybean stocks up by almost 10% according to WASDE estimates. Source: Thomson Reuters Datastream Consumption and production will continue to increase Soybeans production and consumption Source: USDA Group Economics price forecast (Cts/bushel) 3-m price end of quarter and year averages Soy 3-month 2014 2015 2016 1,280 1,200 - - Source: ABN AMRO The Economist Intelligence Unit forecasts a 5% yoy increase in global soybean consumption in the coming two years. Increasing wealth in China will continue to underpin the demand for soybeans for feed use and hence stimulate soybean production and trade. China imports more than 80% of its consumption needs and this represents around two-thirds of total soybean production. The China National Grain and Oils information centre expects imports to rise by around 10% yoy in 2013/2014 to 66 million mt, while the WASDE report estimates even higher imports of 69 million mt. This is a 15% increase from the 60 million mt in 2012/2013. Due to good weather conditions and price conditions, which, at least for producers in Brazil, are in favour of soybeans instead of corn, the projected increase in production continues to exceed the increase in consumption. In January, the USDA increased its estimate for 2013/2014 production from 285 million mt to 287 million mt. Brazil is expected to have another record harvest of 89 million mt, up from an estimated 88 million mt in December. Conap, the Brazilian government food supply agency, even raised its forecast to 90 million mt. This is almost 11% higher than the record 81.5 million mt harvest of 2012/2013. According to the Minister of Agriculture Antonio Andrade, the crop could even be as high as 95 million mt. This is due to better yields and an increase of almost 7% in hectares planted, while the hectares of corn planted has declined by almost 6%. The outlook for the Argentine crop are also favourable, as rainfall has improved soil conditions. As production will continue to outpace consumption, downward pressure on soybeans are expected to continue. As a result, we have lowered our average price forecast for 2014 from 1250 to 1200. Upside to the forecast: - Weather-related problems in the main soybean-producing countries threatening harvests - Feed demand in Asia increases more sharply than expected Downside to the forecast: - Much larger crops than expected 23 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Hans van Cleef (+31 20 343 46 79) Agriculturals | Sugar Steep downtrend resumed after a revival in October Oversupply will likely continue, but focus will be on Brazilian policy and Indian exports ABN AMRO expects sugar prices to trade, on average, around USDc 15.50/lb in Q1 2014 Renewed price pressure after temporary recovery Historical price sugar After the steep downtrend as a result of a worldwide oversupply, sugar prices saw a temporary recovery in September and October. This recovery was partially triggered by a fire at two Brazilian sugar warehouses. However, the revival was only short-lived as the rally was driven by speculation (profittaking on short positions and worries of possible lower supply due to the fire), and did not reflect fundamental drivers. Price pressure resurfaced in November and still continues. All in all, sugar prices are down by more than 53% since the peak in February 2011. Currently, ICE raw sugar prices trade just slightly above USDc 15/lb, which is a 3.5-year low. A market surplus and weak physica demand in the fourth quarter were seen as the main reasons for the pressure on sugar. The weakening of the Brazilian real and the Indian rupee were not helpful either and depressed sugar prices even more because of lower receipt in local currencies. This could demotivate farmers. The ISO forecast that world sugar in 2013/2014 will be 4.7 million tonnes (mt) and with weak world prices, we should start to see a production response in 2014/15 as some farmers look to curtail expansion plans, consider alternative cash markets and lower cane field husbandry. Source: Thomson Reuters Datastream Sugar production and consumption Oversupply versus weather conditions Source: ISO Group Economics price forecast (Cts/lb) 3-m price end of quarter and year averages Sugar 3-month 2014 2015 2016 15.50 16.00 - - Source: ABN AMRO In an election year, the Indian government has been grappling with ways to support domestic sugar prices to curry favour with the 50 million voters who are dependent on sugar as their primary source of income. With the combined carry over stock and this season’s production surplus at around 8 mt, domestic prices have been in steep decline with the domestic futures market dropping under USD 450/mt this week, but still remain around $40/mt above London white sugar futures. The plan being considered by the government is to give tax incentives to raw sugar exports, but no decision has yet been taken on the levels or modalities and the threat of Indian exports overhangs the market. The 2013/2014 Central-South Brazil cane harvest is vitually complete with a record 594 mt crushed producing 34 mt of sugar and 25 billion litres of ethanol according to UNICA. We think that cane output in the forthcoming 2014/15 campaign could hit 625 mt on account of the improving agricultural yield per hectare due to the younger age profile of the ratoon, but with capacity restraints and a weak world market, we are only expecting sugar output to increase by around one mt with ethanol output set to surge. This oversupply, in combination with slow demand and a weak Brazilian real, will prevent sugar prices from a significant recovery. Consequently, we expect sugar prices to remain trading within the USDc 1417/lb range in this quarter. For the remainder of the year, price development will strongly depend on weather-related issues. A trading range of USDc 1318/lb seems very likely. All in all, the attractiveness of long positions is limited as there are a number of weak fundamentals painting a bleak picture for sugar, including funds still being short, slowing index activity, tapering by the US Fed, a US dollar recovery with a weakening of the Brazilian real as a result, rising yields and attractive equity markets. Upside to the forecast: Downside to the forecast: - Weather-related production risks in big production areas - Economic recovery takes longer - Unexpected increase in Chinese imports - Lower biofuel demand - Increase of ethanol production is even bigger than expected 24 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Hans van Cleef (+31 20 343 46 79) Agriculturals | Coffee Strong buying resulted in stabilisation of Arabica prices in Q4 Brazilian crop crucial for the direction of Arabica in the coming months Robusta: Vietnamese crop strong, but growers are holding back from selling Historical price coffee Large supplies and disease drove market Vietnamese growers have been holding back from selling with only circa 30% sold by the end of January, as was hinted at in our previous Quarterly Commodity Outlook. Although a larger crop is expected for this season (expectations are for 10% increase), only 10-15% of the crop was sold in December. Traditionally, half of the crop is sold before Tet, or Chinese New Year. So, with a larger proportion of the crop selling delayed, Robusta prices are arguably trading higher as a result. The price of Arabica has been declining for some time. Since the high reached in May 2011, levels have declined in almost a straight line towards a low of USc 105/lb (-66%). Finally, in December, a recovery pushed Arabica coffee prices out of their steep downward trading channel. There were three reasons for this bottoming out. First, a reweighing of indices, which resulted in roughly 4,000 lots of buying. Secondly, major trade houses revised lower the forthcoming Brazilian crop estimate down to 51 million bags. And thirdly, the December rains in Brazil hurting crops. As a result, and due to a disparity in views, the consensus opinion to sell short now appears to be over, replaced by a more neutral stance in the near term. The number of short positions reduced from 40,000 net short at the beginning of November to 10,000 in the last commitment of traders update. Source: Thomson Reuters Datastream Coffee: production and consumption Downside is limited despite record crops Source: USDA Group Economics price forecast (Cts/lb) 3-m price end of quarter and year averages 3-month 2014 120 125 Arabica 2015 - 2016 - Source: ABN AMRO When we look at the Robusta contract we see that prices stabilised in November after the steady decline since March. The focus for the coming months will be on the Vietnamese crop which will continue be important to monitor. Since crop harvesting started in December, initial data should have given an indication of the final outcome. But as stated, Vietnamese growers have been holding back from selling. As said, traditionally, farmers sold about 50% of their crop before the Chinese New Year in order to cover their costs. Currently, this activity is much lower than usual, as the Vietnamese speculate to see if they can get a better price at a later date. Secondly, we must keep an eye on the forthcoming Indonesian crop which is estimated to be 10% lower than last year. Some questions remain, however, with Vietnamese differentials are not at very appealing levels. How are certified stocks going to increase if the market is not going to be allowed to reach tenderable parity? We expect Arabica prices to continue to stabilise and to trade at around USc 120/lb in the forthcoming months. For 2014, we expect prices to increase at a moderate pace, which should result in an average price of USc 125/lb. Upside to the forecast: Downside to the forecast: - Coffee production’s sensitivity to weather conditions - Downturn in the global economy - In the long term, the switch from a world surplus to a deficit as - Anticipation of another year of large harvests stocks dwindle 25 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Hans van Cleef (+31 20 343 46 79) Agriculturals | Cocoa Global grinding data are strong Deficit expected by ICCO, but strong arrivals create the possibility of a revision Speculative long positions could result in more support: three-month outlook USDc 2900 Positive signals from grindings data Historical price cocoa According to the European Cocoa Association, European fourth-quarter cocoa grindings rose by 6.2% (to 348,406 tonnes) from the same period last year. In reaction, cocoa outright prices appreciated, as the market was positively surprised, expecting an increase of just 5%. In the US, data from the National Confectioners Association showed that North American cocoa grindings rose by 4.37% in Q4 2013 (to 125,332 tonnes). Here, the price impact was less strong, as the market was expecting a better outcome. Nonetheless, it is was still another positive number year-on-year. Asian grindings rose by 10% to 170,684 tonnes in Q4, as was indicated by the Cocoa Association of Asia. This brought the 2013 full-year grindings to 639,500 tonnes (or +5.4% compared to 2012). This was also a positive reading, which indicates that disappointing harvesting data seem to be unlikely for this season. The International Cocoa Organisation (ICCO) revised its world 2012/2013 deficit to 3.931 million tonnes compared to 3.986 million tonnes three months ago. The ICCO revised its production surplus estimate for the 2011/2012 season down to 83,000 tonnes from 87,000 tonnes. Nevertheless, the ICCO expects a much larger deficit of around 160,000 tonnes during the 2012/2013 crop year (54,000 tonnes last quarter). Source: Thomson Reuters Datastream Cocoa beans production and grinding Higher prices due to speculation despite strong crop Source: ICCO Group Economics price forecast (USD/t) 3-m price end of quarter and year averages Cocoa 3-month 2014 2015 2016 2,950 3,025 - - Source: ABN AMRO The arrival of cocoa at main ports in Ivory Coast indicate that the current crop (2013/2014) is going very well. As of January 19th arrivals since 1st October have reached 1.05m tonnes, compared to 806,000 tonnes in the same period last year. This is a 24% increase and suggests that the total crop could reach a level of 1.5 million tonnes or more. Also, when we look at other crops in cocoa-producing countries, we see increased production in general. Nevertheless, cocoa prices increased significantly during the third and fourth quarter of 2013 with futures prices touching a three-year high. One factor for the strong support was not necessarily all supply-driven worries, but instead related to speculative involvement. Large fund positions were increased significantly as adverse weather fears and continued strong demand triggered the rally in cocoa prices drawing in further speculative buying into one of the few commodities showing upside strength at the time. The start of 2014 has seen these speculative long positions begin to fall and the market has now entered a more balanced period. Support still remains however with the ICCO still expecting a deficit for the coming years. We believe that this deficit forecast is open to revision, given the strong arrivals in Ivory Coast although patchy rains could potentially impact the mid-crop which runs from April until September. We believe that the expectations of a strong harvest will continue to cap the upside potential of cocoa prices in the near term. As a result, we expect cocoa prices to trade at USD 2900/tonne at the end of April. However reduction in stocks as reported by ICCO and demand rising we expect cocoa prices to continue on an uptrend for the course of the year. Therefore, for 2014, we expect that the ICE cocoa price will rise, resulting in a yearly average of USD 3000/tonne. Upside to the forecast: Downside to the forecast: - Cocoa production’s sensitivity to weather conditions - Downturn in the global economy - High vulnerability of the cocoa crop to diseases - Unwinding of speculative long positions 26 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Macro-economic data | Leading indicators supporting commodity price forecasts Macro-economic Forecasts ABN AMRO Group Economics GDP growth (% y-o-y) US China Japan EU UK Germany World Inflation (CPI, % y-o-y avg) 2012 2013e 2014e 2015e 2012 2013e 2014e 2015e GDP per cap USD 2012 2.8% 1.7% 3.2% 3.8% 2.1% 1.5% 1.9% 2.2% 51,704 7.7% 7.5% 7.5% 7.0% 2.6% 3.0% 3.4% 4.1% 9,055 2.0% 1.9% 1.9% 1.5% 0.0% 0.3% 2.7% 1.1% 35,855 -0.6% -0.4% 1.3% 1.8% 2.5% 1.4% 0.4% 0.8% 31,571 0.2% 1.5% 3.0% 2.8% 2.8% 2.8% 1.7% 2.0% 36,569 0.9% 0.5% 1.9% 2.2% 2.0% 1.5% 1.0% 1.4% 38,666 2.9% 2.7% 3.7% 3.8% 3.9% 3.9% 3.9% 3.7% 11,964 Forecasts from 18th of December 2013 by ABN AMRO Group Economics GDP Forecast Developed and Developing Countries Regional Manufacturing PMIs (index) US Germany 60 Consumer Prices per region (change in CPI, % y-o-y) UK 56 Russia 52 Europe 48 44 World % change y-o-y Japan 40 India France China Italy Brazil november 2013 Spain december 2013 neutral 160 20% 140 120 10% 5% 100 0% 80 -5% 60 -10% 40 -15% 20 -20% 0 2008 2009 2010 2011 2012 2011 US 2012 2013 Japan 2014 China Business & Consumer Confidence Euro Area World Trade (volume index) and y-o-y % change 15% 2010 EU27 25% -25% 2007 7 6 5 4 3 2 1 0 -1 -2 -3 2009 10 5 0 -5 -10 -15 -20 -25 -30 -35 -40 2013 World trade (l.axis, y-o-y % change) World trade balance (r.axis, volume index) Consumer confidence indicator Euro Area Business confidence indicator Euro Area Consulted sources for this publication: Economic forecasts, insights and publications from ABN AMRO | Group Economics, Metal Bulletin, Commodities Now, Mining Journal, Coaltrans, Bloomberg, IGC, IISI, ISSB, NBS, IGC, IEA, Baker Hughes, ICCO, ICO, USDA, China Mining, Clarkson Research Services, ABARE, AME, Thomson Reuters Datastream, World bank, ECB, Eurostat, IMF 27 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Contributors E-mailbox of Group Economics: [email protected] Group Economics: Contact information ABN AMRO | Group Economics (in order of appearance): Primary area of expertise: Phone: E-mail: Head Macro Research +31 20 343 56 16 [email protected] - Georgette Boele Precious Metals, top down +31 20 629 77 89 [email protected] - Hans van Cleef Energy, Soft commodities +31 20 343 46 79 [email protected] - Casper Burgering Ferrous and Non-ferrous metals +31 20 383 26 93 [email protected] +31 20 383 05 18 [email protected] +31 20 628 04 89 [email protected] - Nick Kounis - Marijke Zewuster - Theo de Kort Head Emerging Markets & Commodities, Soft commodities Information specialist More information: Websites Group Economics - Internet Group Economics (Macro Research and theme reports, including commodities): English: insights.abnamro.nl/en/ Dutch: insights.abnamro.nl/ All publications of ABN AMRO on macro-economics and sector developments can be found on: insights.abnamro.nl/en. You can also download our Market Insights App on abnamro.nl/marketinsights or directly in de App Store. Follow Group Economics on Twitter: https://twitter.com/sectoreconomen 28 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics Disclaimer & further information © Copyright 2014 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO"), Gustav Mahlerlaan 10, 1082 PP Amsterdam / P.O. box 283, 1000 EA Amsterdam, The Netherlands. All rights reserved. This material was prepared by ABN AMRO Group Economics Sector Research and ABN AMRO Private Banking International. It is provided for informational purposes only and does not constitute an offer to sell or a solicitation to buy any security or other financial instrument. While based on information believed to be reliable, no guarantee is given that it is accurate or complete. 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