Quarterly Commodity Outlook

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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
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