Smart commodity picks for 2018

G Chandrashekhar | Updated on March 09, 2018 Published on December 31, 2017

Many growth-oriented commodities are likely to perform better than in 2017

The positive correlation between global economic growth and commodity consumption is well recognised. The year 2018 is likely to witness broad-based and continued strong expansion in the world economy with some forecasts placing GDP growth at 4 per cent, up from 3.7 per cent in the previous year. In other words, the macro underpinnings of demand look constructive.

By implication, this year, many growth-oriented commodities are likely to perform better than they did in 2017. The year will, of course, not be without challenges.

Although commodity markets are usually driven by a host of critical factors — economic growth, geopolitics, monetary policy, currency gyrations and weather — the primary risk to commodity markets in 2018 may come from the political side and, to a lesser extent, from the divergent monetary policies of central banks.

Both demand side and supply side factors will come into play in the year ahead; and will impact price performance, depending on the market fundamentals of individual commodities.

For a volatile market such as that of commodities, it is necessary not to be influenced by more recent price action; instead, one must examine broader trends likely to impact the market.

For metals in particular, critical sectors such as automotive, construction, engineering and metal goods are expected to perform well.

Here are the top five performers of 2018 based on constructive market outlook and reasonable safety of investment.

Copper: Demand-supply mis-match to help

After two consecutive years of unplanned mine disruptions, supplies are expected to swing back by about 3 per cent. However, in recent years, the investment in new mine projects is insufficient.

The demand side looks robust with strong consumption indicated for a host of applications, including power grids as well as white goods such as refrigerators and air-conditioners.

Refined supply shows below trend growth.

As for refined production, under the lead of China, world production is expected to be 24.38 million tonnes (mt) while consumption, again under the lead of China, is estimated higher at 24.46 mt, resulting in a small, refined market deficit. So, robust demand growth combined with limited supply growth and falling exchange-held copper stocks is reason to be bullish on copper. But the market is set for a pull-back in the short term — in Q1 and Q2 of 2018 — to mid-$6,000 levels caused by slowdown in Chinese consumption. In the second half of the year fundamentals will catch up and lift copper prices higher.

The metal has the potential to move up from around $6,300-6,500 a tonne in H1 to above $7,000 a tonne in H2 2018. Indeed, 2019 may turn out to be an even better year for the metal, creating an investment opportunity in H1 2018 for price gains in subsequent quarters.

Nickel: Supply deficit to push prices higher

Although the recent price performance of nickel is largely attributed to growing interest in electric vehicles and the batteries that power them, the truth is that while batteries account for just about 3 per cent of nickel usage, the stainless steel industry consumes about two-thirds of the nickel produced globally.

Having swung into deficit in 2016, the nickel market is set to stay there. For 2018, refined production is estimated at 2.10 mt while consumption is estimated higher at 2.17 mt. Excess inventories in China are substantially drawn down.

Need for more clarity on the mining and ore export policy of the Philippines and Indonesia has created uncertainty over supplies. Global stainless steel production is set to grow at a far slower pace in 2018 amid de-stocking and reduction of excess capacity in China. But the outlook for the global economy is solid and investments in new stainless capacities are flowing in. That makes the outlook for nickel positive in terms of price performance.

From Q2 onwards, the nickel market is set to gradually gain price strength and move to $12,000-12,500 a tonne levels. Supply disruptions can potentially push this higher.

Lead: Higher demand to drive rally in the metal

While lead enjoyed a 20 per cent rally in price in 2017, the market in 2018 is expected to turn increasingly tight and move into deficit.

The stock cover too is set to fall during the year.

Without doubt, the long-term outlook for the metal is clouded by the threat of demand substitution as the global auto industry moves towards electric vehicles and, by implication, away from lead-acid batteries.

However, penetration of electric vehicles is still a few years away — perhaps after 2020; while hybrids may stay for a while, promoting demand for lead-acid batteries.

The supply-demand balance in 2018 is bullish. While refined lead production for the year is estimated at 11.96 mt (previous year 11.67 mt), refined consumption is forecast higher at 12.07 mt.

For 2018, the annual average price of lead could move closer to $2,900 a tonne from the previous year’s average of $2,400/t.

Sugar: Lower supplies from Brazil to stoke prices

From about 13 cents a pound a year ago, global sugar prices have recovered to about 15 cents a pound recently following steady draw-down of stocks. Brazil is the world’s largest sugar producer and exporter. Investors have now become more positive in response to data showing a downturn in sugar production in Brazil’s key south-centre growing region.

Heavy rains have prompted early closure of mills while there has also been a preference for ethanol rather than sugar production.

Although sugar production in India, the world’s second largest producer, is set to bounce back to about 25 million tonnes, tightness in supplies is likely persist, given the low stocks.

The weather in 2018 will be the key factor market participants will be watching. India may be a surprise importer, albeit of a small quantity. If there is a change in price, it would be to the upside.

World sugar prices in 2018 have the potential to rise to over 16 cents a pound and breach ₹40,000 a tonne in India.

Palm oil: Go short: Market flooded with stocks

While analysts usually pick stocks and commodities that have upside price potential, there are unexplored opportunities in a falling market.

Palm oil presents one such opportunity to ‘go short’.

Rebound in production in the two principal producing nations — Indonesia and Malaysia — coupled with rapidly rising stocks at the origins, softer crude oil prices (biodiesel route), competition from soft oils and somewhat weakened demand (especially after a sharp tariff hike by India) suggest a steady decline in palm oil prices in the months ahead.

The market has already fallen below Ringgit Malaysia (RM) 2500 a tonne from the recent peak of RM 2800/t. The first quarter of 2018 could see prices first test RM 2350/t and then RM 2250/t in Q2.

The writer, a policy commentator, is a commodities market and agribusiness specialist

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Published on December 31, 2017
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