Commodities Comment:Price forecast changes

Most metals and bulk commodity markets remain in the early stages ofrebalancing, with supply growth slowing but not to the extent needed to createany bottlenecks. Add to this an environment where Chinese macro indicatorsare weakening and the European commodity restock cycle is normalising,hopes for a sustained price recovery beyond scattered individual fundamentalstories seem unviable. Basically, there are few immediate constraints set tobecome evident on the raw material supply side over 2015, and plenty ofelasticity in the chain. The lagged impact of a lack of growth capex cutsremains more of a 2016 story.

    We have upgraded our price assumptions for zinc as the long-awaitedconcentrate deficit takes effect from next year, while the barriers to primaryaluminium trade should also result in a higher all-in price over the next coupleof years than previously anticipated. In terms of downgrades, the ever-lowercost curve and elasticity of supply has seen met and thermal coal priceexpectations lowered, while the aggression of price recovery in platinum,uranium and manganese ore in the coming years has also been tapered.

    Under this environment, the binary nature of commodity prices means afurther stint of time trading into cost curves, keeping supply offline, before theneed to incentivise new supply comes into play. Many metals and bulkcommodities should thus continue trading below our long run ‘equilibrium’price expectations through the course of 2015.

    Latest news

    LME metal prices broadly stabilised on Tuesday, helped by firmer economicdata from China. The HSBC flash manufacturing PMI for September came inas 50.5, up from 50.2 in August, a print greeted with some relief as manymarket participants were expecting a slide into sub-50 contraction. The detailsof the report though were not so positive, with robust export orders but weakemployment data, and in the view of our China economist, Dr Larry Hu, willnot stop the authorities launching another mini-stimulus in coming weeks.

    Gold firmed in early London trading after the US dollar slipped amid news ofUS and allied air strikes in Syria, but as the dollar recovered it gave back mostof its gains. Physical gold volumes traded on the Shanghai Gold Exchange