Commodity markets are looking up this year with a strong start to 2012, after prices were a mixed bag in 2011.
But as the Aesop Fable shows, it takes more than a strong start to win the race, according to CIBC senior economist Peter Buchanan.
While diminished risk aversion helped reduce prices for commodities and other volatile assets, Mr. Buchanan says they have better traction in 2012.
Commodity markets have indicated over the past couple of years that they are inherently cyclical, even with prospects for long-term support from increased emerging-market consumption, he noted.
CIBC expect’s the global economy will grow around 3% in 2012, but falling into the flat-to-modestly negative range for many industrial product prices during this economic slowdown.
That being said, Mr. Buchanan believes the second half of 2012 could see optimism return to commodity markets. The European Central Bank’s recent €500-billion injection into the banking system, along with China’s pro-growth and resource-intensive projects as part of its five-year plan, will most likely provide helpful steps forward.
Here is CIBC’s outlook for various commodities:
OIL
With tension in the Persian Gulf and Nigeria’s strike over fuel subsidy cuts, underlying fundamentals have deteriorated. Global oil consumption fell sharply in 2011 – the first time since the recession – as demand growth waned in key emerging markets and oil producers continued to conserve. A similar pattern is expected in China for 2012, with crude demand decelerating to the 4-5% range after 14% and 7% increases, respectively, over the past two years due to price-related conservation on fuel use. Tightened measures in the fall helped crude oil inventories rebound in the U.S., which now stand measurably above normal seasonal levels. The good news continues for industrial countries, as inventories have increased for the first time in three months as of November. OPEC and rising non-OPEC production juxtaposed on muted growth are conducive to further stocking. Barring a major supply shock caused by a closure of the Straits of Hormuz, for example, CIBC sees WTI oil prices averaging roughly US$95 per barrel in 2012 and 2013.
NATURAL GAS
A bearish combination of unseasonably early mild winter weather and heavy inventories, due to fast-paced expansion of non-conventional output such as shale production, forced North American prices to sink. Production continues to outrun demand, as U.S. gas output rose by a record 7.4% in 2011. As a result, CIBC recently cut its outlook for the commodity to an average of US$3.25 mmbtu in 2012 and US$4.00 in 2013.
GOLD
The Lunar New Year brought precious metals markets back to life, but while Chinese inflation appears to be easing, the same cannot be said for other emerging markets. Net buying ETFs has resumed with 250 tones acquired since the late-summer. Moreover, official net purchases and lower interest rates in key industrial countries should support a year-end target of $US1750 per ounce, a figure up modestly form current levels.
BASE METALS
Copper takes the lead, having outperformed other base metals in recent months, regaining about 40% of the losses during the fall period, recently closing at a 4-month high. China, in particular, has seen record imports, meaning there is high demand, even though growth is cooling as low inventories limit the potential for additional stocking. For aluminum, spot prices have fallen to less than US$1 per pound from US$1.30 last spring. Recent and planned capacity cuts by North American and foreign producers should help to cushion prices from the full effect of a slowing global economy. Nickel inventory levels have been reduced, but remain appreciably above pre-recession levels.
AGRICULTURE
Prices have eased for key grains over the past few months due to upgraded world inventory and crop estimates, with wheat prices hitting 17-month lows, down 30% from highs last spring. Canada is expected to have a fruitful year, with overall wheat production expected to increased 9%. While soybeans and corn crops are pressured because of reduced feedstock demand and heavy year-end inventories, cattle futures set seasonal records due to of lucrative export sales.
LUMBER
Once again China proved to be industrious, with imports growing a hefty 46% in 2011. However, an excess in production capacity and a depressed housing market have conspired to keep a lid on prices. With the U.S. construction sector expected to improve in the next two to three years, prices should see a modest recovery.