2 Commodities in a two-speed world
5 Trading recommendations
6 Key commodity forecasts vs forward prices*
7 SG long-term forecasts*
8 Quarterly energy & steel forecasts*
9 Global Economic Outlook
10 SG Global Economic Forecasts
11 Fundamental drivers - Summary
12 Oil
22 US natural gas
30 Thermal coal
40 European natural gas*
45 European carbon
52 European power*
58 Grains: corn, soybean, wheat
67 Sugar
72 Livestock: lean hogs, live cattle
76 Steel and iron ore**
79 Aluminium
83 Copper
87 Zinc
90 Nickel
94 Tin
96 Lead
99 Gold
102 Silver
104 Platinum and palladium
Commodities in a two-speed world
From a top-down, macro approach, we are moderately bullish on commodities as a group for
the remainder of 2010. However, we expect the prices of individual commodities to vary
considerably.
When assessing the top-down, macro outlook for commodities as an asset class, we
distinguish between fundamental end-user commodity consumption and investor commodity
demand, both of which will, in our view, provide moderate support for commodities as a group
over the next few quarters.
Emerging market growth is the key driver of commodity consumption
The recovery in end-user consumption of commodities should continue this year, driven by
the expected gradual recovery in global economic growth. Our economists are predicting
global economic growth of 4.1% this year, which is made up of a modest 2.2% for developed
economies and an impressive 6.2% for emerging countries. Expansionary monetary and fiscal
policies are working much better in emerging countries compared to developed countries
because the former are not suffering from impaired balance sheets. This multi-speed nature of
the global economic recovery is likely to be a feature not only for 2010 but for the next few
years. Growth in emerging economies is heavily tilted towards infrastructure spending which
requires a lot of commodities such as base metals, steel, iron ore and energy.
Investors are excessively worried about China tightening
Investor flows into commodities appears to have slowed during Q1 2010 after very strong
inflows during the second half of 2009. The cause of this slowdown may have been concerns
about the impact of tightening of monetary and fiscal policies in emerging markets, in
particular in China. Some market participants believe that China has a massive property
market bubble and substantial industrial overcapacity, and that tighter policies will result in a
sharp drop in Chinese economic growth. We strongly disagree with this view.
While China may have pockets of empty new housing/offices and excess industrial capacity,
underlying demand driven by the migration of rural workers to the cities should soon eliminate
this. It is also important to realise that the leverage of both the private and public sectors of
the economy has remained moderate despite 2009’s dramatic increase in bank lending. For
example, according to our chief Asia economist, Glenn Maguire, the purchase of a first home
in China requires a 30% down-payment, increasing to 40% for a second home. Such very
tight lending standards have helped to prevent broad-based property market bubbles.
The Chinese economy should grow by around 10% this year, according to our economists.
Government-directed capital spending is expected to remain the key driver of economic
growth in 2010 but less so than it was last year as the central government is taking measures
to broaden economic growth. For example, spending on health and social security will be
increased while bank lending to infrastructure projects will be reduced in order to achieve
20% growth in capital spending, down from 30% growth last year. The bottom-line on China
is that the tightening in economic policies is fine-tuned to make sure that China achieves high
sustainable growth, which should give uplift to commodity prices for years to come.
Chinese 5-10% yuan revaluation – commodity price impact?
Our economists are confident that China will revalue its currency this year. They expect a oneoff
5-10% revaluation of the yuan against the US dollar in around April-May rather than a
resumption of a gradual appreciation policy. Such a move would serve to curb building
inflationary pressures as import price inflation has risen sharply as a result of higher