BackMetals seen rallying with crops after record tumble
Average annual prices for 15 of 23 non-energy commodities are expected by analysts to be higher in 2014
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Metal and crop prices are poised to rebound in 2014 as accelerating economic growth boosts demand, helping to staunch this year’s record retreat for investments in commodity-focused funds.
Average annual prices for 15 of 23 non-energy commodities from aluminium to sugar will be higher than now, according to estimates from as many as 26 analysts compiled by Bloomberg. Corn may rise as much as 21%, platinum 24% and nickel 20%, based on the median of trader and investor forecasts in a survey that asked as many as 59 respondents to predict next year’s peak price for each of 15 raw materials.
Corn, silver and gold dropped the most in 2013, and five more raw materials tumbled into bear markets as output rose and investors shifted to equities. Commodity-fund investments fell by a record $88 billion to $332 billion in the first 11 months, almost all of it in metals and agriculture, Barclays Plc. says. While Goldman Sachs Group Inc. says supplies are mostly ample and Bank of America Corp. expects more losses, global manufacturing is the strongest since April 2011 and the International Monetary Fund (IMF) says world growth will quicken.
“It’s a good time to come into commodities," said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees about $340 billion of assets. “This is the first time in the recovery that we’ve had simultaneous positive and accelerating growth in the US, Europe, Japan and the emerging world all at the same time. That’s a pretty big demand change. But until people kind of pick up on the fact that commodities can come back, you’ll still see some people sticking a little more to stocks."
Commodity slump
The Standard & Poor’s GSCI Spot Index of 24 commodities fell 1.6% this year, the first drop since the global recession in 2008. Corn declined 38%, poised for its worst year in at least a half century, and silver’s 36% rout puts it on track for the biggest loss in more than three decades. Gold, down 28%, is heading for its first annual slide since 2000 and was the biggest contributor to the contraction in commodity investments in 2013.
Investors added instead $8.72 trillion to the value of global equity markets, taking valuations to the highest since 2007 and driving the S&P 500 to a record, according to data compiled by Bloomberg. The MSCI All-Country World Index of equities rose 19% this year, and the Bloomberg Treasury Bond Index lost 3%.
Slower growth
The global economy will expand 3.6% next year, from 2.9 percent in 2013, the Washington-based IMF said in a report in October. China, the biggest consumer of everything from soybeans to copper to cotton, will grow 7.5%, according to the median of 53 economist estimates compiled by Bloomberg. While that will be a fourth year of slower growth, the pace is still almost three times that of the US.
The global manufacturing purchasing managers index tracked by JPMorgan Chase and Co. and Markit Economics rose in November for a fifth consecutive month, data showed on 2 December. That same day, the Institute for Supply Management reported that US manufacturing accelerated at the fastest pace in more than two years, while export orders reached a 21-month high.
Economic growth may not be enough to end the slump. There will be “significant" declines through next year for iron ore, gold, soybeans and copper, Jeffrey Currie, Goldman’s head of commodities research in New York, said in a 20 November report. Currie said on 8 October that gold, headed for its biggest drop since 1981, was a “slam dunk" sell for 2014 as an improving US economy reduces the need for the metal as a store of value.
After a decade in which the S&P GSCI Spot Index more than doubled, reaching a record in 2008 as producers failed to keep up with demand, that super cycle of gains has ended because supply has caught up, Citigroup Inc. said 13 months ago.
Exiting funds
This year’s price slumps were a surprise. In December 2012, analysts and traders who were asked to predict the highest prices in 2013 said precious metals would be the biggest winners, with gains of as much as 25%, compared with 18% for grains and 16% for industrial metals.
Investors are dumping commodity funds for the first time since 2000, with net withdrawals of $37.37 billion this year through 12 December, according to EPFR Global, which tracks fund flows. Exchange-traded products linked to gold saw their holdings shrink by 33%, heading for the first annual drop since the securities were created a decade ago and erasing $73.27 billion of value, data compiled by Bloomberg show.
Goldman analysts
Gold, soybeans, copper and iron ore will drop at least 15% next year because of rising supply, Goldman analysts said in a November report. The bank said on 5 December that gold will slide to $1,110 an ounce in 12 months, compared with Monday’s close in New York of $1,197. Prices are down 38% from a record $1,923.70 in September 2011.
Gold-mining companies, including Barrick Gold Corp., already have taken at least $26 billion of asset writedowns this year as prices plunged, and billionaires John Paulson and George Soros cut their holdings of the precious metal.
Goldman said in October that commodities will fall 0.7% in 12 months. A month later, Bank of America predicted a 4.6% loss. While 14 of 24 commodities in the S&P GSCI fell in 2013, including nine by double digits, the overall drop was limited because energy is about 70% of the weighting. Crude oil rose 7.9%, and natural gas advanced 32%.
Hedge funds and other large speculators still are betting on a rally. Money managers expanded their net-long holdings of futures and options across 18 US-traded commodities for a fourth consecutive week through 17 December, with the most contracts held since the end of October, US Commodity Futures Trade Commission data show.
Rising exports
The grain slump is showing signs of boosting demand for crops in the US, the largest agricultural exporter, and the prospect of dry weather next year may mean reduced output. Corn export sales as of 12 December for delivery before 31 August were more than double a year earlier, while wheat sales since 1 June jumped 34%t, US Department of Agriculture data show. Chicago corn futures will jump as high as $5.225 a bushel next year and wheat may peak at $7.20 a bushel, based on the median of at least 49 estimates in the Bloomberg survey.
Palladium will advance as much as 22% to $850 an ounce, and platinum will gain 24% to $1,650 an ounce as demand tops production, the median of 30 estimates shows. Output trailed demand since 2012 and deficits will continue next year as mine strikes reduce platinum supply from South Africa and government inventories of palladium decline in Russia, Johnson Matthey Plc. estimates.
Production deficit
Cocoa use will exceed output by about 70,000 metric tons in the 12 months that began 1 October, and deficits will persist through 2018, a six-year stretch that would be the longest since the data began in 1960, the International Cocoa Organization in London estimates. Prices will rally as much as 13% to $3,200 a ton next year, according to the median of 17 estimates.
Sugar prices that fell 16% this year and touched a 41-month low of 15.86 cents a pound on December 18 are below the cost of production in countries including India, the largest grower after Brazil, and Thailand, squeezing mills and hurting prospects for next year’s crop, said Michael McDougall, the head of the Brazil desk at Newedge USA LLC. Prices may rise 23% to 20 cents, based on the median of 25 estimates.
Silver, after posting the biggest loss of any precious metal, will rise as much as 29% in 2014 to $25 an ounce on spot markets, according to the median of 40 estimates. That would still be 23% below this year’s high. Gold for immediate delivery will gain 21% to $1,450, based on 59 estimates, or 15 percent below the 2013 high.
Industrial metals
Nickel will rise as much as 20% to $16,875 a ton, the median of 22 estimates show. Indonesia, the biggest producer of mined metal, plans to ban raw-mineral exports. Barclays recommended this month that investors buy nickel.
Aluminium will increase 17% to $2,050 a ton, zinc will rise 6.3%to $2,200 a ton, and copper will advance 7.7% to $7,836 a ton, the survey shows. Copper output will exceed demand by 127,000 tons next year, against a shortage of 79,000 tons this year, according to Barclays. It forecast shortages for aluminum and lead in 2014, while surpluses shrink for nickel and zinc.
Lower prices this year already forced mining companies to rein in expansion plans and cut costs. Vale SA, the biggest iron-ore producer, reduced this month its investment budget for next year to the lowest since 2010. Rio Tinto Group plans to cut capital spending by more than half by 2015 from last year’s estimate.
Mining earnings
London-based Rio Tinto will report a 47% jump in net profit to $10.8 billion in 2014, the mean of 19 estimates compiled by Bloomberg shows. Its shares, which dropped 5.3% this year, will gain 14% in the next 12 months, the average of 24 estimates show.
Glencore Xstrata Plc., the world’s biggest listed commodities trader, will report profit of $5.245 billion next year, the mean of 10 estimates show. The shares will jump 19% after slumping 12% this year.
“Growth of demand for most commodities is going to be above the trend" of the past several years, said Kevin Norrish, an analyst at Barclays in London. “China’s force as the big driver of commodity demand maybe is stabilizing, but it’s not going away, and it’s going to continue to drive the bulk of commodity demand for at least the next 10 years." Bloomberg
Glenys Sim in Singapore, Agnieszka Troszkiewicz, Whitney McFerron and Isis Almeida in London, Phoebe Sedgman in Melbourne, Joe Richter and Marvin G. Perez in New York, William Bi and Feiwen Rong in Beijing, Jae Hur and Aya Takada in Tokyo, Alfred Cang in Shanghai, Jeff Wilson and Elizabeth Campbell in Chicago and Jen Skerritt in Winnipeg contributed to this story.
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