Track Record: Commodities 2013 Retrospective

At the beginning of 2013, we laid out our key commodities themes and price forecasts for the year ( see 'Key Themes For 2013: Commodities', December 17 2012). Our price forecasts were more accurate than Bloomberg consensus, particularly for industrial commodities. The key themes we laid out also performed well, recording four 'hits' and one 'miss'.

Price Forecasts - Ahead Of The Curve

One way to assess the accuracy of our forecasts is to focus on the 2013 average price forecasts we laid out on January 1 2013. Of course shifting fundamentals over the course of the year due to events such as macroeconomic surprises or adverse weather conditions mean that most January forecasts end up being too bullish or bearish. Nonetheless, by comparing the degree of error with Bloomberg consensus, it is possible to partially illustrate the value of our price forecasts.

Consensus Generally Moved Our Way
2013 Average Price Forecast As Of January 1 2013, % Difference From Eventual Year Average

At the beginning of 2013, we laid out our key commodities themes and price forecasts for the year ( see 'Key Themes For 2013: Commodities', December 17 2012). Our price forecasts were more accurate than Bloomberg consensus, particularly for industrial commodities. The key themes we laid out also performed well, recording four 'hits' and one 'miss'.

Price Forecasts - Ahead Of The Curve

One way to assess the accuracy of our forecasts is to focus on the 2013 average price forecasts we laid out on January 1 2013. Of course shifting fundamentals over the course of the year due to events such as macroeconomic surprises or adverse weather conditions mean that most January forecasts end up being too bullish or bearish. Nonetheless, by comparing the degree of error with Bloomberg consensus, it is possible to partially illustrate the value of our price forecasts.

Consensus Generally Moved Our Way
2013 Average Price Forecast As Of January 1 2013, % Difference From Eventual Year Average

For instance, the 2013 average price forecasts we laid out in January 2013 differed from the eventual end-year average by a mean of 11.0%. This compares favourably to Bloomberg consensus, the forecasts for which were on average 15% off the mark. Our forecasts for industrial commodities were particularly ahead of the curve, at 6.4% difference from the eventual 2013 average, compared to 12.9% for Bloomberg consensus.

Down Year In 2013
Select Commodities - Average Price, % Change 2013 vs 2012

The success of our price forecasts was in large part due to the accuracy of our macroeconomic view on China and our associated fundamental forecasts for commodities supply and demand. In particular, the China economic growth forecast of 7.5% that we held on January 1 st was significantly below the Bloomberg consensus forecast of 8.1%. However, as Chinese economic growth disappointed as expected, consensus moved our way and China real GDP growth came in at 7.7% in 2013. These dynamics meant that although our January 2013 commodity price forecasts were in many cases below consensus, consensus broadly moved towards us over the year.

Key Themes: Four Hits, One Miss

Lower average prices in 2013 compared to 2012 - HIT

Our forecast for generally lower prices across energy, grains and metals played out well in 2013. The CRB commodities index declined by 5.0% over the year and 15 of the 23 commodities that we forecast averaged lower in 2013 than 2012.

Ahead Of The Curve
2013 Average Price Forecasts For Copper (LHS) & Aluminium (RHS)

Industrial metals will underperform - HIT

Our industrial metal forecasts were particularly below consensus at the outset of 2013. This played out extremely well as metal prices experienced another tough year and consensus moved consistently our way. For instance, the S&P GSCI Industrial Metals Index declined by 13.0% over 2013 as a whole and the following chart illustrates how BMI's forecasts were generally closer to the mark than market consensus.

Forecasts Show Their Metal
2013 Average Price Forecast As Of January 1 2013, % Difference From Eventual Year Average

Softs and precious metals to outperform - MISS

The big miss in our 2013 key these was our expectation that gold would perform well over the year. While our January 2013 view was off the mark, it is worth highlighting that our gold view evolved drastically over Q113. We were flagging up a break of US$1,520/oz as the potential catalyst for a sharp correction as of late March/early April and on April 15 called for gold to head down to US$1,200/oz. Gold and silver prices collapsed from mid-April to June.

Softs Supply Risks Play Out...Eventually
S&P GSCI Softs Index

Although we were forced to revise down many of our soft commodity price forecasts over the course of 2013, softs still outperformed most other commodity groups over the year as a whole. The S&P GSCI Softs Index declined by only 7.9% over 2013 and of the S&P GSCI sub-components, only the Energy Index performed better (+2.9%). Prices for softs such as sugar and coffee then exploded higher in Q114 and thus our bullish view on soft commodities proved accurate, but a little early. A deterioration in supply prospects for Brazilian coffee and sugar and an associated resurgence in speculative sentiment towards these commodities has seen the softs index rise by 15.5% since the start of 2014.

Commodity inflation to tick higher but remain contained - HIT

In line with our view, the severe year-on-year declines in commodity prices that occurred in 2012 normalised in 2013, but there was no return of significant commodity driven inflation. For instance, global food price inflation as tracked by the UN ticked higher in H113 as the low base effects of 2012 wore off. However in line with our forecasts, food prices remain subdued over the year do to a bumper 2013/14 global grain crop. For instance, CBOT grain prices (which include corn, wheat, soybean and rough rice) generally declined sharply over 2013, falling by an average of 25%.

Commodity Price Pressures Remained Subdued In 2013
UN Food Price Indices, % Change y-o-y

Supply risks elevated for oil, tin, coffee and wheat - HIT

We highlighted several commodity markets that we felt were particularly sensitive to supply shocks in 2013, namely oil, tin, wheat and coffee. Tin prices were the strongest performer amongst the commodities that we track, gaining 5.6% over 2013 as Indonesian government policy restricted supply from the world's top exporter. Although wheat and coffee remained free for severe supply disruption in 2013, Q114 has seen this change dramatically. Coffee prices have spiked by over 50% since the start of 2014 due to adverse weather in top-grower Brazil, while wheat prices have surged by over 25% since the end of January 2014 due to supply threats relating to the Russia-Ukraine crisis and adverse weather in US growing regions.

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Related sectors of this article: Commodities, Softs, Copper, Gold, Oil, Grains - Commodities, Industrial Metals, Precious Metals, Sugar - Commodities, Aluminium, Lead, Nickel, Tin, Zinc, Corn - Commodities, Soybean - Commodities, Wheat - Commodities, Cocoa - Commodities, Coffee - Commodities, Energy - Commodities, Rice - Commodities, Palm Oil - Commodities, Steel/Iron ore - Commodities, Cotton - Commodities
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