Commodities Outlook: A Year Of Two Halves

Business Monitor International (BMI) expects industrial commodity price strength in the first half (H1) of 2013 before renewed weakness in H2. The global economy will continue to gather steam in the coming months, assisted by a rebound in China. Meanwhile, the ‘risk-on’ environment that has propelled assets such as the euro and US equities to multi-quarter highs appears to have further to run. Many industrial commodity markets such as copper and oil prices have also broken above key technical resistance levels.

Despite a more positive outlook for the first half of the year, we maintain our bearish longer-term outlook for industrial commodities. For demand, we believe the current upturn in Chinese economic growth is temporary, and expect some negative surprises as the year progresses. For supply, favourable production prospects from high prices in recent years will result in markets loosening up in the coming quarters. This is particularly the case for oil, and in 2013 we forecast the first global production surplus since 2007.

Gold prices will struggle in H1 2013, and a break of key technical support at US$1,640/oz would prompt us to remove the bullish view from our commodity strategy table. As the global economy gently grows, investors will price in monetary policy normalising sooner than anticipated, causing US Treasury yields to rise and gold prices to fall.  However, we do not expect a sustained bearish reversal in gold prices until 2014.

After two years of broad-based declines, we believe soft commodities such as sugar and coffee have bottomed out, and we expect modestly higher average prices in 2013 than current spot levels. Supply will remain healthy for these crops over the coming months, but the market has priced in an optimal production picture. As non-commercial net speculative long positions are languishing at multi-year lows for these commodities, prices will be very sensitive to any supply disruption. We expect a temporary recovery in prices over 2013, before the long-term structural downtrend resumes. We retain a bullish coffee view in our commodity strategy and have palm oil on our watch list.

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This Week’s Trivia Question

Last week, we asked, which Central London landmark was partly donated to the City of Westminster in the 1980s by Liechtenstein? (Hint: West End cinema-goers will probably have walked past it.) The answer is a set of glockenspiel that stands just off Leicester Square. The bells and moving figures used to adorn the façade of the now defunct Swiss Centre, but disappeared in 2008 when the building was demolished. The bells and figures were restored in 2011. They were jointly donated by Liechtenstein and Switzerland in 1985.

This week’s question is about ancient institutions, and was inspired by the Pope’s resignation. The day Pope Benedict XVI announced his retirement, an even older institution than the Papacy marked its 2,673rd anniversary. What is that institution? And which organisation celebrated its 900th anniversary over the past week?