Commodities Quarterly:Building on strength

Overview.

    Healthy medium-term fundamentals are poised to continue with PMI readingsremaining near 6-month highs across the US, Eurozone, China and other EM. Ourglobal growth forecast has been lifted from 3.7% to 3.8% for 2018. The trend ofslow supply growth and policy restriction continues, and we see further upsidefor industrial metals in particular.

    Crude Oil.

    The shift into backwardation in September 2017 has proved to be prescient, onceagain marking a turning point. Prices have been strong in what is typically aweak quarter for demand. Affordability remains moderate, and demand upsideappears possible amidst a supportive macro backdrop and US dollar weakness.

    We raise 2018-19 Brent forecasts to USD 62/bbl in 2018-19, below spot owing toour expectations for a stronger extension of the supply rebound in the US.

    Precious Metals.

    We expect gold will shrug off worries of fundamental downside amidst theunwind of accommodative central bank policy, and that the market premiumover fair value will widen. Our USD 1,283/oz forecast for 2018 incorporatesboth our outlook for four Fed rate hikes and modest dollar weakness. Furthersupport for gold could also derive from the possibility that strengthening inflationexpectations are a prerequisite for the tightening policy trajectory.

    Industrial Metals.

    Industrial metals are our most favored sector across the commodity spectrum.

    Supply-side reform, disruption, or slow supply growth and robust industrialactivity are combining to establish market deficits broadly across Copper, Nickel,Zinc and Aluminium, fueling material upgrades to our price decks over themedium term. We see larger deficits in copper which could be exacerbated byfurther labour strikes, cuts of illegal Chinese aluminium capacity, and strongdemand for Nickel from stainless steel and battery production.

    Bulk Commodities.

    We expect steel and iron ore to retrace from current levels as Chinese steelproduction returns to normal from March, and additional seaborne iron ore supplyenters the market from the majors. Our estimate of the market surplus has risento 65Mt with supply rising by a further 2% in 2018 to 1,515Mt. In thermal coal, wesee a balanced market and expect China will eventually raise domestic productionto control power prices, lowering seaborne prices towards USD 90/t.