Commodity prices set for strong finish to 2021
Top investment banks predict the rich form enjoyed by commodity markets will continue as prices remain elevated into the end of this year before what some are expecting to be a period of normalisation in 2022 (reports The Australian Financial Review).
14th October 2021
Just last week, the Bloomberg Commodity Spot Index (a basket of 23 energy, metals and agricultural raw materials contracts) climbed to an all-time high, surpassing the peaks reached during the last commodity supercycle in 2011.
It comes despite a plunge in iron ore prices, which is being offset by gains posted by a fresh crop of energy commodities such as natural gas and crude oil, while thermal coal prices have surged to record highs.
“After what has already been a strong year for commodities, we maintain a bullish outlook into the fourth quarter and beyond,” says head of commodity strategy at Saxo Bank, Ole Hansen. “Supply constraints will, in our opinion, continue to support prices despite a slower growth trajectory.”
Accelerating demand for electric vehicles has seen lithium carbonate prices surge over 75 per cent since late July. With further upside expected this year, Morgan Stanley has labelled the commodity as one of its top picks, along with uranium, over the next six months.
Against a backdrop of Chinese electric vehicle production increasing almost 250 per cent this year, and supply struggling to keep up with demand, analysts expect China’s lithium carbonate spot price to average $US19,500 a tonne in the second half of this year. Morgan Stanley expects the price to normalise in the second half of 2022 at $US13,000 a tonne.
“As supply plays catch up and the rate of demand growth slows, we see the current tight market returning to an oversupplied one through next year,” says commodity strategist at Morgan Stanley, Marius van Straaten.
Citi’s commodity team agrees that the rally in spot carbonate prices has a bit further to run before falling by the middle of next year.
“Prices are back to 2018 highs and, like then, we expect these levels are unsustainable,” says Citi’s head of Australian research, Paul McTaggart.
The broker raised its lithium carbonate price forecast to average $US18,270 per tonne next year and $US12,600 per tonne in 2023. Analysts also increased their spodumene projections to $US800 a tonne in 2022 and $US700 a tonne in 2023.
RBC Capital Markets is more bullish, lifting its spodumene price forecasts for 2021 to 2023 above $US1000 a tonne. It also expects carbonate and hydroxide prices to be supported by limited spot spodumene availability.
Last week, JPMorgan increased its forecast for Brent crude oil by 11 per cent, projecting prices will average $US73 a barrel next year.
“Notwithstanding the recent rally, we continue to see stocks under our coverage trading at a discount to fair value across the energy sector,” says energy and utilities analyst at JPMorgan, Mark Busuttil.
The firm’s favourite stocks in the sector are Santos, Beach Energy and Senex.
Morningstar analysts agree the energy sector is materially undervalued given spot oil prices haven’t been fully factored in to share prices.
Morningstar’s top picks in the sector are Woodside Petroleum, Beach Energy and Santos.
The biggest commodity story of the third quarter was iron ore as Australia’s number one export collapsed by more than 60 per cent from its May peak amid China’s nationwide crackdown on steel production.
Despite this, Morgan Stanley notes the bulk commodity still doesn’t look cheap from an historical perspective and sees scope for the sell-off to extend into the end of this year. The broker’s fourth-quarter forecast is $US85 a tonne.
This is set to be followed by the iron ore market entering a 26 million tonne surplus in 2022 before a modest price recovery sparked by a lift in Chinese steel output sees it average $US110 a tonne in the second quarter of next year.
Citi forecasts prices dropping to $US90 a tonne in the fourth quarter before bouncing to $US120 a tonne by the middle of 2022, leaving prices at an average of $US106 a tonne next year.
“This assumes strict Chinese production cuts until the February 2022 Winter Olympic Games and gradual loosening of cuts afterwards,” says Citi’s McTaggart.
“We expect the market to stay in surplus in 2022 and 2023 based on planned supply increases and a lack of demand growth, though the scale of the surplus may shrink into the second half of 2022 amid a sequential bounce in Chinese steel demand.”
RBC lowered its 2022 average iron ore price projection by 31 per cent to $US75 a tonne, saying it also expects a surplus next year.
The outlook for gold isn’t as promising, with brokers projecting lower prices on the back of central bank tapering and rising real bond yields.
The precious metal spent the third quarter predominantly between $US1750 and $US1830 an ounce. It was weighed down by a strong US dollar and rising real rates but safe-haven demand and inflation concerns put a floor under the price.
Morgan Stanley expects the US Federal Reserve to taper its asset purchases in November, and sees the possibility of an interest rate hike by as early as December next year.
“This drives upside to real yields and the US dollar, both headwinds for gold prices,” says Van Straaten.
The broker calls gold falling to $US1725 an ounce in the fourth quarter this year and $US1621 an ounce next year.
RBC concurs, anticipating prices to fall to $US1700 an ounce next year. “With central banks globally tapering and first rate increase expectations in the US set for the fourth quarter next year, we have retained our declining price forecast,” says RBC’s Australian metals and mining equity analyst, Kaan Peker.
© 2021 Resources Rising Stars All Rights Reserved