Via Stockmarket News (131 page PDF)
From the Forward:
HT: Heard on the Street via MoneyBeat for the tip the report was out.Spring is in the air and, right on schedule, the familiar swoon in commodities has arrived.But although the price action may be familiar, the causes are less so. For the past few years sovereign debt concerns and financial market jitters have been dominant price drivers, bulldozing their way indiscriminately through markets as diverse as gold, copper and oil with little care for the subtleties of supply or the nuances of demand trends. In contrast, the factors at work recently are much more commodity-specific: investors turning bearish on gold as the prospect of an easing in Fed liquidity injections beckons; disappointing Chinese growth bringing in to question the health of base metals demand; concerns that an unusually high level of refinery maintenance is resulting in a large surplus of crude oil. And the price response, with gold leading the fall, some base metals following but others less affected and energy markets dipping relatively modestly, was suitably differentiated.That brings us to the first of the key themes of this report: in our view, 2013 is shaping up to be the year when commodity risk in all its varied forms makes a welcome return. The signs have been there for some time in the steadily declining positive correlations between commodities and other assets, between commodity sectors and even between some closely related markets. These trends reflect both a growing diversity in commodity supply and demand and a much greater degree of leverage or individual market fundamentals as tail risks for the global economy continue to fade.For example, a slowing in China’s appetite for infrastructure-related materials and strong growth in more consumer-driven commodities like gasoline, aluminium and palladium is already driving widely diverging demand profiles for different commodities with direct price implications in different markets. The second is that variations in supply growth are likely to be a key differentiator of commodity performance.Over the next few months , supply growth is likely to be relatively quick across a range of markets but we do not see that as the beginning of a persistent or sector-wide trend. It is tempting to extend the technical progress that has facilitated a surge in US shale oil and gas production to other commodities and conclude that supply shortages will soon be a thing of the past. However, the consequences of many decades of underinvestment still loom large.Spare capacity and inventory buffers are still relatively low in many markets and this at a time when geopolitical risks are a becoming an ever more clear and present danger, especially to energy supplies from the Middle East. The most obvious friction point at present lies in the severe infrastructure deficits that are creating choke points and preventing the smooth flow of many commodities around the globe. A lack of pipelines, storage facilities and ports of the scale required to get new supplies to where they are most needed is at the heart of the huge increase in regional oil and gas price differentials and soaring physical premiums in base metals.Distribution is becoming the new battleground for commodities and is likely to remain one for some time to come. Finally, we believe commodities are on the brink of a great rotation in price performance and market leadership. Gold and silver, the front-runners since 2009, are likely over the next few years to be among the weakest of all the commodities we analyse. King copper may be unthroned as base metals laggards of the past few years like zinc challenge for the crown. WTI is likely to outperform Brent and US natural gas may turn out one of the strongest energy markets of all.
Commodities may face a slow growth environment for the next few quarters, but that does not mean any shortage of opportunities for investors, consumers or producers. We are dedicated to providing you – our clients – with the first-rate analysis required to make the most of them. We sincerely hope that this publication helps to achieve that objective.