quarterly commodity outlook - abn amro · 2017-02-27 · quarterly commodity outlook group...

Quarterly Commodity Outlook

Group [email protected]

30 April 2014

Energy:Despite new geopolitical tensions, oil prices traded within narrow ranges. However

geopolitical tension remain an uncertain factor, we believe that the impact could

ease somewhat in the coming year. Increased oil production in both Non-OPEC and

OPEC countries will result in abundant oil supply. As a result, we expect oil prices to

ease towards the lower band of the longer-term USD 100-120/bbl trading range.

Although gas prices traditionally ease during the second quarter, this year could be

different as US inventories need to be rebuilt after the strong cold winter demand.

European gas prices remained within the downtrend, despite increased worries

about gas deliveries from Russia to Europe. We expect this trend to continue.

Precious metals:We have revised our forecasts for precious metals to reflect the recent changes in

currency forecasts and recent market dynamics. Going forward, we expect the US

economy to accelerate, US yields and the US dollar to move higher and investor

sentiment to improve. These will continue to be major negatives for gold and silver.

We expect supply concerns in palladium to ease and strikes at mining companies in

South Africa to end. Once this happens, investors will likely liquidate part of their

large outstanding positions in platinum and palladium, driving prices lower in 2014.

We judge that 2015 and 2016 are more positive for silver, platinum and palladium

because fundamentals will take over again.

Base metals:Demand for (cyclical) base metals will remain solid. The recently announced ‘mini’

stimulus from the Chinese government will provide some support, and will be

sufficient to shift confidence in base metal markets. We expect stronger prices in the

future, due to improving global economic conditions and robust market outlooks for

base-metal end-using sectors (such as construction, electronics automotive and

machinery). We foresee that until 2016, base metal prices will increase

progressively, but chances on significant gains are limited on lingering uncertainty.

Ferrous metals:In our view, European steel demand in particular will pick up during 2015-2016,

which will further boost price strength. Long-term prospects are promising for the US

market, with supportive market fundamentals going forward. However, China still

poses a risk. We think that overcapacity will persist in the forecast period, which will

put pressure on prices. Additional iron ore supply from new mining projects until

2016 will soften prices. However, prices are expected to stay relatively high in

historic terms, but will nevertheless decline until 2016. At current low coking coal

prices, small (high-cost) producers will have an increased risk of default.

Agriculture:The prices of almost all grains and soft commodities strengthened since the

beginning of February, due to bad weather conditions in the major producing

countries. With the coffee harvest starting in May-June, the actual impact of the

Brazil drought on this season’s crop will be crystallised then. Under normal weather

conditions grain production is expected to exceed consumption and this will have a

dampening impact on prices in the course of this year. Speculation about a possible

El Nino increases the risk of supply disruptions for cocoa, sugar and wheat, leading

to possible higher prices. However, an El Nino could be positive for the production of

corn and soybeans and, in the latter case, could lead to even lower prices.

- Short term: our three month outlook versus

spot rate on April 28th.

- Long term: 2016 average forecast price versus

2014 forecast price.

i decrease by 11% or more

i l k decrease betw een 5% and 10%

i l n price movement betw een -4% and + 4%

k increase between 5% and 10%

h increase by 11% or more

WTI l k h i k

Brent i l k i l k h

Natural gas i l h h

Gold l n k i k

Silver i n h i h

Platinum i l k h

Palladium i l h i l n h

Aluminium n k h

Copper n k h i l n k

Nickel l k h i k h

Zinc n k h k h

Steel (HRC) l n i l n

Iron ore i l k i l

Coking coal l k i k

Wheat i n k h k

Corn i k h k

Soybeans i l h k

Sugar i l n k h i

Coffee i l h i

Cocoa i l k h

i

3-months view

long term view

(until 2016)

ABN AMRO Price Outlook Q2-2014

2 | Quarterly Commodity Outlook 30 April 2014 ABN AMRO Group Economics

Spot rate28

thApr

Average price Q1-2014

3-months(Q2 exit)

2014 2015 2016

Energy:

- Brent (USD/barrel) 109.28 108.25 100 100 95 90

- WTI (USD/barrel) 101.13 98.62 95 95 90 85

- Natural gas (USD/mmBtu) 4.78 5.14 4.50 4.50 4.75 5.00

Precious metals:

- Gold (USD/oz) 1,294.49 1,291.99 1,250 1,235 925 1,000

- Silver (USD/oz) 19.60 20.46 19.0 19 18.3 25

- Platinum (USD/oz) 1,428.00 1,427.52 1,350 1,350 1,375 1,650

- Palladium (USD/oz) 812.00 744.88 740 740 725 725

Base metals:

- Aluminium (USD/t) 1,787.75 1,710.35 1,805 1,825 2,000 2,050

Aluminium (USD/lb) 0.78 0.82 0.83 0.91 0.93

- Copper (USD/t) 6,765.75 7,037.86 6,800 7,150 7,100 7,000

Copper (USD/lb) 3.19 3.08 3.24 3.22 3.18

- Nickel (USD/t) 18,145.00 14,646.41 16,850 15,500 16,000 16,500

Nickel (USD/lb) 6.64 7.64 7.03 7.26 7.48

- Zinc (USD/t) 2,062.25 2,026.91 2,095 2,100 2,250 2,300

Zinc (USD/lb) 0.92 0.95 0.95 1.02 1.04

Ferrous metals:

- Steel (global, HRC; USD/t) 568.36 581.48 560 570 550 545

- Iron ore (fines, USD/t) 108.70 123.10 118 120 115 113

- Hard coking coal (USD/t) (2) 115.00 127.70 107 119 121 126

Agricultural:

- Wheat (USDc/bu) 708.50 564.13 680 660 - -

- Corn (USDc/bu) 513.75 435.10 420 430 - -

- Soybean (USDc/bu) 1,500.00 1,349.95 1,350 1,300 - -

- Sugar (USDc/lb) 17.56 16.69 18.00 17.50 - -

- Coffee (USDc/lb) 201.15 139.96 230 200 - -

- Cocoa (USD/t) 2,946.00 2,946.41 3,150 3,025 - -

(1) The 3-months forecasts is the Q2 2014 exit price. Forecasts for 2014, 2015 and 2016 are average year prices.

(2) Prime coking coal Australia, CIF

FORECASTS Q2-2014 (1)


CONTENTS

Macroeconomic developments• Macro ------------------------------------------------------------------------------------------------------------------------------------ 4

• Commodity Top Down -------------------------------------------------------------------------------------------------------------- 5

Energy• Brent ------------------------------------------------------------------------------------------------------------------------------------- 6

• WTI --------------------------------------------------------------------------------------------------------------------------------------- 7

• Natural Gas ---------------------------------------------------------------------------------------------------------------------------- 8

Precious metals• Gold -------------------------------------------------------------------------------------------------------------------------------------- 9

• Silver ------------------------------------------------------------------------------------------------------------------------------------ 10

• Platinum --------------------------------------------------------------------------------------------------------------------------------- 11

• Palladium -------------------------------------------------------------------------------------------------------------------------------- 12

Base metals• Aluminium ----------------------------------------------------------------------------------------------------------------------------- 13

• Copper ---------------------------------------------------------------------------------------------------------------------------------- 14

• Nickel ----------------------------------------------------------------------------------------------------------------------------------- 15

• Zinc -------------------------------------------------------------------------------------------------------------------------------------- 16

Ferrous metals• Steel (HRC) --------------------------------------------------------------------------------------------------------------------------- 17

• Iron ore --------------------------------------------------------------------------------------------------------------------------------- 18

• Coking coal --------------------------------------------------------------------------------------------------------------------------- 19

Agriculturals• Wheat ----------------------------------------------------------------------------------------------------------------------------------- 20

• Corn ------------------------------------------------------------------------------------------------------------------------------------- 21

• Soybeans ------------------------------------------------------------------------------------------------------------------------------ 22

• Sugar ------------------------------------------------------------------------------------------------------------------------------------ 23

• Coffee ----------------------------------------------------------------------------------------------------------------------------------- 24

• Cocoa ----------------------------------------------------------------------------------------------------------------------------------- 25

Macroeconomic indicators• Facts & Figures ----------------------------------------------------------------------------------------------------------------------- 26

Contributors• Analysts and economists ---------------------------------------------------------------------------------------------------------- 27

• Disclaimer ----------------------------------------------------------------------------------------------------------------------------- 28

4 | Quarterly Commodity Outlook 30 April 2014 ABN AMRO Commodity Research

Nick Kounis (Head Macro Research, Group Economics)

Macro • Global growth softened in the first quarter, but should accelerate going forward • The US economy is shaking off the bad weather, while stimulus should support China’s growth • Geo-political risks have risen because of the rising Russia-Ukraine tensions

US economy shaking off bad weather

Source: Thomson Reuters Datastream OECD demand and EM exports Source: Thomson Reuters Datastream Global Economic Forecasts

2012 2013 2014e 2015e

China 7.7 7.7 7.5 7.0

US 2.8 1.9 3.3 3.9

Eurozone -0.6 -0.4 1.3 1.8

World 3.0 2.9 3.6 3.8

trade 1.9 2.3 6.0 6.0

Source: ABN AMRO Group Economics

Global economy has lost momentum After gaining strength last summer, the pace of global economic expansion eased towards the end of last year and start of this year at rates close to historical averages. This reflects exceptionally cold and snowy weather in the US and Japan. Second, there was an inventory correction in the manufacturing sector, especially in the US, as output growth exceeded demand earlier in the year, and hence a rebalancing was necessary. Third, China’s economy slowed more sharply than expected as the authorities try to shift the economy away from credit-fuelled investment in real estate and heavy industry towards consumer spending and infrastructure investment. This is not a smooth process, and default of a corporate bond and near-default of a trust fund affect sentiment. Finally, a number of emerging markets, such as Russia, and Turkey, have faced a negative cocktail of political uncertainty, capital outflows, financial market instability and monetary tightening. Global growth likely to accelerate We expect the pace of global GDP growth to accelerate in the coming quarters, to rates above long-term averages. Temporary factors should fade. For instance, work that we have done looking at the impact of past instances of bad weather on economic growth suggests that there can be a substantial impact but that economic data tend to rebound within a couple of months of the event. Advanced economy fundamentals have clearly improved, with fiscal consolidation having faded, and the corporate sector looking ready to pick up the baton to drive economic growth. Emerging markets should benefit from high exports to the advanced economies, which will over time also feed through into higher capital spending, in particular in the manufacturing sector. In addition, some emerging markets are planning significant investment in infrastructure. For instance, China’s authorities have the acceleration of construction of railways and low cost housing. This ‘mini stimulus’ should help China’s economy meeting the growth target of 7.5% this year. Geo-political risks have risen Risks related to tensions between Ukraine and Russia and the US/EU and Russia have recently risen. The agreement reached in Geneva on 17 April between Russia, Ukraine, EU and US did not have yet many effect on the ground and many uncertainties remain given the tensions in Eastern Ukraine. The key risk for the global economy is if energy supply is somehow affected. Even though sanctions against Russia might be stepped up, a full Iran-style energy blockage still seems unlikely. Another source of risk relates to the Fed’s exit from its exceptionally accommodative monetary policy. However, we think that low inflation will allow the Fed to remove accommodation at a gradual pace, which should be manageable.

Upside to the forecast: Downside to the forecast:

- Stronger return of confidence - Financial market instability related to eventual Fed exit - Pent-up demand larger than expected - Abrupt investment slowdown in China

- Accommodative monetary conditions - Geo-political risks related to Russia-Ukraine tensions


Georgette Boele (+31 20 629 7789)

Commodity top-down • Strong start of the year • …but commodity prices to weaken in 2014… • …barring major risks playing out

CRB Index

Source: Thomson Reuters Datastream Commodity price performance Q1

Source: Thomson Reuters Datastream

Strong start of the year The CRB Index made a strong start in 2014, rallying by more than 11%. This was driven by several factors, including the rise in natural gas prices due to the cold spell in the US, which then fell once the weather improved. The tensions between Russia and Ukraine, and the possibility of sanctions, also gave some support to natural gas and gold. The latter mainly because of safe-haven demand. However, we judge that the rally in gold prices was mainly driven by lower US interest rate expectations and a lower US dollar. But the largest boost to the CRB came from the rally in grain and soft commodity prices. The drought in Brazil was the major reason for the sharp pick-up in prices of coffee, sugar and grains. Copper prices fell under heavy pressure on expectations that copper-CNY trades may have to be unwound and worries over the general health of the Chinese economy.

…but commodity prices to weaken in 2014… We believe that the strong start of 2014 will not likely continue. For starters, we still expect lower oil prices for this year, driven by ample supply, no supply disruption, only modest demand and weak demand from investors. We anticipate weakness in precious metals due to our above-consensus view on US interest rates, the US economy, a higher US dollar and a better investor climate. This will prompt investors to liquidate positions. Our 2014 outlook for base metal prices is mixed. We expect copper prices will decrease compared to their 2013 average level. And we foresee stable prices for aluminium and nickel and, contrary to 2013, an increase in zinc prices in 2014. Still, we remain positive on the long-term outlook. In the case of grains, we believe prices have rallied too fast and a correction is around the corner if weather conditions improve.

…barring major risks playing out The main risks to our base view are as follows. First, if the Chinese economy slows faster than we currently foresee, prices for base metals, ferrous metals and precious metals will likely suffer. The scenario for gold very much depends on whether such a slowdown is accompanied by a general wave of risk aversion. If that were the case, gold prices could be resilient. Second, if the Chinese yuan weakens more than expected, this could trigger an unwinding of copper/CNY and gold/CNY positions, resulting in more copper and gold supply coming to the market and pressing prices lower. Third, if the (geo)political situation (read Ukraine) escalates further into a full-blown military or energy crisis, energy, nickel, palladium and gold could rally higher. And last but not least is the risk of the development of an El Niño weather pattern. This would create additional weather uncertainty and hence, price volatility.


- full-blown military crisis in Ukraine - Chinese economic hard landing

- Later-than-expected Fed rate hikes - Earlier Fed rate hikes

-20%

-16%

-10%

-4%

-4%

-2%

-1%

2%

3%

4%

4%

7%

9%

9%

9%

13%

15%

15%

19%

59%

-40% -20% 0% 20% 40% 60% 80%

Coking coal

Iron ore

Copper

Zinc

Oil (Brent)

Steel (global, hrc)

Aluminium

Silver

Natural Gas

Oil (WTI)

Platinum

Gold

Palladium

Cocoa

Sugar

Soybean

Wheat

Nickel

Corn

Coffee

Q1 % change (31/03 vs.


Hans van Cleef (+31 20 343 46 79)

Energy | Brent • Oil prices were trading within narrow ranges despite new geopolitical tensions • New supply will outbalance the rise in demand • Brent oil declining trend to remain intact, but risks remain high

Historical price Brent

Source: Thomson Reuters Datastream Global oil supply and demand (x 1mln bbl)

Source: IEA Group Economics price forecast (USD/barrel) 3-m price end of quarter and year averages

3-month 2014 2015 2016

Brent 100 100 95 90 Source: ABN AMRO

Geopolitics still seen as the major driver… During the first quarter of 2013, Brent oil prices traded within narrow ranges of roughly USD 104-112/bbl. The impact of weak winter demand and higher inventories was balanced out by geopolitical tensions, supply disruptions and risk premiums. Although Russia is the world’s largest oil producer, the impact on oil prices of the recent tensions following the annexation of the Crimea was very limited. The market clearly expects oil flows not to be affected by this event. But even if Russian oil exports to Europe are reduced or actually stopped as a result of sanctions, we believe it will be relatively easy to replace this supply with oil from other regions (mainly the Middle East). With Russian oil finding buyers in Asia, the total global oil supply should not be seriously affected in such a scenario.

…but tensions will ease In other regions, there are signs of hope that the impact of geopolitical tensions could ebb away. The Iran negotiations with some western countries are going well and may even result in a final agreement on Iran’s nuclear programme in the course of May. There is optimism that this will lead to reduced sanctions, which could mean a recovery of Iranian oil exports. Libya oil exports are also set to increase as the rebels recently agreed to open up some ports by handing them over to the government. This potentially means that Libyan oil exports could increase by 700.000 bpd. Some larger ports, however, are unlikely to reopen soon. Therefore, a full recovery of Libyan oil production and its oil exports cannot be expected. Furthermore, increasing the Iranian and Libyan oil exports would automatically mean that another OPEC member must reduce its output. And with Iraq also increasing its output, all eyes will be on Saudi Arabia (as the only swing producer) to reduce production. This will prevent a glut of oil on the market, assuming that non-OPEC production remains stable or even slightly higher. More range trading could be seen in the near term, but there are some downside risks if oil supply versus demand is not managed in a timely fashion.

Downtrend to continue, but risks are lurking Although global economic growth is solid and will even become stronger in the coming years, we do not believe this will lead to higher oil prices. Demand growth is a relatively stable phenomenon while, especially for oil, the biggest driver is supply. In recent years, oil prices were elevated due to supply disruptions, or fears of supply disruptions. With the main drivers (Iran and Libya) moving in the right direction towards a more stable production environment, oil production – or at least oil production capacity – could increase and the risk premium could decline. This should be more than enough to counterbalance the effects of a growth in demand. Energy efficiency is another reason why global growth will have less of an impact than in the past. Although supply disruption risks will be lurking everywhere during the outlook period, we believe that the downside risks are greater. As a result, we forecast a modest declining trend in Brent oil prices in 2015/2016.

Upside to the forecast: Downside to the forecast: - Escalation of unrest in the Middle East and/or Russia affecting oil output - A higher-than-expected increase in global oil production

- A larger-than-expected pickup in economic growth/risk appetite - Faster easing of Iran sanctions and/or Libyan oil production

- Failure of the US dollar to recover


Hans van Cleef (+31 20 343 46 79)

Energy | WTI (West Texas Intermediate) • New US pipelines coming online will narrow the Brent/WTI spread • Q2 seasonal demand will ease and, combined with ample supply, put pressure on WTI • Several factors point to somewhat lower oil prices in 2014-2016

Historical price WTI

Source: Thomson Reuters Datastream Oil price spread Brent-WTI

Source: Thomson Reuters Datastream Group Economics price forecast (USD/barrel) 3-m price end of quarter and year averages

3-month 2014 2015 2016

WTI 95 95 90 85 Source: ABN AMRO

Large inventories shift to Gulf of Mexico For quite some time, crude inventories in Cushing, Oklahoma, were at or near record levels. This was the result of increased production in the US and Canada – mainly driven by new shale and tight oil production – as well as an imperfect energy infrastructure. Early January marked the start-up of the TransCanada Marketlink 700,000-barrel-per-day Gulf Coast pipeline. As a result, inventories from Cushing started to be transported to the Gulf of Mexico region. Crude inventories at Cushing dropped by more than 14 million barrels of oil, while inventories at the Gulf of Mexico reached record levels of more than 200 million barrels. Since refineries are not able to switch directly to the lighter crude compared to the imported crude, this new flow was not immediately absorbed. WTI found support as the discount compared to imported oil reduced.

Brent/WTI spread narrowed to lowest in six months As Brent traded within narrow ranges, and WTI found some support due to lower inventories at Cushing, the Brent/WTI spread contracted to USD 4/bbl. This is the lowest level in six months. In our view, a spread of USD 3-5/barrel is justified to make the lighter WTI crude interesting enough for the US refineries to prefer this crude above Brent. With the Seaway pipeline (450,000 barrels/day) also coming online this summer, more crude is expected to be transported from Cushing to the US Gulf Coast. If the spread becomes even smaller, or even reverses, it will be more attractive for US refiners at the Gulf and/or East Coast to use imported crudes like Brent. All in all, inventories are still at high levels, only geographically better spread which makes WTI more competitive with Brent.

Limited upside in Q2, pressure building thereafter In addition to US oil production – which continues to rise – and the economic growth triggering more oil demand, international factors are also seen as important drivers for WTI. The Russia/Ukraine conflict did not hurt oil prices much, but it is still a closely watched factor which could trigger some volatility during the coming months. Meanwhile, the market is also focussed on the expected return of Libyan oil exports. With US oil imports continuing to decline in the forecast period, the ample supply will continue to cap the upside of WTI prices. The second quarter always shows a decline in (seasonal heating) demand. Normally, this goes hand in hand with lower oil prices. Furthermore, these days the US driving season (starting Memorial Day) only has a limited effect. The real seasonal impact will emerge when temperatures start to rise – or summer starts – and cooling demand draws on inventories. After the summer, we expect pressure to remain on oil prices. This pressure may result from slow demand, high inventories and easing geopolitical tensions regarding Iran, Russia/Ukraine as well as increased production in both OPEC and non-OPEC countries.


- Stronger-than-forecasted global/US economic growth - Increased production of shale oil in non-OPEC regions

- Possible escalation of the geopolitical conflicts - Stronger-than-expected appreciation of the US dollar

- More pipelines announced which transport oil to the Gulf Coast - Disappointing economic growth in US


Hans van Cleef (+31 20 343 46 79)

Energy | Natural gas • While European gas prices were mixed, US prices ballooned • Seasonal trend will lead to some pressure, but economic growth will prevent a huge decline • The longer-term trend is for higher prices, but the upside is capped

Historical price natural gas

Source: Thomson Reuters Datastream Natural gas prices

Source: Thomson Reuters Datastream Group Economics price forecast (USD/mmBtu) 3-m price end of quarter and year averages

3-month 2014 2015 2016 Natural gas H. Hub

4.50 4.50 4.75 5.00

Source: ABN AMRO

Weather conditions resulted in narrow price differental During the first quarter, weather conditions were seen as the most important driver of gas prices. In the US, Henry Hub gas showed an impressive rally, especially in February, reaching a 5.5-year high. US gas touched a high of almost USD 6.50/mmBtu on the back of increased seasonal demand during a period of frigid cold. When temperatures started to normalise, prices corrected lower, hovering within a narrow USD 4.25-4.75/mmBtu range. Europe experienced an opposite development, with mild winter conditions and full inventories. As a result, Dutch Title Transfer Facility (TTF) gas prices, as well as other European gas benchmarks like National Balancing Point (NBP), continued their downward trends. Despite increased tensions between Russia and Ukraine, which may influence gas deliveries to Europe, gas prices were hardly affected and even touched the lowest level since October 2011. As a result of higher prices in the US and lower prices in Europe, the spot price differential narrowed, leading to a lower industrial competition benefit for the US.

Tensions and stock building may temper price moves Traditionally, the second quarter of the year coincides with lower gas prices as seasonal demand weakens. This year, European gas prices may remain somewhat more volatile than due to the lingering conflict between Russia and Ukraine. Although we do not expect gas deliveries to Europe and Ukraine to be hindered, this possibility cannot be completely ruled out. Even if the situation escalates further, and more sanctions are implemented against Russia, we still believe that a full Iran-style energy blockade is unlikely, as the EU imports around 30% of its energy needs from Russia. In the US, the Q2 dip may be lower than normal as the rebuild of inventories may keep demand at elevated levels. Therefore, the floor will likely be somewhere around USD 4.50/mmBtu for the coming months.

Difference between European and US prices to narrow Near term tensions in Ukraine have no impact on our expectation regarding the longer-term trends. Decoupling from oil prices will continue, keeping European gas prices in a downward trend. This will be particularly true if combined with lower demand due to energy efficiency. While US gas prices may find some further cyclical support due to economic growth, barring a temporary spike the upside is capped at USD 6/mmBtu, as other alternatives like coal would then become more attractive. As a result of the higher US gas prices in the first quarter, we adjusted our 2014 average forecast upwards to USD 4.50/mmBtu from USD 4.25/mmBtu. For TTF, we lowered our expectation of the 2014 average price to EUR 23/KWh from EUR 27/KWh based on lower-than-expected demand and high inventories. This scenario assumes no escalation of the Russia/Ukraine conflict affecting gas deliveries to Europe.


- Switch to additional gas-fired power generation - Continued and accelerating unconventional gas output

- Extreme weather conditions (longer periods of cold or heat) - Disappointing economic recovery

- Disruptions to gas deliveries between Russia and Europe



Precious metals | Gold • Good start of the year • New forecasts reflecting a less bearish outlook for 2014… • …but the sell-off will accelerate in 2015, followed by a recovery in 2016

Gold price

Source: Thomson Reuters Datastream Gold ETF positions Ounces,

Source: Bloomberg, ABN AMRO Commodity Research price forecast (USD/oz), end of the month and year average

3-month 2014 2015 2016

Gold 1,250 1,235 925 1,000 Source: ABN AMRO

Good start of the year Gold prices have increased by around 8% year-to-date. The precious metal was supported by strong demand from China at the start of the year, weak US data, the weak US dollar and some safe-haven demand resulting from the tensions between Russia and Ukraine. Those tensions have been reflected in a small positive correlation with the equity volatility index (VIX) and a large negative correlation with the US 10-Y yield. Despite the safe haven demand flows, we continue to believe that US interest rate expectations and the direction of the US dollar have been the most dominant drivers. Historically, gold correlates negatively with both US 2-Y and 10-Y yields. However, its sensitivity with the US 10-Y is more significant. The strong negative correlation between gold and US 10-Y was a reflection of weaker US data and some safe-haven demand.

New forecasts We have revised our forecasts for gold to reflect the recent changes in currency forecasts and market dynamics. Going forward, we expect the US economy to accelerate, US yields and the US dollar to move higher and investor sentiment to improve. We have above-consensus views on 3-M and 10-Y yields, which are mainly related to US growth acceleration in an environment of risk-seeking, whereby the Fed tightens monetary policy earlier than now is anticipated. If our views prove correct, this will be a substantial headwind for gold prices and will continue to act as a major negative driver. Higher US yields make non-income assets such as gold less attractive. The impact of a higher US dollar will also be a clear negative for gold prices. But the momentum of the US dollar rally will likely come later this year (in Q4) and accelerate in 2015. We forecast that the overall size of the US Dollar rally in 2014 will be lower than we initially anticipated. Therefore, we have adjusted forecasts for 2014 to reflect a less bearish view on gold prices.

Recovery in 2016 In our view, the drivers for gold prices in 2015 will continue to be: a strong US economy, a supportive investor climate, higher US rates and a higher US dollar. All this will likely result in a continuation of the liquidation of investor long positions, which will push gold prices lower. For 2016, we expect the situation in the gold market to calm down and prices to actually recover. There are several reasons for this. For starters, with the investor liquidation mostly behind us, there will not be many positions left to be squeezed. Moreover, the expected large drop in gold prices will likely have resulted in unprofitable mines being closed, resulting in lower supply coming to the market. In addition, the relatively low gold prices have resulted in a drop in gold scrap supply also limiting total supply. Furthermore, we feel total demand will likely grow, driven by increased consumer demand from China and a recovery of demand in India. We therefore expect the balance between supply and demand to tighten in 2016, and gold prices to recover.


- Monetary policy to remain accommodative longer than expected - Central banks running for the exit

- US dollar debasement - Strong global growth makes equities & base metals more attractive

- Distrust in paper money and inflation fears - More aggressive position liquidation



Precious metals | Silver • The worst-performing precious metal year-to-date • Bearish outlook for 2014 • More upside in 2015-16

Spot price USD per ounce

Source: Thomson Reuters Datastream Total silver and gold ETF positions

Source: Bloomberg Group Economics price forecast (USD/oz), 3-m price end of quarter and year averages

3-month 2014 2015 2016

Silver 19 19 18.3 25.0 Source: ABN AMRO

The worst-performing precious metal so far this year In 2014, silver turned in the worst performance of the precious metals, with prices only increasing by less than 1.0%. Often when prices recover, silver outperforms most of the other precious metals. However, not so far this year. This is rather surprising, but there are several reasons behind the slump. For starters, the largest industrial market for silver – the US – was under the effects of a cold winter, which reduced demand expectations. And concerns about the state of the Chinese economy also hurt prices. China is the second-largest industrial market and the largest silver jewellery market. Still, silver was able to lift, because following drivers also supported silver: a lower US dollar, lower US interest rates, some safe-haven demand and reports that Indian consumers have stockpiled silver instead of gold.

Bearish outlook for 2014 Our outlook on silver is bearish for 2014 for the following reasons. Given silver’s high interest rate sensitivity, expectations of higher US rates will hurt silver prices (alongside gold). In addition, a higher US dollar will also push silver prices lower. The expected weakness in gold prices will have a negative spillover effect on silver and other precious metals. Furthermore, lower demand for safe-haven assets such as gold will have a further impact. We expect these drivers to push silver prices sharply lower in 2014 resulting in large position liquidations. However, there are some factors that could somewhat dampen these effects. Demand from India could pick up the longer the gold import restrictions remain in place. Moreover, if concerns about the state of the Chinese economy fade, this will help silver somewhat. And silver prices should receive good support if the US economy accelerates as we expect. However, the latter two factors will only play out if the market starts differentiating between the different precious metals. We expect this to happen in 2015 after a general position liquidation of precious metals plays out in 2014.

More upside in 2015-2016 As mentioned above, we expect investors to start differentiating among precious metals in 2015 after a general position liquidation this year. At that time, the industrial character of silver compared to that of gold will be more appreciated. With the US economy firing on all cylinders, demand for silver should increase given that this is the largest market for industrial demand. We expect the Chinese economy to do relatively well, so we do not expect a sharp drop in demand there. For 2015 and 2016, fundamentals will play a larger role compared with 2014, which will be marked by sentiment-related investment liquidation. As such, silver will behave more like a cyclical (precious) metal. On the one hand, we expect total supply to stabilise as an increase in mine supply is offset by a decrease in scrap supply. Meanwhile, on the other hand we expect global demand to increase. Therefore, the balance between supply and demand will tighten. This, and a recovery of the gold price in 2016, are the main reasons we expect higher silver prices in that year.


- Sharp increase in global growth

- Aggressive position liquidation by investors - US dollar debasement

- Global recession



Precious metals | Platinum • A disappointing year-to-date rally • The remainder of 2014 to be negative • A brighter outlook for 2015 and 2016

Spot price platinum

Source: Thomson Reuters Datastream ETF positions

Source: Bloomberg Commodity Research price forecast (USD/oz), end of the month and year average

3-month 2014 2015 2016

Platinum 1,350 1,350 1,375 1,500 Source: ABN AMRO

A disappointing year-to-date rally Platinum prices have increased by less than 4% so far this year, driven by a better outlook for the eurozone economy, strikes at South African mining companies since 23 January, the rally in gold prices and optimism at the start of the year concerning Chinese jewellery demand. However, the size of the price increase is rather small considering the duration of the strikes. There are several reasons for this. Despite the improvement in the outlook for eurozone car sales, data from the US – the second-largest market for autocatalysts – were under a weather cold spell. In addition, recent concerns about the state of the Chinese economy hurt the platinum jewellery demand outlook. Some demand for safe haven assets also limited the upside because platinum is not, by nature, a safe haven asset. Furthermore due to the sale of stocks, the strikes also had a limited impact on prices until recently.

The remainder of 2014 will be more negative The strikes at South African mining companies (around 70% of annual mine supply) have been underway for more than 13 weeks. So far, more than 15% of the annual platinum mine production has been lost. Mining companies have mainly reduced stocks to compensate for the loss in production (but this may prove difficult going forward). Although there is increasing pressure to end the strikes It will be very difficult to predict when this will actually happen, but once it does, prices could drop sharply. Investors have piled up net long platinum positions, and they will likely be liquidated as soon as the strike ends. While the strikes may have resulted in lower mining production, any supply shortage has already largely been priced in. Furthermore, if gold prices are pushed lower as we expect, this will spill over to platinum as well. All in all we anticipate a sharp retracement this year.

A brighter outlook for 2015 and 2016 For the forecast period 2015-2016, we expect underlying platinum fundamentals to improve. First, we expect demand to grow in the main platinum markets: the eurozone and Japan. Moreover, increased jewellery demand from China, driven by a growing middle class, will also underpin an overall improvement in the demand outlook. And the tightening of emission standards and legislation, such as Euro 6 (September 2014), require a higher platinum content in diesel engines. This trend will continue. Demand for platinum in engines will therefore grow until these engines are made obsolete. On the supply side, mine supply will likely be stable at best. An efficiency wave in the mining sector will continue, and the risk of strikes and labour unrest will remain present. We expect scrap supply to stabilise. As a result, the supply and demand balance is tightening. This should result in higher platinum prices during our forecast period, after investors have liquidated their positions.


- Stronger-than-expected economic recovery in the eurozone - Global recession

- Supply disruptions - More aggressive investor position liquidation

- Stronger platinum jewellery demand from China - Chinese consumers favouring white gold over platinum

12 | Quarterly Commodity Outlook 30 January 2014 ABN AMRO Group Economics


Precious metals | Palladium • Star performer so far this year • Weakness seen for the remainder of 2014 • Fundamentals to take over again in 2015-16

Spot price palladium (in USD)

Source: Thomson Reuters Datastream, Total palladium ETF positions In ounces

Source: Bloomberg Commodity Research price forecast (USD/oz), end of the month and year average

3-month 2014 2015 2016

Palladium 740 740 725 725 Source: ABN AMRO

Star performer so far this year Palladium outperformed all other precious metals by surging more than 11% since 1 January. For palladium it seems all the stars were aligned, at least so far. For some time now, there has been a supply shortage. Expectations of lower mine supply have supported prices. Strikes at South African mining companies have limited production for platinum group metals, including palladium, but the mining companies have been able to counterbalance this by selling inventory. South Africa is the second-largest source of supply after Russia and accounts for around 37% of annual mine supply. Moreover, tensions between Russia and Ukraine and, more importantly, the risk of sanctions have resulted in concerns about a decrease in supply from Russia, the world’s largest supply source. Meanwhile, the demand outlook has also improved. The prospects for eurozone car sales have picked up, Chinese car sales are progressing relatively well and US vehicle sales are strong. These are the largest markets for gasoline cars with palladium converters.

Weakness for the remainder of 2014 While the stars may be aligned for palladium at the time of writing, we expect this to change going forward. Investors are widely positioned for a strong rally in palladium prices. We do not expect many new investors to enter net long palladium positions at this time. The speculative positions show large net long non-commercial positions and total ETF positions are also close to all-time highs. If investors become nervous, a large portion of these positions could be liquidated. This risk has already been present for some time and is only increasing. There are three possible triggers for a large liquidation. First, that tensions between Russia and Ukraine ease and/or that sanctions fail to limit palladium exports. Second, that strikes at mining companies in South Africa come to an end. And third, that the market concerns about China increase. The first two are part of our general base scenario, while the third is not.

Fundamentals to take over again in 2015-2016 We expect 2014 to be the year of investor liquidation. Once this has played out, fundamentals will be a dominant force again in 2015 and 2016. Demand for catalytic converters for car engines is expected to increase, but at a slower pace that we had originally foreseen. We expect the rise in US vehicle sales to continue. However, car demand from China should moderate somewhat in 2015 and 2016, in line with a slight slowdown in economic activity. In addition, environmental issues have become a key priority, putting a cap on car sales. On the one hand, tougher standards should result in a higher palladium content in gasoline cars. However, on the other hand, overall car sales will likely be capped. As a result, this impact will be more mixed. Emission laws continue to tighten in the US and eurozone as well. On balance, the moderate positive demand outlook and a shortage on the supply side will likely support prices.


- US and Chinese economies strengthen - Global recession

- Russian supply disruption and/or sanctions limiting exports - Larger-than-expected Russian stock sales

- Risk-seeking environment and/or US dollar debasement - Larger-than-expected supply


Casper Burgering (+31 20 383 26 93)

Base metals | Aluminium • Q1 2014 was uneventful for the aluminium market; aluminium price lost only 0.6% • Given the promising prospects for demand going forward, we foresee further pricing strength in Q2 • We expect a progressive increase in the aluminium price up to 2016

Historical price Aluminium

Source: Thomson Reuters Datastream Supply, demand & stocks

Source: Metal Bulletin Group Economics price forecast 3-m price (Q2 exit) and year averages

3-month 2014 2015 2016 Aluminium (USD/t) 1,805 1,825 2,000 2,050 Aluminium (USD/lb) 0.82 0.83 0.91 0.93

Source: ABN AMRO

Q1 relatively calm The first quarter of 2014 was a rather uneventful period for the aluminium market. Aluminium prices started at USD 1,755/t on 1 January and finished at USD 1,744/t on 31 March, which is a loss of only 0.6%. However, towards the end of the quarter, aluminium prices started increasing again and have since already gained 4-5%. The increase was triggered by announcements of capacity cuts (which could indicate a future deficit) and the postponement of the new LME warehousing rules, which should have been implemented on 1 April. The level of inventories at LME warehouses also changed marginally, up 1.5% quarter-on-quarter at the end of March to 5.4 million tonnes. Still, the volume of aluminium inventories at the LME warehouses remains historically high. Most (38%) of the volume of LME stocks is located at the Vlissingen warehouse, while 28% of total inventories is stocked in Detroit.

Price revival during Q2 2014 The fact that the aluminium price rebounded at the beginning of Q2 2014 was good news for high-cost aluminium producers. However, a further price rally could delay production curtailments, which the sector needs to rebalance the market. However, given the promising prospects for demand going forward, we foresee further pricing strength in Q2. We expect a gradual recovery in non-residential construction activity worldwide. In the US, better weather should lead to a strong improvement in construction activity over the next few months. Leading indicators, such as the American Institute of Architects' architectural billings index (ABI), point to further improvements in the sector. On the other hand, no significant increases are expected in the construction sectors in China and Europe and we foresee a modest revival in Q2 for these regions. We think the use of aluminium in the automotive sector will increase further this year. Cars with aluminium components can be significantly lighter (reducing fuel consumption) than those with steel.

Long-term progressive increase in price Alcoa, the US-based aluminium producer, is optimistic about buying activity in 2014 from several North American end-using sectors, including aerospace, automotive, building and construction and commercial transportation. However, global oversupply is a problem in this market, which is in desperate need of producer discipline to cut capacity. A few aluminium producers (in the US and Europe) have already announced some cutbacks, but the market is still waiting for significant cuts in China. We expect that during the forecast period, aluminium prices will increase progressively. We also think production growth will turn out to be relatively weak compared to consumption growth until 2016. As a result, stocks in LME warehouses will decline. In addition, we foresee more rebalancing and capacity cuts in physical markets in the long term.


- Stronger-than-expected eurozone recovery - New capacity entering the market (India, Middle East)

- Significant cutbacks in output by smelters in China - Weaker-than-expected growth of Chinese economy

- Increased demand for aluminium as a substitute for copper/steel - Weaker demand than expected from end-using sectors

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Base metals | Copper

• Flow of bad economic news in Q1 was a major reason behind the depreciation of the copper price

• We foresee an increase, albeit slow, in the copper price over the next three months

• Copper market will remain oversupplied until 2016, with supply growth outpacing demand growth

Historical copper price

Source: Thomson Reuters Datastream

Supply, demand & stocks

Source: Metal Bulletin

Group Economics price forecast3-m price (Q2 exit) and year averages

3-month 2014 2015 2016

Copper(USD/t) 6,800 7,150 7,100 7,000

Copper (USD/lb) 3.08 3.24 3.22 3.18

Source: ABN AMRO

Too much bad news to digestCopper prices came under pressure during the first quarter of 2014, losing

10% over the three-month period. There were also several serious economic

setbacks for industry to digest, such as disappointing manufacturing data

from China, Fed tapering announcements, weaker-than-expected

employment data from the US and the impact of geopolitical events such as

increased tensions over Ukraine. In addition, panic selling due to increased

volatility in the Yuan and the greater chance of more copper entering the

market (from copper financing deals) added to the depreciation of the copper

price. Economic data from the eurozone was better. In March, the PMI

composite output, which tracks the development of the manufacturing and

services sectors, decreased slightly but held steady above 53 points,

indicating a further expansion of activity. And copper stocks in LME

warehouses decreased by a sharp 28% in Q1, which was however not

reflected in the direction of the copper price. Still, these data could not

prevent the price from decreasing further.

Waiting for directionIn China, domestic industrial materials demand improved slightly, but some

market participants judged that the downside risks still predominated. As a

result, copper prices are hovering between USD 6,600/t and USD 6,700/t

and are clearly waiting for direction. Going forward, Chinese demand

indicators and other leading economic data coming from China will

determine the direction of the copper price. Worries over the health of the

Chinese economy and the level of copper demand have dented confidence

in the market. However, the recently announced ‘mini’ stimulus from the

Chinese government will provide some support, and will prove sufficient to

shift market confidence. This bodes well for the copper price. Investment

growth is expected to pick up and the Chinese manufacturing sector already

showed some signs of recovery during April. Alongside the rebound in

manufacturing activity in Q2 and an improvement in market sentiment, we

foresee an increase, albeit slow, in the copper price over the next three

months.

Oversupply until 2016Since our previous Quarterly Commodity Outlook, we have lowered our

average yearly forecast in 2014 given the strong price decrease in Q1 and

the weaker economic data – including manufacturing data – from China.

Although we expect a pick-up in industrial activity there during the second

half of this year, and assume that authorities will remain committed to

maintaining a growth target of around 7.5%, this will not lead to significant

increases in copper prices. The market outlook until 2016 for copper end-

use sectors (such as construction, electronics and machinery) is forecast to

improve. However, the copper market as a whole will remain oversupplied

until 2016, with production growth outpacing consumption growth. This will

limit any significant gains in copper prices during that period. We have

revised our forecast until 2016 and foresee an average 2016 price of USD

7,000/t.


- Recovery in construction (US, EU, China) - Risk aversion and need for liquidity increases

- Stronger-than-forecast Chinese economic performance - Weaker-than-expected Chinese economic growth

- Rising Chinese copper import requirements - Funds scale back their interest in copper as an asset class

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Base metals | Nickel • During Q1 nickel availability was more than sufficient to meet consumer demand • Uncertainty over geopolitical tensions is overshadowing the nickel market • We expect that fundamentals for the nickel market will slowly but steadily improve

Historical price Nickel



3-month 2014 2015 2016 Nickel (USD/t) 16,850 15,500 16,000 16,500 Nickel (USD/lb) 7.64 7.03 7.26 7.48

Source: ABN AMRO

Strong price increases during Q1 The nickel price surged during Q1, increasing nearly 15% from 1 January to 31 March. The price increase during Q1 was due to restocking activity by stainless steel mills on an expected decrease in the future availability of nickel, and not to significant increases in physical end-user demand. The strong increase in the nickel price was primarily the result of an anticipated deficit in the foreseeable future. Nervousness among buyers was not only increased by the imposed Indonesia nickel ore exports ban (in order to stimulate domestic investments in the industry), but also the increased tensions in Russia and Ukraine. Fundamentally, the international nickel market was oversupplied and stocks at LME warehouses increased by almost 9% during Q1. Warehouse stock levels represented approximately 10-11 weeks of consumption in Q1 2014, an increase of 3 weeks compared to Q1 2013. In other words, nickel availability has been more than adequate over the past three months to meet the level of consumer demand. And most of the excess material was delivered to LME warehouses during this period, leading once again to record levels of stocks.

Market jitters will persist in the short term Fundamentally, the international nickel market will remain oversupplied for the next three months. Uncertainty will overshadow the nickel market in the short term. The geopolitical tensions in Russia and Ukraine are encouraging the jitters in the nickel market. The nervousness among stakeholders will probably increase along with geopolitical tensions surrounding Russia. Russia is a major nickel producer, with a share of approximately 15% of global refined output. However, if the Ukraine conflict escalates and (economic) sanctions on Russia are intensified, this will definitely affect the market supply and demand balance, with an upward effect on nickel prices. We expect that the nervousness in the international nickel market will intensify over the coming period and nickel prices to stay strong in response.

We foresee higher prices in the long term We expect fundamentals in the international nickel market will slowly but steadily improve up to 2016. Global stainless steel output will rise steadily during 2014-2016. The gap between supply and demand will slowly become smaller until 2016, which will result in some price support. The supply of refined nickel will increase by approximately 10% against 2013 levels, while consumption is expected to increase by 20% in the same period. This will restore the balance in the market, but it will not lead to a deficit. Stocks will remain high. In our view, long-term end-user demand conditions will improve, with a revival of the construction sector (in China, US, Europe) and a further recovery in the automotive and home appliances sectors. We foresee higher nickel prices in the future. However, this picture could change if the situation in Russia and Ukraine escalates further and the Indonesian export ban is revised. Chances are that with fresh negotiations likely planned in Indonesia after the parliamentary elections in April and presidential elections in July, the export ban will return to the agenda.


- Stainless steel output increases on stronger demand - Funds scale back their interest in nickel

- Further economic sanctions on Russia - Weaker-than-expected growth of Chinese economy

- Increase in government stimulus spending - Substitution with lower nickel content by stainless steel industry

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Base metals | Zinc • Zinc market was fairly weak in Q1, with soft buying activity compared to previous quarters • Conditions in the international zinc market should start to improve in the coming months • Long-term outlook for the zinc market remains positive, given current economic forecasts

Historical price Zinc



3-month 2014 2015 2016 Zinc (USD/t) 2,095 2,100 2,250 2,300 Zinc (USD/lb) 0.95 0.95 1.02 1.04

Source: ABN AMRO

Refined zinc price lost 4% in Q1 Downbeat buying sentiment in the zinc market and the relatively negative economic climate in China were not positive for zinc market conditions. In the first quarter of 2014, refined zinc prices lost 4% and the Q1 average zinc price settled at USD 2,027/t. During this period, the zinc market has been rather weak, marked by soft buying activity compared to previous quarters. But even at this slower pace of purchasing, zinc consumption growth managed to outpace production growth in Q1. And as a result, zinc stocks registered at LME warehouses decreased by 10%. Currently, the total registered inventories at LME warehouses represent approximately eight weeks of consumption. The latest data shows that car sales in China have increased strongly, with car registrations showing double-digit growth over the first three months of 2013 and rising 10% on a yearly basis. This sharp increase in car sales was mainly driven by China’s growing urban middle class. New car registrations in Europe increased by 6% in the first two months of 2014 year-on-year, while car sales in the US decreased by 4%. The latter was mainly due to harsh weather in large parts of the US.

Near-term uncertainty and volatility In the short term, the market will be characterised by uncertainty and volatility, given the current geopolitical issues and worries over the health of the Chinese economy. From an end-user perspective, however, conditions in the international zinc market are looking more promising for the near term. The American Institute of Architects (AIA) is signalling a steady gain in US construction activity. The AIA noted that with the US economy stabilising, the construction outlook should improve further this year and a rise in construction spending on buildings and increased building activity is expected. Still, such an increase is not expected in China and Europe and we therefore foresee a modest revival in Q2. The most relevant factor directing the zinc price in the future will be the level of demand from China (with a share of more than 40% in both global supply and demand). In short, conditions in the international zinc market should start to turn for the better in the coming months, and sentiment among end-use sectors (but also galvanisers) should improve.

Long-term price is expected to increase The long-term outlook for the zinc market remains positive. According to our view, the global economy and the Chinese economy are set to improve further, albeit slowly. Despite the rebalancing of the Chinese economy, the level of investments is expected to remain elevated. According to the International Lead & Zinc Study Group (ILZSG) zinc metal usage will increase by 4.5% this year, while the global production of refined zinc metal will rise by 4.4%. We expect that global building activity will start to show a stronger recovery this year and the revival will continue into 2015-2016. At the same time, a number of zinc mines are set to be closed. This will add pressure to the future supply and demand balance in the long term, which will inflate the zinc price. We foresee a price of USD 2,300/t in 2016.


- Demand recovery in major zinc-consuming countries - Sharper weakening of Chinese housing/construction sector

- Rising use of galvanised sheet in China - Substitution of zinc for aluminium in e.g. automotive die casting

- More mine closures than currently foreseen - Weaker growth than expected in Chinese economy

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Ferrous metals | Steel (global HRC) • Conditions in Europe are slowly but steadily reviving and steel output increased in Q1 • We see no significant increases in global steel prices in the short term • Capacity cuts will increase, especially among smaller (inefficient) producers

Historical price steel (USD/t)

Source: Thomson Reuters Datastream Steel production & world trade (y-o-y % change)

Source: IISI, Thomson Reuters Datastream Group Economics price forecast (USD/t), 3-m price (Q2 exit) and year averages

3-month 2014 2015 2016 Steel (HRC, global)

560 570 550 545

Source: ABN AMRO

Global steel output decreases In China, economic data signaled a weakening in industrial activity at the end of 2013, which continued in the first quarter of 2014. China’s official PMI manufacturing index (NBS) hovered around the neutral 50 mark, industrial output softened and the credit supply remained tight. Despite the downbeat macro-economic data, steel production in China increased strongly in January, growing 8% yoy. The growth in steel output in February disappointed (0.4% yoy), but this was mainly due to the longer holiday period. The cumulative volume growth up to February was 4.3%. In the US, steel production was negatively impacted by the harsh winter weather, which also affected end-user demand, including the automotive and construction sectors. Conditions in Europe are slowly but steadily reviving. Steel output increased by 6.5% in the first two months of this year and end-using sectors in Europe are increasing their buying activity.

Short-term prices expected to remain soft While prices in the CIS and the US have dropped relatively sharply since 1 January (by 7% and 5%, respectively), steel prices in Southern and Northern Europe increased slightly on the first signs of a revival in end-using markets. Decreasing steel prices were also reported in China (-2%) and Latin America (-1%). March is typically the month in which seasonal construction demand in China improves, but this has not yet shown up in the data. Despite regional differences, we foresee no significant increases in global steel prices in the short term. In Europe and the US, conditions will improve further, marked by an increase in domestic consumption by service centres and end-users. Conditions in Latin America, the CIS and China seem to be less promising. The geopolitical issues in Russia could hamper the market and the Chinese market is still dictated by oversupply.

More balance in the long term Long-term macro-economic fundamentals are robust according to our view. This will benefit demand for cyclical industrial metals (such as steel). Therefore, we expect a revival of demand for steel in most regions from major end-using sectors (automotive and construction). In our view, European steel demand in particular will pick up during 2015-2016, which will further boost price strength. Long-term prospects are promising for the US market, with supportive market fundamentals going forward. However, China still poses a risk. We think that overcapacity will persist in the forecast period, which will put pressure on prices. The rebalancing to a consumption-driven economy in China will lead to lower GDP growth starting in 2015. This means that steel demand is also likely to soften. However, given the infrastructure projects (investments in transport networks) and construction plans (investments in social housing) for urbanisation purposes, steel demand will remain relatively high. In addition, we expect that capacity cuts will increase, especially among smaller (inefficient) producers. We also expect the government will take some action to curb steel mill pollution and output. In the long term, this should bring more market balance.


- Governments implement economic stimulus packages - Strong decline in steel demand in China

- Strong pick-up in steel demand from key sectors - Stagnation of EU and Chinese economies

- Permanent shutdown (defaults) of Chinese capacity (small mills) - Continued oversupply of steel and limited producer discipline

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Ferrous metals | Iron ore (fines) • China’s iron ore imports increased by 19% in Q1 compared to the same period in 2013 • China may increase buying activity in Q2 2014 if prices remain relatively low • Additional supply from new mining projects until 2016 will soften iron ore prices

Historical price iron ore (fines, USD/t)

Source: Thomson Reuters Datastream Chinese iron ore import & steel production (10,000 Mt)

Source: Thomson Reuters Datastream, IISI Group Economics price forecast (USD/t), 3-m price (Q2 exit) and year averages

3-month 2014 2015 2016 Iron ore (fines) 118 120 115 113

Source: ABN AMRO

Strong import demand from China in Q1 Demand for iron ore from major buyers was buoyant in the first quarter of 2014. Notably, China’s iron ore imports increased by 19% in Q1 compared to the same period in 2013. But at the same time, the supply of this steelmaking raw material has been sufficient and as a result, iron ore prices weakened by 15.6%. Normally, supply disruptions during the first quarter are quite common, as tropical cyclones hit West Australia (flooding iron ore mines in Queensland) and heavy rains batter Brazil. But relatively few projects declared force majeure on deliveries of iron ore and the market remained well supplied. Besides these fundamental effects, iron ore prices also softened on rumors of even tighter credit availability for the steel sector and widespread nervousness amongst buyers due the uncertainty surrounding the Chinese economy. The high volume of bad economic news coming out of China in Q1 was damaging to general sentiment. In addition, Chinese iron ore port stocks are still relatively high and stakeholders are concerned about future iron ore demand from China.

Given low prices, China may increase buying activity For the second quarter of 2014, we foresee a rebound in global construction activity. A seasonal recovery of the construction sector in China in the second quarter (after the holiday periods in Q1) is expected, and construction activity will also pick up in the US and Europe. But given the current high level of inventories at steel mills, we do not expect steel and iron ore demand to rebound significantly in the short term. With the current relatively low sentiment and on-going economic uncertainty over the Chinese economy, steel end users prefer not to have high inventories of steel, making them reluctant to buy higher volumes. Indirectly, this will have a negative effect on iron ore demand which, added to the fundamental situation of oversupply, will pressure prices in Q2. However, China may also increase buying activity in the iron ore market if prices maintain their relatively low level.

Additional supply will put further pressure on prices With many new projects in the pipeline, overcapacity is looming and this will depress prices. This additional supply from new mining projects until 2016 will soften iron ore prices. However, prices are expected to stay relatively high in historic terms, but will nevertheless decline during the forecast period. This will force many miners to cut costs and/or scale back their investment initiatives. When prices fall to lower levels, it becomes economically unviable to operate the high-cost mining projects. We therefore expect that small and inefficient (high-cost) iron ore producers will be closed down and some development projects (both green- and brownfield) will likely be mothballed. Future (infrastructure and construction) projects aimed at China’s further development will ensure a solid demand base for iron ore. This view is supported by the planned construction and infrastructure projects as well as on-going urbanisation and industrialisation. The pace of growth in this process will be slower, but it will provide a good base for demand levels.


- Infrastructure problems, unfavourable weather conditions - Shut-down of steel capacity (small mills in China)

- Expansion of government policies limiting total exports - Economic stagnation in EU and China

- Government stockpiling strategies - New mining capacity entering the market

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Ferrous metals | Coking coal • While demand was very soft in Q1, supply proved abundant • More producers must intervene in mine cost structure or ultimately shut down capacity • Small (high-cost) coking coal producers will have an increased risk of default

Historical price coking coal

Source: Metal Bulletin, Thomson Reuters Datastream Coking coal international trade (y-o-y % change)

Source: Thomson Reuters Datastream, Clarksons SIN Group Economics price forecast (USD/t), 3-m price (Q2 exit) and year averages

3-month 2014 2015 2016 Hard coking coal

107 119 121 126

Source: ABN AMRO

Coking coal prices continued to slide during Q1 Spot prices for coking coal continued to slide during the first quarter of 2014. Spot prices were at USD 140/t on 1 January, then lost USD 28/t until mid-April, a decline of 20%. Sentiment has been very poor in the coking coal market. Since the start of the year, activity on the international coking market has been soft on weak end-user demand by steel mills. Import demand from Japan decreased over the first two months of 2014, falling 17% yoy, while imported volumes of coking coal into China declined by 29% in the same period. And while demand was soft, supply proved abundant in Q1. During the first quarter, severe mining conditions for major coking coal mining regions are quite common, which disrupt supply and shipments. From December to February, Australia’s Queensland normally experiences heavy weather conditions. This period is characterised by high rainfall and occasional tropical cyclones. However, this year the weather conditions were not so severe and shipments of coal from Australia’s main export coal terminals were not significantly distorted.

We expect a short-term deterioration in price A decrease in the coking coal price is expected in the near term. Uncertainty over the health of the Chinese economy, lacklustre end-user demand from major buyers and ample supply will trigger a further deterioration of the coking coal price. In fact, Chinese coal production has not shown any sign of easing lately, even at current low price levels. The excess material will be available on the international market, adding pressure to prices when demand is relatively weak. We expect that the appetite for coking coal will remain soft for the next three months, given the level of coking coal inventories. Stockpiles at steel mills will probably be sufficient to service the expected level of steel production. In addition, the current tight credit conditions for steel mills imply that demand for coking coal will not accelerate soon. At the current low spot prices, a substantial number of coking coal producers have difficulty staying financially healthy and when the coking coal price continues to slide, more producers will be forced to intervene in the mine cost structure or ultimately shut down capacity.

Production cuts will help restore balance Given the low coking coal prices, we expect that production cuts are inevitable, which should help prices firm up during 2015. Low spot prices will lead to further capacity loss in the international coking coal market this year. This should bring demand closer to supply levels, which could restore the balance in the coking coal market in the long term. Especially small (high-cost) producers will have an increased risk of default, while the bigger mining companies in Australia, such as Rio Tinto and Glencore, will continue to increase production. Australia’s coking coal shipments are projected to increase by 6% in 2014. Seaborne coking coal trade to the four main importing regions is expected to remain firm this year. Imports of coking coal into Japan and Europe will increase mildly, by respectively 3% and 2% yoy, while seaborne imports into China and India will accelerate by 6% yoy.


- Supply problems (weather-related) in major supplying countries - Stronger decrease in steel demand

- Other coal supply difficulties (strikes, export limits, regulations, etc.) - Economic stagnation in the EU and Chinese economies

- Government coal stockpiling strategies - Steel mills switching to (cheaper) alternatives (PCI or gas)

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Frank Rijkers (+31 20 628 64 37)

Agriculturals | Wheat • Wheat prices increasing to highest point within ten months • Wheat production will remain elevated in 2014-15, higher consumption • Prices will decline steadily, but will continue to be high

Historical price wheat

Source: Thomson Reuters Datastream Wheat production and consumption

Source: IGC Group Economics price forecast (Cts/bu) 3-m price end of quarter and year averages

3-month 2014 2015 2016

Wheat 680 660 - - Source: ABN AMRO

Higher prices in first quarter of 2014 After a further decline in the wheat price in January, prices started to rise from the beginning of February. Since then, wheat prices surged more than 28% to a high of USDc 717/bushel at the end of March. Currently, the price is fluctuating around the five-year average. There are two reasons for the strong increase in wheat prices. The first main one is related to the adverse weather conditions. A long period of drought and cold in the US and Canada has affected both production and transport in these areas. The second reason is the political tensions in the Black Sea region, which is an important grain production area. Recently Egypt, as the largest importer of grains in the world, purchased grain from Ukraine (55,000 tonnes). This was the first order in three months because of the uncertainty of deliveries due to the political tensions. The International Grain Council (IGC) projects that production will increase in 2013-14 by one million tonnes (mt) to 709 mt. This is the highest production level in history. Meanwhile, consumption will also increase by one million tonnes to 692 mt. Carryover stocks will grow by 17 mt year-on-year compared to the end-2012-13 levels, to a total of 190mt.

Anxiety about El Niño The IGC has issued its preliminary projection for the 2014-15 season. These early projections have a significant influence on the trading price of grain worldwide. For the moment, the projections of the IGC are having a stabilising, and even slightly dampening, effect on the current price. Since the IGC began issuing the projections, the price of wheat has decreased by 6% to USDc 677/bushel. For 2014-15 it expects production to reach 700 mt. This is a decrease of 1% compared to the record production of 709 mt in the 2013-14 season, but is still 24 mt higher than the five-year average of 676 mt. Consumption is expected to continue to rise to 700 mt, while end-season stock remains unchanged. Over the coming months, the price development will continue to strongly depend on the political situation in the Black Sea region. If political tensions between Ukraine and Russia increase, this could affect the export of grains. The price will be positively affected by the IGC projections for next year, which suggest a higher production level than consumption. Another factor influencing prices is the decline in Chinese wheat demand. The wheat trade is likely to decline, as shipments have been boosted by below-average harvest quality in the current season. These last two factors may have a dampening effect on the price. The expected development of an El Niño could also negatively impact wheat prices. Assuming normal weather conditions, we expect wheat prices to ease, resulting in a three-month forecast of USDc 680 /bushel. The 2014 average price is set at USDc 660/bushel.


- Production risks, due to bad weather in production areas - Further decline in Chinese demand

- Escalation of political tensions in the Black Sea region - Better weather conditions leading to an adjustment in the crop outlook (e.g. early development of El Niño)


Marijke Zewuster (+31 20 383 05 18)

Agriculturals | Corn • Corn prices surged due to supply concerns in the US and developments in Ukraine • Price rises will be reversed as ample supply is likely to continue • Risks are tilted to the upside

Historical price corn

Source: Thomson Reuters Datastream Corn production and consumption

Source: IGC Group Economics price forecast (Cts/bu) 3-m price end of quarter and year averages

3-month 2014 2015 2016

Corn 500 450 - - Source: ABN AMRO

Corn prices surged, but remain low Like wheat and soybeans, the price of corn has risen sharply since February and now trades around 500 cents/bushel. The recent price surge was still nowhere near enough to make up for the steep price fall which took place between mid-2012 and January 2014. During that period, prices almost halved, falling from a high of 835 cents/bushel in August 2012 to a low of 420 in January 2014. Prices were supported by supply concerns as large exports resulted in a decline in US stocks. Meanwhile, unlike wheat and soybeans, corn prices are affected by the developments in Ukraine – the third largest corn exporter. Lower exports from that country could result in more demand for US corn. According to the latest Grain Market Report of the International Grain Council (IGC), export data indicated that Ukraine’s shipments have so far continued to be at normal levels. However, the IGC believes corn planting in Ukraine might be curbed by financial constraints.

Surge in supply and consumption to new record highs The United States Department of Agriculture (USDA) slightly increased its estimate for global corn production by 6.4 million mt to 974 million mt, and global consumption by 6.6 million tonnes to 950.3. The world corn ending stocks forecast for 2013/14 was lowered by 0.5 million mt, but at 158 million mt it is still far higher than in the two previous years when stocks ended around 134 million mt. While consumption fell slightly in 2012-13, expectations are for a strong rise in consumption in 2013-14. The USDA foresees a 9.8% increase compared to 2012-13 and the EIU has forecast an increase of 7.5%. As consumption will be met with ample supply, the increase in prices will most likely be reversed in the coming months. Still, given the current higher prices we have increased our three-month estimate to 500 and the 2014 average to 450 cents/bushel. Feed use accounts for over half of total corn use and this will continue to underpin demand for corn in the coming years while helping to stabilise prices. In the short term, developments in Ukraine will be the most important unknown in predicting future corn prices, with risks mostly tilted to the upside. In the longer run, an important determinant of future prices will be any change in the use of corn for ethanol, which has increased rapidly over the last decade. In 2000 over 90% of the US corn crop was used for feed and human consumption and less than 5% for ethanol. In 2013 the use for ethanol had risen to around 40%. As the US produces around 40% of the world’s corn and is the largest corn exporter, a change in the way corn is used in the US could have a significant impact on prices. The EIU expects the amount of corn used to produce ethanol to increase by around 8% in 2013-14, as lower corn prices have boosted ethanol operating margins. However, the use of corn for ethanol is controversial, as it could lead to a strong rise in food prices in countries were corn is used as a staple food. In the longer run, this could lead to a decrease in the use of corn for the production of biofuels.


- A decline in production in Ukraine - Higher-than-expected production in Latin America

- Stronger increase in the use for biofuels - Decrease in the use for biofuels


Marijke Zewuster (+31 20 383 05 18)

Agriculturals | Soybeans • Prices have surged since February • Production will continue to outpace demand… • …resulting in rising stocks and lower prices

Historical price soybeans

Source: Thomson Reuters Datastream Soybeans production and consumption

Source: USDA Group Economics price forecast (Cts/bushel) 3-m price end of quarter and year averages

3-month 2014 2015 2016

Soy 1,350 1,300 - - Source: ABN AMRO

Production, consumption and exports at record highs Like the prices of corn and wheat, soybean prices have risen significantly since February. In the case of soybeans, the main reasons were related to a weaker crop than initially expected, stronger imports from China and lower stock estimates for the US due to strong US exports. In January, the United States Department of Agriculture (USDA) increased its estimate for 2013-14 (Oct/Sep) production from 285 million metric tons (mt) to 287 million mt. However, the USDA lowered its estimates again in its 9 April World Agricultural Supply and Demand Estimates (WASDE) report to 284.0 million mt. With the current record at 271 million mt in 2012-13, this is still a record crop. Most of the anticipated decline in production is on account of Brazil, were a higher harvested area is offset by lower yields due to adverse weather conditions. The total area planted rose by 7% to almost 30 mln ha, but production is expected to rise by just 5%. Global consumption is also forecast to increase 5% to a new record high of 281 million mt and total ending stocks of soybeans are seen increasing from 58 million mt in 2012-13 to 71 million mt in 2013-14 according to latest WASDE estimates. In the US, however, high domestic consumption and exports have resulted in record low stocks. The stocks-to-use ratio is on course to end 2013-14 at 4.0%, according to USDA data. While total soybean trade is expected to rise by 11% to 107 million tonnes, it is anticipated that the US will export fewer soybeans. Imports from China (which accounts for around 70% of world trade) in the first five months of the 2013-14 (Oct/Sep) year totalled a record of 28.3m t, up 30% yoy.

Price increases will be reversed Under normal weather conditions, production is expected to continue to exceed consumption, which underpins our expectations of a fall in prices during the year. However, given the higher-than-anticipated prices in February to April, which resulted in an average price in the first four months of this year of 1,355 (Cts/bushel), we have increased our average price forecast from 1,200 to 1,300. This compares to an average price of 1,360 in 2013. Soybean prices are still favourable compared to corn, which will lead to more substitution of corn with soybean plantings. The EIU expects soybean production to rise to 299 million mt in 2014-15, with consumption reaching 288 million mt, resulting in an almost doubling of stocks from 5.7 million mt in 2013-14 to 11.1 million mt in 2014-15. The expected development of an El Niño could have a further negative impact on prices. According to some sources, recent Pacific Ocean trends suggest that an El Niño might already develop during our summer. This could be favourable for both soybean and corn production and hence lead to even lower prices.


- Weather-related problems in the main soybean-producing countries, which threaten harvests

- Much larger crops than expected - Early development of El Niño

- Feed demand in Asia increases more sharply than expected


Hans van Cleef (+31 20 343 46 79)

Agriculturals | Sugar • Sugar prices have appreciated, mainly on speculative buying • Oversupply will remain in 2013-14 crop, but first deficit in five years looms • ABN AMRO expects sugar prices to trade around USDc 17.50/lb in 2014

Historical price sugar

Source: Thomson Reuters Datastream Sugar production and consumption

Source: ISO Group Economics price forecast (Cts/lb) 3-m price end of quarter and year averages

3-month 2014 2015 2016

Sugar 18.00 17.50 - - Source: ABN AMRO

Price recovery due to adjusted crop expectations During the first quarter of 2014, sugar prices recovered from the four-year low of USDc 14.92/lb. Sugar prices staged a particularly strong recovery in February and March – triggered by short-covering rallies – and reached a high of USDc 18.57/lb before stabilising. The recovery was triggered by several factors. 1) The drought in Brazil led to adjustments in sugar crop expectations. This was clearly based on a loss of supply, and not a change in demand expectations. 2) As a result, funds turned from short to long positions as investors bought into the weather-related stories. 3) The Brazilian Real (BRL) appreciated to USD/BRL 2.20 (from USD/BRL 2.50 in Q1), which proved to be a supportive factor for sugar. 4) US sugar rallied due to short covering, as concerns increased that a trade dispute with Mexico over alleged dumping will tighten supplies of sugar. 5) Finally, other parts of the sugar production regions were also not doing so well, including in India where production has fallen. Although temperatures in Central-South Brazil have been around average levels, precipitation and soil moisture levels have been far below average.

Surplus will cap the upside this year Despite these events, which have affected crop volumes, the International Sugar Organisation (ISO) still expects a surplus in 2013-14 of 4.5 million tonnes. However, the ISO’s expectations for the 2014-15 crop tightened to a 1.5-million ton deficit. This would be the first deficit in five years. The lower estimates are mainly driven by anticipating planting and long-term weather expectations. In addition, Brazil’s Conab crop bureau indicated in its first estimates for Brazil’s cane, ethanol and sugar output that it expects a 2% rise (y-o-y) in 2014-15, despite the drought damage. Notwithstanding the fact that prices have somewhat stabilised, there are still significant speculative positions in the market. The main driver for soft commodity growing areas over the coming months will be a possible El Niño event. Currently, the risk of an El Niño is already priced in. However, any confirmation that such an event will actually develop during this southern hemisphere’s winter season could trigger more support for cocoa, coffee and sugar prices. The Australian Bureau of meteorology has updated its estimates to a greater than 70% chance that El Niño will develop. The prompt physical market remains oversupplied with end user demand lagging behind the speculative type demand we have seen recently in the futures market. This is highlighted by the recent steep carries we have witnessed going into delivery both in raw and white sugar. Despite the large downward revision in production in both India and Brazil, the market continues to grapple with large carryover stocks from the recent surpluses. Our expectation for the near-term sugar price development is for more sideway trading with some upside bias. However, the upside seems to be capped due to large stocks and the production surplus expected for this year. Therefore, the three-month outlook for sugar prices is set at USDc 18.00. The average price for 2014 has been adjusted higher to USDc 17.50 as a result of recent short-covering rallies.


- Weather-related production risks in big production areas - Economic recovery takes longer

- BRL appreciation against the USD - Lower biofuel demand

- Bigger-than-expected increase in ethanol production


Hans van Cleef (+31 20 343 46 79)

Agriculturals | Coffee • Impressive rally due to weather-related events, which pushed down crop expectations • More upward potential for Arabica in the coming months • Robusta supported by Arabica strength but capped by origin resistance

Historical price coffee

Source: Thomson Reuters Datastream Coffee: production and consumption

Source: USDA Group Economics price forecast (Cts/lb) 3-m price end of quarter and year averages

3-month 2014 2015 2016

Arabica 230 200 - - Source: ABN AMRO

Weather events resulted in major rally Coffee was, by far, the best-performing commodity with a more than 85% rally in the first quarter of 2014. In our previous update, we expected a bottoming-out phase for Arabica coffee prices as Brazilian rains hurt crop expectations. However, the situation changed completely thereafter. Due to the severe and unprecedented hot and dry weather in Brazil during January, February and March, coffee crop forecasts were cut back significantly, resulting in an impressive rally. Arabica prices more than doubled from a low of USDc 100/lb to over USDc 210/lb. In January and February, rainfall levels were more than 60% below the longer term averages. In March, rainfall was 40% below normal. April levels appear to be above the longer-term average, but this cannot unwind the damage already done. Initial market estimates were for a record Brazilian crop of more than 55 million bags. Now even the lowest estimates have been cut back to 40 million bags, although this is seen as unrealistic. The harvest starts in May/June. Only then will the actual impact of the drought on this season’s crop be crystallised.

Impact to be felt in years ahead As a result of the strong rally, Arabica became even more expensive than Robusta, with the mutual relationship (arb) rising to a recent high of USDc 108/lb. The sharply changing story compared to the start of the year resulted in the fund positions on Arabica switching from being significantly short to long. Robusta funds were already long, thus changing the arbitrage outlook. As a result of the recent significant rally in coffee prices, the roaster community is likely to increase their commercial prices so retail consumers will probably be confronted soon with higher coffee prices in supermarkets. The market’s direction will remain strongly weather-dependent. As the winter will start soon in Brazil, the risk of more negative weather-related news cannot be ruled out in the form of cold spells and frost. Therefore, some more upside in Arabica coffee prices can be expected in the near term. For the next three months, a target price in the range of USDc 220-240/lb seems plausible. We have significantly raised our 2014 average price for Arabica to USDc 200/lb. Price developments for Robusta will strongly depend on the outlook for Arabica. If there is further support for Arabica, Robusta prices are likely to follow higher. Expectations for a near record crop in Vietnam are being confirmed by excellent shipment numbers, while the Indonesian crop may somewhat disappoint. In line with the Arabica development, Robusta prices could gain another USD 100-200 towards our price target of USD 2350. In addition to the impact on the 2014-15 crop year, the following year’s Brazil crop will be affected as a result of the unseasonal dryness. For 2015-16, an ‘off-year’ in the cycle, a significant reduction will be seen in the crop size although this is really an unquantifiable number right now. The impact on this years’ crop may be dampened somewhat by the large carryover stocks, but this will not help the 2015-16 supply and demand picture. The impact on the subsequent crop years is impossible to gauge as there is no historical precedent for this atypical weather event.


- Indonesian crop reductions - Downturn in the global economy

- Lack of rainfall in Brazil - Brazilian Arabica output

- A spill-over from negative sentiment towards commodities if other asset classes are seen as a better investment


Hans van Cleef (+31 20 343 46 79)

Agriculturals | Cocoa • Speculative buying, strong Asian demand and risks of a higher deficit resulted in 2.5-year highs • Fundamental and firm technical factors, and a possible El Niño developing, seen as main drivers • Speculative long positions keep markets well supported: three-month outlook USD 3,150

Historical price cocoa

Source: Thomson Reuters Datastream Cocoa beans production and grinding

Source: ICCO Group Economics price forecast (USD/t) 3-m price end of quarter and year averages

3-month 2014 2015 2016

Cocoa 3,150 3,025 - - Source: ABN AMRO

Positive signals from grindings data In recent months, cocoa prices have rallied on the back of expectations of a second straight deficit year. The upward moves gained extra support in recent weeks from the increased possibility of an El Niño weather event occurring this southern hemisphere winter, which could impact global supplies over the next two years. In our previous update, we already hinted on the likelihood of another deficit. This potential deficit, combined with reports of black pod disease in Cameroon and strong Asian demand, have proven supportive for cocoa prices. Both London and New York prices appreciated, reaching 2.5-year highs in March. On 1 April, the Ivory Coast mid-crop season started. The mid-crop outlook is healthy and favourable weather is said to be having a positive effect. Meanwhile, bean deliveries remain strong for this season. Arrival numbers are up 8.7% year-on-year in Ivory Coast and 12.5% in Ghana. European Q1 grindings, released by the European Cocoa Association (ECA), showed a very modest rise in processing (+0.4% to 340,735 tonnes). The outcome was below traders’ expectations for a 3-5% rise on the back of growing consumption. US Q1 grindings showed a rise of 1.03% in the first quarter of 2014 According to the National Confectioners Association (NCA). This is the sixth straight quarterly report showing a year-on-year rise but represents the smallest increase In nearly a year-and-a-half.

Bullish factors could keep prices supported In January, US Q4 grinding data showed that a record amount of cocoa (509,237 tonnes) was processed in North America in 2013, signalling strong demand. Market expectations are that 2014 will show similarly strong data. According to initial forecasts for the current 2013/2014 cocoa year, published in the latest issue of the Quarterly Bulletin of Cocoa Statistics, the International Cocoa Organisation ICCO envisages a supply deficit of around 115,000 tonnes. Despite the risk of the near-term limited upside as a result of the mid-crop (April-September), we believe that the drivers for the coming months will be similar to those seen in the previous quarter. More support for cocoa prices can be seen, especially at the end of the summer when the mid-crop nears its end and there is more certainty about any El Niño phenomenon. Recently, the Australian Bureau of meteorology has updated its estimates to a greater than 70% chance that El Niño will develop during the forthcoming southern hemisphere winter. This could potentially hurt output in main cocoa producers Ivory Coast, Ghana and Indonesia. Bullish fundamental factors like poor weather, deficits, diseases and continued Asian demand will most likely keep cocoa well-supported. On top of that, the technical outlook remains bullish, with target resistance levels seen at USD 3,175/t to USD 3,215/t. As a result, we believe that the uptrend in cocoa prices could resume, largely driven by speculative traders who continue to hold significant long positions.


- Cocoa production’s sensitivity to weather conditions - Downturn in the global economy

- High vulnerability of the cocoa crop to diseases - Return of El Niño phenomenon in southern hemisphere winter

- Unwinding of speculative long positions


GDP Forecast Developed and Developing Countries

World Trade (volume index) and y-o-y % change

Regional Manufacturing PMIs (index) Consumer Prices per region (change in CPI, % y-o-y)

Business & Consumer Confidence Euro Area

Macro-economic Forecasts ABN AMRO Group Economics

Consulted sources for this publication: Economic forecasts, insights and publications from ABN AMRO | Group Economics, Metal Bulletin, CRU, Commodities Now, Mining Journal, Coaltrans, Bloomberg, IGC, IISI, ISSB, NBS, IGC, IEA, Baker Hughes, ICCO, ICO, USDA, China Mining, Clarkson Research Services, ABARE, AME, Thomson Reuters Datastream, World bank, ECB, Eurostat, IMF

Macro-economic data | Leading indicators supporting commodity price forecasts

Forecasts from 17th of April 2014 by ABN AMRO Group Economics

40

44

48

52

56

60Germany

UK

Europe

World

France

Italy

SpainBrazil

China

India

Japan

Russia

US

February March neutral

-3-2-101234567

2009 2010 2011 2012 2013 2014

% c

hang

e y-

o-y

EU27 US Japan China

GDP per cap USD2012 2013 2014e 2015e 2012 2013 2014e 2015e 2012

US 2.8% 1.9% 3.3% 3.9% 2.1% 1.5% 1.6% 2.0% 51,704China 7.7% 7.7% 7.5% 7.0% 2.6% 2.6% 2.8% 3.2% 9,055Japan 1.4% 1.5% 1.6% 1.4% -0.1% 0.4% 2.3% 1.7% 35,855EU -0.6% -0.4% 1.3% 1.8% 2.5% 1.4% 0.5% 0.8% 31,571UK 0.3% 1.9% 3.0% 2.8% 2.8% 2.5% 1.6% 1.7% 36,569Germany 0.9% 0.5% 2.0% 2.3% 2.0% 1.5% 1.0% 1.3% 38,666World 3.0% 2.9% 3.6% 3.8% 3.9% 3.8% 3.8% 3.6% 11,964

Inflation (CPI, % y-o-y avg)GDP growth (% y-o-y)

0

20

40

60

80

100

120

140

160

-25%-20%-15%-10%-5%0%5%

10%15%20%25%

2007 2008 2009 2010 2011 2012 2013 2014

World trade (l.axis, y-o-y % change) World trade balance (r.axis, volume index)

-40

-30

-20

-10

0

10

Consumer confidence indicator Euro Area Business confidence indicator Euro Area


E-mailbox of Group Economics: [email protected] Group Economics:

Contact information ABN AMRO | Group Economics (in order of appearance): Primary area of expertise: Phone: E-mail:

- Marijke Zewuster Head Emerging Markets & Commodities, Grains

+31 20 383 05 18 [email protected]

- Nick Kounis Head Macro Research +31 20 343 56 16 [email protected] - Georgette Boele Precious Metals, top down +31 20 629 77 89 [email protected] - Casper Burgering Ferrous and Non-ferrous metals +31 20 383 26 93 [email protected] - Hans van Cleef Energy, Soft commodities +31 20 343 46 79 [email protected] - Theo de Kort Information specialist +31 20 628 04 89 [email protected] - Frank Rijkers Grains +31 20 628 64 37 [email protected]

More information:

Websites Group Economics - Internet Group Economics (Macro Research and theme

reports, including commodities): English: insights.abnamro.nl/en/ Dutch: insights.abnamro.nl/

Contributors

All publications of ABN AMRO on macro-economics and sector developments can be found on: insights.abnamro.nl/en. You can also download our Market Insights App on abnamro.nl/marketinsights or directly in de App Store. Follow Group Economics on Twitter: https://twitter.com/sectoreconomen


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Personal disclosures The information in this opinion is not intended as individual investment advice or as a recommendation to invest in certain investments products. The opinion is based on investment research of ABN AMRO Group Economics Sector Research and ABN AMRO Private Banking International. The analysts have no personal interest in the companies included in this publication'. Their remuneration for this work is not, was not and will not be related directly or indirectly to the specific recommendations or views expressed in this opinion.

quarterly commodity outlook - abn amro · 2017-02-27 · quarterly commodity outlook group...

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