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BofAML updates mined commodity price forecasts as Chinese policies prop up prices
The Global Research team at the Bank of America Merrill Lynch (BofAML) has updated its price forecasts for mined commodities, saying on Wednesday that its prior price outlook had been too bearish for cyclical raw materials, while the near-term outlook for gold and silver looks less bullish than originally thought.
In general, the research team advised in the latest ‘Global Metals Weekly’ report, it categorises commodities in four groups, each reflecting the fundamental backdrop.
These include commodities where China is cutting capacity, that should keep prices for steel, iron-ore and aluminium stable; raw materials with limited supply growth outside of China, such as zinc – which has the strongest fundamentals and an expected modest deficit in 2018; materials that are predominantly demand-driven such as copper; and macro plays, such as gold, which the bank believes faces headwinds as the market looks toward the next US Federal Reserve rate hike.
According to BofAML, base metals are rallying on strong demand and fundamentals.
Aluminium has rallied as market participants have priced in production curtailments in China, with an expected rebalancing of the country's physical market now on the cards. BofAML lifted its 2017 price forecast by 5.4% to $2 005/t ($0.91/lb) and added 6.4% to its price forecast for 2018 to $2 075/t ($0.94/lb).
“While most of this dynamic has already been priced in, we see further gains reflected in our expectations for prices to rise to $2 250/t ($1.02/lb),” the research team stated.
Copper has rallied over summer, but the physical market has not tightened. The analysts see an ‘air pocket’ during winter as Chinese demand growth has been slowing. They lifted the 2017 price forecast 8.5% to $5 897/t ($268/lb), with the 2018 forecast rising 13.6% to $6 260/t ($2.84/lb).
Zinc has the strongest fundamentals among the base metals, with exchange stocks running low, prompting prices to rise to BofAML’s previous price target of $3 000/t ($1.36/lb). “Notwithstanding, the metal could squeeze higher still, touching potentially $3 500/t ($1.59/lb),” BofAML stated.
The group has increased its 2017 zinc price forecast by 4.3% to $2 830/t ($1.28/lb) and, for 2018, added 5.9% to $2 830/t ($1.42/lb).
Meanwhile, nickel has become the go-to material for market participants looking to get exposure to electric vehicles. “While we agree that the commodity will benefit, prices are unlikely to react imminently; indeed, increasing supply from Indonesia remains a focal point and there is considerable apprehension over whether the Philippines will indeed curtail output, keeping the metal in a range,” according to the report.