In an interview with CNBC-TV18, Alan Heap, Managing Director （Global Commodity Analyst）, Citi Investment Research spoke about his reading of the commodity markets and the road ahead.
Below is a verbatim transcript of the interview.
Q: We had the Conference Board, which was a bit of a shocker for Chinese growth and today the Purchasing Managers' Index （PMI） numbers are indicating closer to 15—that would be saying a lot. And of course the US bond market are reputedly showing that they don’t have much faith in the recovery process there. Would all that mean that commodities have seen the best for 2010?
A: Potentially yes. We did see some very spectacular prices earlier in the year then we saw a dramatic pull back of course and now in recent weeks the LME has been trading within quite wide range—very choppy markets as they try to come to grips with two key areas of risk. One is what’s going on in China and the other is what’s going on in the developed economies particularly in Europe.
Q: What’s the sense you are getting with aluminum and copper. While we have seen while aluminum prices have tumbled quite a bit this year, at least for copper there seems to be some sort of resilience. What’s your reading of these two commodities?
A: Yes, it’s been interesting. As you said aluminum absolutely collapsed but it’s now down at prices where we are right deep into the cost curve. The prices now round about the 75% point on the global cost cash cost curve. The downside risk from here I would suggest is really quite limited. It’s reasonable to expect that soon we will start to see production cut backs in China and that will set the stage perhaps for recovery but certainly very limited downside risk.
On the other hand, copper despite the slowdown in demand, the market remains extremely tight, inventories are at low levels and it’s that chronic supply shortage, which is really keeping prices up at these still quite good levels.
Q: So what would your forecast be on copper for the rest of 2010? Would you forecast an improvement in prices—if so, by how much?
A: Yes we are looking for an improvement but no longer back up to the USD 7000 plus that we were looking for. It’s going to be a little more moderate than that. The key part of the jigsaw puzzle, which I now think is missing, is the confidence in the developed economies that will boost a powerful restocking cycle.
But all the indicators of demand are really not that bad and the main driver behind this pullback in prices that we have seen profit taking by speculators where we have seen spectacular contraction in the speculative long position in copper but also in the other metals.
Now that money is sitting on the sidelines and any sign of an improvement in the macro economic position or even a reduction in the risk, we will see that money come pouring back into the market and I believe see these base metal prices start to recover although may be not back to the levels that we saw back in March and April.
Q: What about steel and iron ore? We had news last week from China about cutting the VAT rebate for exports that would include steel also. What’s your reading of steel and iron ore prices?
A: Those moves by the Chinese government were one of a string of measures, which they are adopting to force consolidation, rationalization and a curtailment in capacity growth, not only in steel incidentally, but in a range of other energy intensive industries which they have in their target.
We think that crude steel production in China is now already slowing. The May numbers were still very robust but all the early signals from June are that steel production is slowing. The prices, we know, are under pressure and in turn are going to put downward pressure on iron ore prices. We see Iron Ore prices getting down to USD 130 a tonne on a spot price basis delivered into China.
In addition to those factors within the steel market which are pressuring iron ore prices, domestic iron ore production within China is also now expanding.
Q: If we can speak about crude—in a recent blog of yours you had written that shorts have pilled up in the crude market. What is your trajectory for crude prices for next couple of weeks and for the next quarter?
A: I am not our crude/oil expert. So paraphrasing the work of my colleagues, in the very short-term we could well see further downside risk on prices—certainly very volatile trading. But further out we see prices starting to recover back up to the high USD 70 a barrel level.
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