Citibank says commodities are set for a 'period of outperformance'

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  • Citibank is bullish on the outlook for commodities, mirroring similar sentiment from Macquarie Bank
  • Citi has made several upgrades to its forecasts for industrials, precious metals and the bulks
  • It says lower mining sector investment in recent years should help to support prices, especially for industrial metals

The global economy is looking better than at any point in the past decade growth picking up and inflationary pressures building.

And given that both stocks and bonds are looking expensive, and an expectation that the US dollar will continue to weaken, Macquarie Bank thinks now’s the time to buy commodities.

They’re not the only one saying that.

Citibank, too, thinks that commodities look like a good bet right now.

“All else equal, commodities should be in a period of outperformance given global conditions,” Citi says in a note released this week.

“The current macro backdrop of strong, synchronised global growth, weaker dollar and rising inflation as very positive for the commodities complex.”

So what commodities does Citi like at present?

In short, industrial metals, precious metals and the bulks, says Citi, making a swathe of upgrades to it previous price forecasts.

Here are Citi’s updated forecasts.

Source: Citibank

For industrial metals, Citi says it continues “to expect that the global macroeconomic environment will remain bullish for metals pricing during the first half of 2018”, adding that investors should “rotate into industrial metals, particularly at the expense of fixed income”.

“Specifically, we raise our 0-3 month point price forecasts for zinc and copper to $4,000 a tonne and $7,500 a tonne respectively, while leaving those for nickel and aluminium unchanged,” it says.

Pointing to the chart below, Citi says a collapse of global metals and mining investment over the past five years is a key theme supporting its “relatively constructive 2018 view on metals prices”.

Source: Citibank

“The major decline in Chinese fixed-asset investment in mining over the past two years is particularly notable given the substantial rally in prices, and since China had been the swing supplier to metals markets over the past 15 years,” the bank says.

“This suggests that to the degree demand continues to grow, metals market fundamentals may continue to tighten over time.”

As for precious metals, it likes the look of gold, forecasting prices to reach $1,385 an ounce in 6-12 months time and to average $1,355 an once in 2018.

“Higher inflation, rising portfolio hedge demand, a weaker USD, and a pick-up of consumption in China are all supportive of the yellow metal,” Citi says.

It adds the “headwind from higher bond yields should abate as well, as the back-up in US treasury yields is likely to take a breather after the sharp move so far this year”.

Citi also says that bulk commodity prices are also likely to be firmer than it previously expected, upgrading its forecasts for coking coal, thermal coal as well as iron ore.

For thermal coal it says “prices are now forecast to remain higher-for-longer on rising Chinese costs and constrained supply growth”.

It also revised up coking coal price forecasts modestly by $10 a tonne per annum for 2019 and 2020.

“Similar to thermal coal, a lack of investment capital expenditure in the past few years has resulted in low spare coking coal capacity in the Chinese domestic and seaborne markets,” it says.

“Therefore major disruptions could weigh heavily on the markets and create price spikes.”

Citi is also bullish on iron ore, at least in the short term.

“[We] expect prices to reach $80 a tonne in late February or early March on the back of improved steel demand post Chinese New Year and steel mill re-stocking of high-grade iron ore,” it says.

Over the medium-term, Citi expects the price of benchmark 62% fines to finish the year at $60 a tonne on high iron ore supply and subdued steel mill margins in China.

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