DEUTSCHE BANK: Commodities are looking good but 'demand concerns' are coming

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If there’s been a prevailing theme in markets in recent months, it’s been increased optimism over the outlook for commodity prices, bolstering the view that the nadir seen earlier this year will be just that, the lows in the current cycle.

Joining the ranks of Macquarie Bank and HSBC before them, research analysts at Deutsche Bank believe that the recent strength in commodities will persist, at least over the short to medium term, announcing a swathe of price upgrades in a research note released earlier this week.

“We have made some material changes to near-term commodity prices although these are predominantly mark to market moves,” the bank wrote.

“In terms of relevant changes for our investment universe, we see material changes for 2017 forecasts in thermal (+13%) and metallurgical coal (+25%), zinc (+22%), manganese (+37%), nickel (+8%) and iron ore (+7%).

“Aluminium, alumina and copper are broadly unchanged,” they add.

Here’s the bank’s updated price forecasts for base and precious metals:

And for the raw ingredients used to make steel:

While Deutsche is optimistic about prices in the months ahead, they are more cautious on the longer-term outlook, suggesting that increased demand from China as a result of the government’s latest infrastructure and residential property construction push will likely ebb by the middle of next year.

“Our commodity team has raised forecasts for the remainder of 2016 and 2017 to reflect supply side changes,” it says. “But by 2Q17 we expect demand side concerns to come to the fore as a result of a significant slowdown in Chinese construction activity.”

Deutsche suggests that for “mining equities to take another leg up from here, we believe sufficient confidence in the demand outlook is required to convert compelling FCF [free cash flow] yields into share price performance”.

As the largest consumer of commodities globally, that optimism, as ever, will largely be determined by China.

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