MORGAN STANLEY: Here's What 14 Major Commodities Will Do For The Next Two Years

Soybean farming in brazil

Photo: AP Images

Despite recent hiccups in gold prices, if you’re investing in commodities, it is still the best, safest bet, according to Morgan Stanley’s commodities team led by Hussein Allidina.Silver offers a little more risk and reward than gold; Allidina expects it to outperform gold in 2013.

The report also favours soybeans and corn as demand for them is accelerating faster than supply.

However, the report warns commodities investors away from aluminium and sugar, two commodities that are acutely oversupplied at the moment.

We pulled the price targets and paraphrased the investment theses for 14 major commodities from Morgan Stanley’s latest Commodity Manual.

Brent Oil Market Will Be More Stable As Supply And Demand Are Near Equilibrium

Projected 2013 average: $110/bbl

2014 price: N/A

Demand for crude oil isn't likely to grow much this year, just 0.9%, which means that simply maintaining 2012 levels of production will be enough to keep the market in balance, and the price of oil stable. It's more likely that demand will exceed supply, but only slightly. Any growth in supply will mostly likely be due to an increase in production in the U.S. and Canada, according to the report. Demand from OECD countries will likely decline, though it will be offset by accelerating demand from China and India.

Source: Morgan Stanley

Natural Gas Will Remain Weak Due To Resilient Supply And High Inventory

Projected 2013 average: $3.50/mmBtu

2014 price: N/A

A relatively mild winter which resulted in reduced demands has increased the gas inventories. Prices will remain depressed through the first half of 2013, until inventories remain elevated. But later in the year, prices should improve a bit as consumer switch from coal to gas due to initially lower prices. Supply growth will remain resilient.

Source: Morgan Stanley

Aluminium Will Remain Depressed, Thanks To Huge Global Stores Of The Metal

Projected 2013 average: $2,300/metric ton

2014 price: $2,300/metric ton

High global stores of the metal combined with high production capacity means that aluminium prices will likely remain depressed. Aluminium demand should benefit from any further infrastructure and construction related stimulus from China--and economists expect that it is the 6%-7% increase in demand from that region that will stabilise aluminium prices.

Source: Morgan Stanley

Solid Fundamentals Mean The Market For Copper Will Remain Healthy

Projected 2013 average: $8,600/metric ton

2014 price: $8,200/metric ton

Supply growth will remain constrained over the next five years. And while the demand for the metal in China has been contracting in the past, this will likely reverse as China's power infrastructure and auto market are stabilizing. Copper has superior fundamentals, and long term, investors expect it to outperform other London Metal Exchange metals.

Source: Morgan Stanley

Acute Oversupply Means Nickel Isn't Worth The Trouble

Projected 2013 average: $18,300/metric ton

2014 price: $19,800/metric ton

The laggard of London Metal Exchange metals, nickel recently dropped to mid-2009 lows, due to poor demand and mounting oversupply.

Source: Morgan Stanley

Zinc Supply Is Finally Tapering, But It's Still Much Higher Than Demand

Projected 2013 average: $2,200/metric ton

2014 price: $2,300/metric ton

In 2012, the supply of zinc declined faster than consumption, thanks to a sharp drop in production in China. This an encouraging trend, as the metal has been in over supply since the financial crisis. Any Chinese policy moves towards infrastructure growth would also boost the price of zinc.

Source: Morgan Stanley

Thanks To Easy Money In The U.S. And Europe, Gold Is Still The Best Bet

Projected 2013 average: $1,853/oz

2014 price: $1,800/oz

The third round of quantitative easing from the Fed, combined with the ECB's unlimited bond purchase program has been good for gold prices, reinforcing Morgan Stanley's long-held bullish view on the metal. However, the demand for gold is unusually low, with 2012 gold sales at their lowest level in all three years of the current Central Bank Gold Agreement. This lowered demand will likely temper prices.

Source: Morgan Stanley

Silver Will Probably Outperform Gold But It's More Volatile

Projected 2013 average: $35/oz

2014 price: $35/oz

Silver could outperform gold on a relative price basis, as it has a cheaper entry point. While silver had been underperforming as investors steered to gold thanks to uncertainty over global macroeconomic policy, it started to rally when speculation over QE 3 emerged in September. This is a trend that will likely continue, as supply and demand fundamentals remain favourable. Production from mines has stalled since 2011, whereas demand for silver for electronics and jewelry is making up for the collapse in its use in photographic equipment, coins and medals.

Source: Morgan Stanley

South Africa Is Running Out Of Platinum, And Demand Is Holding Firm

Projected 2013 average: $1,715

2014 price: $1,785

South African supply issues have helped rid the market of any surplus, and industrial demand remains firm, both of which are boosting the price of this precious metal.

Source: Morgan Stanley

China Has Half The World's Cotton Under Lockdown, Which Could Make It More Expensive

Projected 2013 average: 80¢/lb

2014 price: N/A

With China purchasing more and more cotton to add to their reserves, it is likely that at least half the global stocks of the fibre will be locked up there. And since current economics are favouring grain crops, cotton supplies might fall slightly as cotton acreage contracts by 4%. Morgan Stanley remains bullish on cotton, unless a global GDP slowdown lowers demand.

Source: Morgan Stanley

There Is A Sugar Surplus In The World, And It's Probably Going To Stay That Way

Projected 2013 average: 19¢/lb

2014 price: 20¢/lb

A global surplus of sugar, thanks to larger-than-expected production in Brazil and healthy production in India, will likely cause prices to remain depressed for a while. Longer term, prices will need to be high enough to provide farmers with enough incentive to continue to plant sugar. However, that incentive price is well below current levels.

Source: Morgan Stanley

Corn Hasn't Been Properly Rationed In The U.S., Which Could Lead To Short Term Volatility

Projected 2013 average: $7.85/bu

2014 price: $5.90/bu

Global stores of corn remain precariously low, and U.S. demand has not been adequately rationed, which is why Morgan Stanley is bullish on corn for the short term. However, assuming normal weather and increased production in Brazil will likely cause prices to fall into 2014.

Source: Morgan Stanley

Soybean Prices Remain Elevated Due To Supply Disruptions In South America

Projected 2013 average: $15.70/bu

2014 price: $14.50/bu

Strong U.S. demand and recent supply shortages in South America will cause Soybean prices to remain elevated and volatile. High prices will encourage production and stabilise supply, which will likely cause prices to fall slightly and then stabilise.

Source: Morgan Stanley

Demand For Wheat Will Fall Because It Will Be More Expensive Than Corn

Projected 2013 average: $8.30/bu

2014 price: $7.30/bu

Wheat prices will remain sensitive to possible supply challenges in the U.S., but the fact that it's more expensive that corn will likely temper demand. U.S. exports should rise as Ukrainian and Russian wheat production will likely be disappointing. The drought in Australia and flooding in Argentina will also likely put a dent in the quality and quantity of wheat produced in those regions.

Source: Morgan Stanley

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