Recovery delayed. At the start of 2Q12 we had expected accelerating lending and seasonal factors to drive a sharp pick-up in Chinese growth, presaging an improved global outlook in 2H12. Instead, China slowed further, the Eurozone crisis deepened, the US fell back (again), and speculative funds reprised their aggressive short selling attack on commodities, this time encompassing crude oil as well.
2H12 outlook subdued as macro issues dominate. Although we still expect Chinese growth to pick up ahead of the People’s Congress and once-a-decade leadership transition in 4Q12, we now expect a more modest acceleration with a stronger recovery likely in 2013 as the new leaders move to assert their authority. While a clear resolution to the Eurozone crisis remains elusive, Europe could stay in recession for some time while anaemic US growth is unlikely to change ahead of the November elections. We therefore expect macro headwinds to constrain the price outlook further in the short term.
Downside limited, supply constraints escalating. With most metals and bulks at or below global marginal costs, we think the downside risks are limited as shrinking margins, notably in steel, are leading to increased production cuts. As major diversified miners review/cut new project capex, and even brownfield expansions attract greater scrutiny, we expect significant cuts to medium-term supply growth.
Supply overhang drives Brent correction. Crude prices plunged in 2Q12 due to substantial market oversupply and a weak global macro outlook, despite the ongoing issue of sanctions/Iranian supply. We continue to expect that Saudi Arabia will back-stop sub-USD 90/bbl Brent, and we are reiterating our 2012 forecast of USD 105/bbl.
Funds to continue to dictate price performance. Expectations of a stronger recovery in 2013 might drive a sustained 4Q12 short-covering rally, with the key triggers being an acceleration in China or a resolution to the Eurozone crisis. We continue to favour copper, gold, PGMs, iron ore and coking coal, while production cuts would be needed to generate higher steel prices.