Emerging market demand is likely to bolster industrial metals throughout 2018, making them the standout commodity in 2018, says ETF Securities.
Industrial metals looks set to benefit most from improving growth in emerging markets, according to ETF Securities’ 2018 commodities report – although by the same token, supply will be in deficit due to lack of investment in mining infrastructure.
“Emerging market demand is crucial for commodity markets as they represent 70 per cent of industrial metals demand,” wrote ETF Securities head of research and investment strategy James Butterfill in the report.
“In this respect, we expect any weakness in commodity prices to be largely offset by solid demand growth, again led by China.”
As commodity prices look to continue rising in 2018, capital expenditure growth will likely follow, the report said.
However, four years’ lack of investment in mining infrastructure cannot be undone, which was “why industrial metals remain in a supply deficit”.
“Since industrial metal prices began to fall in 2011, capital expenditure by miners collapsed,” Mr Butterfill explained.
“In mid-2017, capital expenditure by the largest 100 mines was 60 per cent lower than in mid-2013.
“Given the long lag times behind investment and completion of mines, we don’t expect the tightness of mine supply to reverse any time soon,” he wrote.
If history were to repeat itself, whereby metal markets “move towards a balance” two years after mining company profit margins hit rock bottom, supply would start improving in “late 2018”.
“But it could take years to move back into balance,” Mr Butterfill concluded.
Regarding other commodities, the price of gold looked to experience “little change” in 2018, but looked to be subject to “assumptions around investor positioning” influenced by geopolitical and financial risk.
“Investors continue to be optimistic about gold despite the rising interest rate environment, we believe this is due to investors now seeing gold as an insurance policy from geopolitical concerns rather than investment,” Mr Butterfill said.
US production of crude oil also appears “likely to hit an all-time high”.
“There is little indication that the backwardation in futures curves is going to stop US production from expanding,” the report said.
“Inventories have been declining across the OECD although we are unlikely to see the decline in inventories continue. US shale oil production can break-even at close to US$40/bbl.
“With WTI oil currently trading at US$60 per 42-gallon barrel, there is plenty of headroom for profitability and we expect a strong expansion in supply.”