Gaurav Dua
With some progress made on the US-China trade front, we are likely to see a drop in demand for safe havens such as gold, yen and treasuries in the near future. Industrial commodities, on the other hand, are expected to take on lustre a bit in the near term.
There are many sticky issues that the world’s two largest economies have yet to thrash out. Some of them are: The deal text is yet to be approved by the lawyers concerned, the issue of China curbing the subsidies being given to its state companies, the stand of the US on Hong Kong, the US approving the Uighur Act of 2019, $250 billion and $120 billion of Chinese imports being subjected to 25 percent and 7.5 percent tariffs, respectively, future talks on sticky issues like digital trade, data localisation and cyber intrusions.
Thus, news flows on the US-China deal will have a significant bearing on commodity prices in the near future.
However, a longer term outlook for 2020 may yield a different picture for bullion and metals.
The global macro environment can be summarised as showing persistent weakness in economic growth with a predictable response from central banks in the form of low interest rates and easy liquidity conditions.
Amid the expected fragile global environment, it would not be surprising to see bouts of risk aversion and risk-off driven rallies across commodity asset classes. Against the possibility of correction in the near term, bullion is likely to keep its upward bias for 2020 whereas the downward pressure on the metal pack could persist because of weak demand conditions. Finally, the price movement is expected to be range-bound in the energy space, especially crude oil.
Gold (current market price $1,475): We expect risk aversion to come back with full force in 2020. The global macroeconomic scenario remains vulnerable, global trade growth is below trend and manufacturing in key economies continues to suffer. Chinese yuan is likely to start weakening again, and gold buying by the central banks is likely to remain buoyant in the foreseeable future. North Korea and Middle-East are perennial sources of geopolitical concerns. We expect gold to rise to $1,700 next year.
Silver (CMP $17): With struggling supply from the mines amid global macroeconomic and geo-political uncertainties, we are bullish on silver in 2020. We expect the metal prices to rise in tandem with gold and reach $21 level by the end of the next year.
Crude oil (CMP $60): The International Energy Agency (IEA) expects US crude output to keep rising in 2020, which will offset the efforts of the OPEC (Organization of the Petroleum Exporting Countries) and its alliance. Non- OPEC inventories are expected to grow by 7 lakh barrels a day in the first quarter of 2020. The US output hit historic highs of 12.9 million barrels per day (mbpd) in 2019. The IEA still sees a surplus of 0.7mbpd oil in Q1 2020 despite the proposed cuts by the OPEC+. We expect WTI (West Texas intermediate) crude oil prices to fall to $45 level next year.
Zinc (CMP $2,285): London Zinc prices have fallen 8 percent year till date to be at around $2,250 a tonne. We expect its prices to continue its downward momentum in the first half of 2020 as the market will be flooded with supplies from Australia, China and India. The metal is expected to decline to $2,000 next year.
Aluminium (CMP $1,785): Overall, global aluminum demand is likely to see a flat or even marginally negative growth. The automobile sector shows no sign of recovery. In Europe, the car industry is faced with significant uncertainty as US President Donald Trump has threatened it with 25 percent tariffs. LME (London Metal Exchange) inventories are rising sharply. We expect the metal to fall to $1,600 in 2020.
Copper (CMP $6,150): Copper is expected to struggle amid weak Chinese demand, mine expansions in Chile and India’s attempts to boost copper production. Global economic uncertainties would start putting the downward pressure soon. We expect the red metal to slump to $5,500 in the year ahead.
Nickel (CMP $14,200): Nickel prices are expected to be under pressure in the near term as producers increase exports of the unrefined version from Indonesia before the ban kicks in from January. Ex-China stainless production dropped in the first seven months of 2019. Demand from the stainless steel mills in China remains weak, too. However, the alloying metal is likely to find good support on dips as Indonesian ban on ore exports coming into play from January 2020 is expected to tighten the market. We see the metal rising to $17,000 level next year.
Gaurav Dua is head of research, Sharekhan. Views are personal.
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