Citi sees firm 2017 show in com­modi­ties

China Daily (Hong Kong) - - BUSINESS - By BLOOMBERG

Cit­i­group Inc has given a clar­ion call for com­mod­ity bulls, pre­dict­ing that most raw ma­te­ri­als are ex­pected to per­form strongly next year as global eco­nomic growth picks up, the over­sup­ply that’s dogged mar­kets fi­nally dis­si­pates and in­vestors plow in more funds.

The bank is bullish on oil, cop­per, zinc, and wheat in a six- to 12-month hori­zon, with global growth seen at 2.7 per­cent from 2.5 per­cent in 2016, ac­cord­ing to an emailed re­port. It’s bear­ish on coal and iron ore — de­scrib­ing this year’s out­per­for­mance in bulks as a fluke — and gold and soy­beans.

Com­modi­ties have made a come­back this year af­ter sinking to a quar­ter-cen­tury low in Jan­uary. The oil mar­ket shows signs of re­bal­anc­ing af­ter a glut, and base met­als are ral­ly­ing on prospects for ris­ing de­mand. Cit­i­group has flagged its op­ti­mism about raw ma­te­ri­als in 2017 since at least July, and other banks have also turned more pos­i­tive. Last month, Gold­man Sachs Group Inc rec­om­mended an over­weight po­si­tion for the first time in four years.

“For com­modi­ties in gen­eral, the over­sup­ply that was in­duced by high prices in the first decade of this cen­tury is fi­nally be­ing bal­anced,” an­a­lysts led by Ed Morse wrote in the note. “What’s more, the cost struc­tures across com­modi­ties are reach­ing an end of a pe­riod of per­sis­tent and record de­fla­tion.”

The Bloomberg Com­mod­ity In­dex has ad­vanced 11 per­cent in 2016 af­ter a five-year los­ing run that was spurred by a slow­down in growth and gluts in ev­ery­thing from cop­per to crude oil. This year, ad­vances in raw ma­te­ri­als have been led by zinc, nickel, cop­per, Brent crude and sugar.

Cit­i­group laced its bullish out­look with warn­ings. Volatil­ity is likely to pick up, both as mar­kets re­bal­ance, and as de­vel­op­ments in China shift prices, ac­cord­ing to the bank, which cited the po­ten­tial im­pact of gov­ern­ment pol­icy on Asia’s top econ­omy, as well as height­ened in­vestor flows in com­mod­ity fu­tures.

While Don­ald Trump’s vic­tory in the US elec­tion may bol­ster fis­cal pol­icy, his move away from glob­al­iza­tion may pose a risk to the out­look for growth, Cit­i­group said. Trump’s elec­tion high­lights a key risk, ac­cord­ing to the bank, which flagged the po­ten­tial for ris­ing ten­sions, in­clud­ing trade wars.

Among the bank’s picks for 2017, oil may out­per­form the rest of the en­ergy com­plex as the first OPEC pro­duc­tion cut in eight years ac­cel­er­ates the bal­anc­ing of the mar­ket, ac­cord­ing to the re­port. In cop­per, the bank raised its 2017 av­er­age price tar­get 9 per­cent to $5,575 a met­ric ton.

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