Resources to lag in soft global economy

By Kate McCaffery | January 19, 2012 | Last updated on January 19, 2012
4 min read

More than any other asset, the demand outlook for commodities is intrinsically tied to the big picture. Forget bottom up investing; if you want to predict the price of, say, copper, you need to examine the entire macroeconomic picture in all of its dismal glory.

The outlook for global growth varies depending on who you ask; at the low end. TD Economics is calling for growth of only 2.5%. More optimistically, Scotiabank Group economists are calling for 3.7% in 2012 and 4% in 2013.

But across the board economists agree that sub-par economic growth, heightened risk aversion, tame demand and deteriorating investor confidence will drag on commodity prices and export price appreciation, particularly for commodities that are linked to industrial production.

Any number of developments can affect commodity prices. Of chief concern to forecasters today:

– China’s economy is slowing and some say it’s due for a significant economic correction

– The Eurozone debt crisis looms large in the minds of most investors and economists, and

– U.S. fiscal policy will take a backseat to presidential electioneering until the votes are counted in November

Moreover, necessary but painful policy adjustments are still to come in Europe, in the U.S. and in China, according to Dundee Wealth economists Martin Murenbeeld and William Tharp.

“The outlook for commodities remains problematic,” says Murenbeeld. “Europe is in recession and China is slowing. The relative bright spot is the U.S. economy but its demand for commodities is less intensive than demand in BRIC countries.”

Scotiabank’s economist, Patricia Mohr says “purchasing managers worldwide are currently deferring orders for base metals, steel and fertilizers, given the uncertain 2012 global economic outlook.”

Although lower prices might be a good time to invest, CIBC’s Peter Buchanan has pointed out that “prices for a range of commodities are cheaper but not necessarily compellingly so, especially compared to past cyclical bottoms.”

Base metals

Copper is usually the first metal discussed, thanks to its extensive use in construction and manufacturing. Emerging markets need it for grid investment and other construction. Even electric-hybrid cars require more copper to build.

At the banks, CIBC is calling for an average spot price of US$3.75 next year. TD expects prices to sink 12% in the first quarter, averaging $3.00/lb but says the sizable drop in prices for various industrial metals (including a 13% drop in Q1 for aluminum, 10% drop for nickel and 11% pullback for zinc) “will set the stage for an even greater rebound, likely by the third quarter.”

Copper, along with oil, meanwhile, is Scotiabank’s “top pick” for investors in 2012. It too says supply and demand conditions will remain in deficit, despite the 6% increase in global mine supply, with prices rallying to $4/lb by the spring.

Finally, BMO is calling for copper prices to dip to $3.75 in 2012 before recovering to $4.00 in 2013. BMO’s outlook for nickel comes in at $9.00 for 2012 (a drop from the average of $10.37 posted in 2011), before increasing to $10.00 in 2013. For aluminum, the bank is calling for $1.02 in 2012 and $1.05 in 2013.

Precious metals

The greatest risk to gold remains a new tightening cycle, which is still at least two years away, according to CIBC. But the bank has reduced earlier projections, calling for gold to average $1,650 in 2012.

James Steel, a New York-based precious metals analyst at HSBC says silver is forecast to reach $34/oz in 2012 and $32/oz in 2013. He is also brave enough to include a 2014 forecast of $28/oz and a five year forecast, which remains unchanged at $25/oz.

TD economists, meanwhile, are calling for silver prices to slide to $27 in the first quarter before rebounding to about $44/oz heading into 2013. They expect gold prices to average $1,550 in the first quarter of 2012 before rebounding strongly. “We continue to expect precious metals to be a top performer in 2012.”


At both BMO and Scotiabank, economists say supply and demand for West Texas Intermediate is ‘balanced’ and prices are expected to hang in around $95 for 2012. Scotia says the discount that currently exists on WTI prices should drop by spring and could eventually disappear as current pipeline constraints ease.

As U.S. imports from Mexico and Venezuela dry up, Scotia says Canada has happily replaced that volumes, but CIBC warns that Canada’s reliance on the U.S. market needs to be addressed with some kind of transportation system connecting Alberta to export terminals on the B.C. coast.

TD economists say WTI prices could slide to the low $80s early in the year before rebounding back above $100 in Q3.


As usual, some of the biggest risks to the commodities outlook are political. Scotia warns that any sanctions against Iran going forward, the second largest OPEC producer, could drive oil prices dramatically higher.

Buchanan points out that agricultural products and energy commodities are susceptible to occasional and abnormally large price and market fluctuations, due to weather and political shocks.

He also writes that commodities most vulnerable to the business cycle or cyclical downside exposure that would come with a global economic slowdown are copper, oil and nickel. Least exposed, he says, are lumber and wheat.

Kate McCaffery