Morgan Stanley cautious on commodities in 2020 outlook

Morgan Stanley strategists Martijn Rats and Susan Bates argue that the outlook for commodities “remains soft”, principally because there’s “too much of everything”.

From an investment perspective, a lack of inflation, soft demand and limited roll yield in forward curves continue to dent broad commodities indices, they said as part of a wider 2020 Global Strategy Outlook released this week.

“The weakness in global trade and manufacturing is yet to turn around,” Mr Rats and Ms Bates wrote. “As long as this prevails, we anticipate a degree of demand weakness across the board.”

The strategists said with the exception of copper and palladium, very few commodity markets look “tight” from a supply perspective. In addition, low interest rates continue to bolster new investments and new technologies continue to drive marginal costs lower.

In broad terms, Morgan Stanley sees benchmark oil at $US60 a barrel next year, and natural gas hovering near current prices.

Copper “retains the strongest fundamentals” among base metals and Morgan Stanley sees the potential for a 7 per cent price rise in 2020.

MS is forecasting a 2.4 per cent advance for aluminium, though there remains “strong downside risk” too.

As for gold, the strategists see it trading in a $US1500 an ounce range through 2020.

The outlook for two key Australian commodities is mixed.

“We are bearish on steelmaking raw materials. Iron ore is still normalising, as Brazilian supply recover following January 2019’s tailings dam failure and resultant suspension of Vale’s operations.

“On the demand side, slowing China housing starts drive over forecast 1.5 per cent fall in steel output in 2020, further easing market tightness – with price forecast at $US79 at tonne in 2020.”

Morgan Stanley is somewhat more optimistic about both metallurgical and thermal coal.

“Metallurgical coal has slumped to a three-year low – it’s more exposed to ex China weakness in steel production (-1 per cent year-to-date), amid ample supply. Given the weak demand outlook, we only expect a modest price recovery, as mainly high cost US supply exists.”

MS is forecasting $US165 a tonne in the first quarter of 2020 and $US160 a tonne in 2020.

“Seaborne thermal coal is oversupplied, with supply cuts insufficient to rebalance the market,” MS also said.

“Europe’s coal demand is falling rapidly, as cheap natural gas drives coal-to-gas switching, while Korea imports are down 7 per cent year-to-date on rising nuclear availability. Only India’s imports are growing, as its domestic coal production lags demand.

“Despite the weak backdrop, Russia and Indonesia are expanding exports, keeping the market in oversupply. However, we forecast the current surplus to shrink in 2020, with price recovering modestly from current lows.”

MS is forecasting prices to rise to $US67 a tone FOB Australia in the first quarter of 2020 and $US69 a tonne in 2020.
Source: Australian Financial Review