Commodity Online Investment demand to drive commodities in 2011

By Agnes Chung-yan Tse - Head of Research www.oilngold.com
Commodities performed well in 2010 with silver being the best performing commodity and precious metals being the best performing sector/complex. The strength last year was driven by macroeconomic developments and weakness in USD.

However, these couldn’t solely explain the whole issue. Indeed, commodity prices showed lucrative gains even after adjusted for trade-weighted USD. We expect more upside for commodities in 2011. Apart from better economic recovery, improved sentiment in the financial markets and prolonged expansionary monetary policy in developed countries, fundamentals will also be supportive. After talking about the outlooks for oil and gold last week, we will discuss about silver and PGMs in this article.

Silver surged to a new 30-year high of 30.975 on December 31 and jumped more than +80% in 2010, following a +17% gain in 2009. Silver’s rally outperformed gold’s +30% gain in 2010 as robust investment demand and optimism in global economic recovery drove prices higher. Industrial demand contributes to 50% of silver demand in the world.

As the world economy recovered from recession, global industrial production recorded +7.7% y/y gain as of October 2010. This revived optimism of fabrication markets. Meanwhile, investors found silver as ‘the poor’s gold’ and rushed to the metal amid loose monetary policies in developed countries. We remain bullish on the metal in 2011 and investment demand will continue to be the biggest driver.

In 2011, investment demand will remain the key price driver. The reason for investing in silver is similar to that of gold. Although the worst of the biggest recession silver World War II has been behind us, the pace of growth has remained uneven. While emerging markets have seen strong growth, most developed countries continued to struggle. Extremely loose monetary policies will still be the main theme in the US and Europe in 2011.

While the Fed announced a second round of QE (QE2) in November, the ECB’s Securities Market Program (SMP) turned out to be a money-printing program as the central bank failed to fully sterilize bond purchases with deposits. For the BOE, policymakers have been divided on whether to tighten of loosen. However, as economic growth is going to be dampened by austere fiscal measures, the BOE may expand monetary stimulus this year.

Concerning the demand/supply balance, traditional silver fabrication demand had declined steadily over the past few years on sharp decline in demand in the photography sector. This pushed the market into a structural surplus. We hope such a surplus will be taken up by emerging markets in the medium term. China’s silver imports this year have been impressive although China itself is the world’s 3rd largest silver producer. The country’s net imports reached 3275 metric tons as of November 2010 as driven by elevated economic growth. Another factor that may drive up silver demand is its applications in solar power. Some analysts estimated that its demand would rise by 4 times in the coming 5 years.

South Africa is responsible for over 75% of the world’s platinum output and therefore its supply outlook is the major swing factor of platinum price in 2011. Mine production in Anglo Platinum, the world’s biggest platinum producer, has declined markedly over the past few years. As platinum prices slumped during the recession, Anglo Platinum broke of the Rustenburg site down into smaller units and the closed some higher cost shafts. The company’s production will remained depressed this year.

The company said that refined platinum production will only improve modestly to 2.6M oz, or 80.9 metric tons, in 2011 from 2.5M oz, or 77.8 metric tons in 2010. Note that other miners in South Africa, such as Lonmin, Impala and Aquarius, also experience similar issues. Meanwhile, output growth will continue to be affected by structural issues such as lower head grades, power outage and cost pressures due to appreciation in Rand.

Palladium’s outlook looks robust in terms of demand. In the auto sector, palladium can now be substituted in part for platinum in diesel catalysts while sales of gasoline-fueled vehicles in China and the US have been showing rapid growth. Shipments from Russia remain an overhang. Indeed, the market would have been in deficit without deliveries from Russian stockpiles. However, the country’s palladium supply outlook has been a mystery to the world.

To conclude, we remain positive to PGMs and expect both platinum and palladium prices will rise further in 2011. Concerning risks, platinum’s major risk is unexpected increase mine supply while that for palladium is the rise in palladium shipments.