Isra-Mart srl: Commodity Forecasts Revised, Plus Europe's Demand

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To reflect a continued worsening in the global economic outlook, Citi has downgraded global GDP growth estimates to 3.1% in 2011 and 3.2% in 2012. This has flowed through to cuts in forecasts for all the base metals, though at current spot levels Citi suggests there is little downside for aluminium prices given the spot price is below that of the high cost marginal producer.

Any downturn in developed economies should be weathered by the higher growing developing economies, so Citi doesn't expect significant weakness among the bulk commodities given demand is being driven by emerging market economies.

Preferred is thermal coal given its exposure to booming demand from India and China and recovering demand from Japan, as well as the expectation thermal coal will see a rise in its share of the world's electricity generating capacity.

While Citi still likes the medium-term outlook for gold it now appears the easy gains have already been made, with a breather expected in the shorter-term. This implies on a risk-weighted basis there are currently better opportunities among the bulk commodities.

In summary, on a 12-month view Citi remains bullish on thermal coal, iron ore, palladium and crude oil, while a neutral view applies to aluminium, metallurgical coal, nickel, gold and platinum. Citi continues to be bearish on steel, copper, zinc and lead.

Citi's adjustments saw cuts to base metal price forecasts of of up to 15% and coal price forecasts of around 1%. Goldman Sachs has also reviewed its commodity price expectations on the back of the recent profit reporting season in Australia. Goldman Sachs has also factored in issues such as signs of faltering demand for raw materials from both the US and Europe.

Given raw material demand from China and other emerging markets is holding reasonably well, Goldman Sachs continues to take a positive view on those commodities that are supply constrained. As well, the emergence of cost inflation is supportive for commodity prices in the view of Goldman Sachs as it raises the 'cost support level'.

A further supportive factor is interest rates in the US are likely to remain low for an extended period of time, while further economic stimulus is likely to be introduced. As this should see the US dollar remain weak, Goldman Sachs sees an environment supportive for US dollar commodity prices.

Forecasts have been adjusted across all the metals and bulks, though Goldman Sachs notes changes for the base metals, platinum group metals and rare earth metals have been little more than a marking-to-market process.

More significant changes are for iron prices to now remain above US$150 per tonne through 2013 and for higher metallurgical coal prices from 2012 to 2015. Gold price forecasts have also been increased through the first half of 2013, with mid-2013 now seen as an inflection point for that market.

Goldman Sachs has made no changes to long-term price forecasts in any markets. Order of preference sees copper preferred in the base metals and aluminium still the least favoured, while gold, mineral sands, platinum group metals, rare earths and crude oil are the broker's preferred tier one commodities.