In our view, this stability is a
significant positive and should lead to
an end of the destocking phase and
stronger growth in 2013. For
commodity markets, the pick-up in
China’s economy has already resulted
in an improvement in demand, and
with it a rally in key commodities
(such as iron ore). Even a modest
recovery in Europe and North
America will be viewed as a positive
in commodity markets, and we
believe presents good opportunities
in 2013.
China’s economy picking up
Real activity indicators in China
marked a trough in
August-September and have been
quickly gathering momentum since
then. We believe the pick-up was
driven by easier credit and fiscal
policy from mid-2012, an alleviation
of the inventory-destocking cycle and
improved corporate/SOE confidence
through, and subsequent to, a
successful leadership transition. We
believe momentum will continue to
gather into 1H13, although the
government appears reluctant to let
growth materially exceed its 7.5%
target given the threat of inflation,
social/environmental hurdles and
necessary reform.
Commodity prices
In the near term, we expect
commodity prices to continue their
improvement; some have already
gained more than 5%. However,
intra-commodity divergence should
be significant as underlying
fundamentals have more sway in the
direction of prices. We believe crude
oil, thermal coal, lead, tin and PGMs
should be the best performers over
the year.
On the flip side, we remain bearish on
aluminium and zinc. Both are
fundamentally oversupplied markets,
only helped by inventory financing
deals that continue to artificially
tighten their markets.
Iron ore and copper should be wellsupported
in 1H13 as a China-led
recovery boosts infrastructure
spending. However, both look likely
to face headwinds later in the year as
supply increasingly overtakes demand
growth.