Rebound In Q2 But No H1 Catch-Up With Equities‏

First, while cyclical conditions have improved, weak spots have also surfaced. Although China avoided a hard landing, its recovery has been less sturdy and less commodity intensive than expected around New Year. Indeed, the pickup in physical buying from Chinese manufacturers that many (including us) were looking for after the Lunar New Year never really materialised. While the US growth engine has certainly shifted into a higher gear, it has become increasingly evident that a soft patch as a result of the heavy federal budget cuts is unavoidable. As a result, commodities have not been granted an outright positive demand background to move unilaterally higher.

Second; uncertainty following the dizzy Italian election outcome has hit risk appetite. The EUR and the Cyprus crisis have not helped to lift sentiment either. Rising speculation on when the Fed will initiate its exit from QE has also held a hand under the USD. The move lower in the EUR/USD has weighed on commodities partly from a denomination point of view (for USD-traded products) and partly from a risk sentiment point of view. In this respect, it is interesting to note that speculators have shred crude, copper, gold and corn alike of late, hinting that it may not take much bullish news for prices to start recovering from here.

Third, supply conditions have generally surprised on the upside. Non-OPEC crude oil production has edged higher as North American shale supplies add, and maintenance in key areas has ended. Although the Saudis have cut production as a result, other OPEC countries have ensured that output from the cartel is still running above 30mb/d. We have argued for a while that it was simply a matter of time before Chinese imports of copper picked up, as booming bonded warehouses had to be run down first. This has not happened. While there is little visibility on the amount of metal in bonded warehouses, it is now clear that recent months have seen a significant ramp-up in global copper production, LME stocks have surged to post-crisis highs, and future supply prospects look much brighter than they did in the autumn. Notably, the International Copper Study group (ICSG) now projects 2013 will see the first refined copper market surplus since 2009. Finally, for grains, U.S. weather conditions have improved and, while drought is still an issue in some areas, recent prospective plantings data point to a marked recovery in production of most grains this season.



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