Press about us

2 December 2013
Asian and global commodity markets in 2013 have been dominated by "weak" headlines: "weak" Chinese growth; slowing demand; a "glut" in copper and steel; "weak" price outlook; and so on.

As a result, speculative investors - spearheaded by fast money and hedge funds — shorted metals markets in record volumes in the first half of the year and prices came under sustained pressure. This has eased in the past three to four months as signs of a global economic recovery gather pace, with the manufacturing purchasing managers index rising above 50 in most regions; residential construction markets recovering their strength; and rising global car sales. This has prompted speculators to cover their short positions, within limits. However, the approaching end of quantitative easing and an obsession with the timing of the Fed's tapering of bond purchases has kept prices in check, supporting continuing short positions.

We believe, however, the “weak” headlines have been misleading and at odds with improving fundamentals. In the third quarter, global finished steel consumption was up 7.7 per cent, year-on-year, with China leading the way with a rise of I 4 per cent, year-on-year.

Chinese production of copper and aluminum, meanwhile, was up 22.7 per cent and 25.1 per cent year-on-year, respectively, in the first three quarters of 2013, although this is admittedly an imperfect proxy for consumption.

Moreover, Chinese imports of crude oil and iron ore reached new all-time highs in September, and coking coal imports in the first three quarters exceeded full-year volumes in 2012, which itself was a record year.

Indeed, we estimate that for all commodities, Chinese and global demand growth in 2013 will be signi?cantly higher than in 2012, and we expect further acceleration in 2014 as global economic recovery gathers momentum. In addition, we think the upcoming third plenum of the central committee is likely to announce measures to boost the pace of urbanization and infrastructure spending, underpinning our forecast of Chinese GDP growth of7.5 per cent next year.

Acting as a constraint to prices, however, has been equally strong production growth - a result of a strong capital expenditure (capex) cycle of the past three years reaching a peak.

This is set to change as substantial capex reductions, project cancellations and growing operating headwinds combine to taper the supply pipeline. Meanwhile, global inventories are low in many commodities, while in base metals warehousing and financing deals have kept metal tightly held and triggered historically high spot premiums. When combined with accelerating demand growth, we believe this creates a strong platform for tightening market balances and hence rising prices over the next two to three years, leading to a more positive outlook for commodities in the medium term.

VTB Capital sees these market developments as encouraging for Asia and the wider global economy. Indeed, we have strengthened our team and are expanding our business in Asia and far their a?eld to cope with the increased and anticipated demand. We've also established a partnership with investment bank Citic Securities, with the aim of increasing deals between Russia and China.
Corporate Communications VTB Capital