Best Metals Forecaster Smirk Sees China Recovering: Commodities

Westpac Commodity Analyst Justin Smirk
Justin Smirk, commodity analyst at Westpac Banking Corp. Photographer: Brendon Thorne/Bloomberg

Industrial metals will rally through the middle of next year as the economy strengthens in China, the biggest user of everything from aluminum to zinc, according to the most accurate price forecaster tracked by Bloomberg.

Justin Smirk of Westpac Banking Corp. in Sydney beat as many as 25 others in predicting metals for two consecutive quarters on a rolling two-year basis, data compiled by Bloomberg Rankings show. He expects copper, nickel and zinc to gain through June and forecasts a 22 percent rise in aluminum.

China will accelerate through the end of September after slowing for seven consecutive quarters, the median of economists’ estimates compiled by Bloomberg show. That’s boosting prospects for demand as policy makers from Europe to the U.S. to Japan pledge more action to bolster growth. Smirk, 47, says he focuses primarily on economic cycles, central banks and financial markets to make his commodity predictions.

“We do see this point in time as perhaps the worst for the growth cycle,” said Smirk, who has worked at Australia’s second-largest lender by assets since 1999. “Commodity prices should be moving stronger through this year and into next.”

Smirk’s average margin of error in the most recent rolling eight-quarter period was 7.4 percent, Bloomberg Rankings data show. That compares with 11.7 percent for his nearest rival, Bart Melek of TD Securities Inc. in Toronto. Prices are often volatile, with nickel surging as much as 24 percent after plunging 31 percent this year.

Energy Prices

Aluminum will advance to $2,380 a metric ton by June because of China’s recovery and central-bank actions in Europe and the U.S., Smirk said. That will boost energy prices, which account for about 40 percent of smelters’ production costs. Nickel, used in stainless steel, will climb 15 percent to $18,500 a ton, as copper rallies as much as 12 percent to $8,500 a ton and zinc gains 8.6 percent to $2,100 a ton, he says.

Barclays Plc raised its estimates for aluminum’s supply glut this year and next in a report Nov. 8 and forecast declining prices. Credit Suisse Group AG cut its copper forecasts on Oct. 25, citing “lackluster” demand and Goldman Sachs Group Inc. said in a report Nov. 8 it was “increasingly cautious” about the metal in the next several months, in part because of record stockpiles in China’s bonded warehouses.

Aluminum will average $2,200 in the second quarter, copper $8,225, zinc $2,200 and nickel $18,875, according to the medians of as many as 21 analyst estimates compiled by Bloomberg.

Economic Cycles

Nickel led declines on the London Metal Exchange this year, dropping 14 percent, followed by aluminum’s 3.2 percent retreat. Copper rose 0.3 percent while zinc advanced 4.8 percent. The Standard & Poor’s GSCI gauge of 24 commodities fell 0.9 percent and the MSCI All-Country World Index of equities gained 6.2 percent. Treasuries returned 2.8 percent, a Bank of America Corp. index shows.

Smirk’s focus on economic cycles gave him an advantage in commodity forecasting this year because his bank was predicting slowing Chinese growth more than a year ago. The nation consumes 43 percent of all aluminum, 41 percent of copper, 44 percent of nickel and 43 percent of zinc, Barclays estimates. Other investors are also adding more economists to their teams.

“I don’t see that as an edge, but a must,” said Itay Simkin, the chief executive officer of Krom River Trading AG in Baar, Switzerland, which has a commodities hedge fund managing about $730 million. The fund added two macro-economic experts to its investment committee in the past 18 months, he said.

Monetary Fund

China’s economy is at a turning point both for policy and inventories, said Smirk, who worked as a property manager in rural Western Australia before studying economics at Murdoch University in the mid-1990s. Europe’s debt crisis is stabilizing and the U.S. recovery continues, said Smirk, who was at the Reserve Bank of Australia for four years before joining Westpac.

The S&P GSCI gauge has fallen for two months because of concern about the pace of economic recovery. The International Monetary Fund cut its 2013 global growth estimate to 3.6 percent in October from 3.9 percent in July. The euro economy won’t expand again until the third quarter, forecasts compiled by Bloomberg show. Europe consumes 18 percent of the world’s copper and 14 percent of its aluminum, Barclays estimates.

Japan contracted last quarter at the fastest pace since the earthquake and tsunami in March 2011, the government said Nov. 12. The U.S. risks entering a recession that will hurt global growth should Congress allow the so-called fiscal cliff of about $600 billion of tax increases and spending cuts to take effect next year, Fitch Ratings said Nov. 8.

Consecutive Year

Smirk was also the most-accurate gold forecaster in the second quarter, according to a separate Bloomberg ranking for that period, as the metal retreated the most in almost four years. Bullion is rising for a 12th consecutive year, the longest streak in at least nine decades, and investor holdings in exchange-traded products backed by the metal reached a record, data compiled by Bloomberg show.

“Because I’m an economist, I don’t see a lot of value in gold and I tend to miss the bullish runs that come through,” said the father of two, who’s also responsible for Westpac’s forecasts for Australian inflation and labor-market data. “The stability that we’re seeing in gold prices at these levels has caught me by surprise.”

Smirk says his best call was in iron ore, having correctly forecast the plunge that drove prices down 42 percent from mid-April to early September. Costs have since rallied 41 percent to $122.40 a ton and “we’ve probably seen the worst,” Smirk said, predicting $170 by June.

“Our view for commodities is very much driven by our view on growth and how the financial markets are working,” he said. “Being such a small house, we don’t have enough time to get an intimate knowledge of each micro-commodity. In some ways it helps us because we don’t get bogged down in detail.”

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