Morgan Stanley prefers metals over bulk commodities such as steel, iron ore and coal in the second half on the potential for stimulus spending by China or the U.S., the world’s two largest economies.
The bank based its bull case on possible programs to rebuild infrastructure, an oil price recovery and rising global growth. While analysts Tom Price and Joel Crane said they were warming to aluminum and nickel and favored lead, they trimmed this year’s forecasts for most metals.
The Bloomberg Commodity Index has slumped 26 percent in the past year as global gluts kept many commodities trapped in bear markets. While iron ore has rebounded 27 percent from a decade low in April, Goldman Sachs Group Inc. and Australia & New Zealand Banking Group Ltd. predict renewed declines.
“Any sustained second-half recovery event would need a surprisingly large stimulus event in China or the U.S.,” the analysts wrote. “Which commodities would respond the most in this scenario? Metals.”
In a bear case scenario, commodity demand may wane if China devalues its currency to bolster exports and if emerging U.S. inflation prompts higher interest rates and buoys the dollar. Concerns about Greece may also undermine investment confidence, the bank said.
Aluminum prices will rise to $1,979 a metric ton in 2016 from $1,823 in 2015, Morgan Stanley predicted. Metal for delivery in three months traded at $1,716.50 on Tuesday. Should tough conditions persist in the second half, high-cost unsupported smelters will cut production and capacity growth will slow, the analysts wrote.
While the bank reduced its nickel forecasts by as much as 15 percent through 2018, it said output cuts have started and projects have been delayed. Lead is favored as mines shutter and there’s a lack of scrap supply, it said.
Morgan Stanley lowered this year’s platinum forecast by 8 percent to $1,151 an ounce, with prices to average $1,175 in 2016. Adequate output growth, led by a better-than-expected recovery in South African production, and possible large downstream inventories are curbing prices, the bank said. The metal traded at $1,074 on Tuesday.
The global thermal coal market remains oversupplied and structurally challenged and the demand side is bearish, Morgan Stanley said. Looming cuts in aluminum production and a competitive supply push in China are weighing on alumina prices, the analysts wrote.