If it is stockpiling then 2010 might not be as good as optimists believe. If it is genuine demand to satisfy the double-digit growth rate of China’s economy, then it would be fair to say the commodity supercycle is intact.

 

The challenge is working out what is a speed bump in the supercycle and what’s a brick wall.

 

The past few weeks have produced a series of speed bumps, starting with the Chinese government toughening bank lending rules to take some of the steam out of an economy which expanded at a break-neck 10.7% in the December quarter.

 

That light tap on the brakes of the China Express, combined with a proposal to whack banks around the world with a special tax to repay government stimulus spending, sent a shudder through stock markets.

 

More importantly, moves to slow the Chinese economy reminded commodity producers that their future profits were inextricably tied to demand in a single country.

 

Even wine producers, sagging under a global grape glut, see China as their saviour, especially white wine producers who have been stampeding into the Chinese market.

 

It’s a similar story with most metals where China has become the world’s only growth market, a dangerous situation if a government-forced slowdown eats into demand.

 

It is with those cautionary comments that investors should approach 2010 hoping for the best, but planning for a slowdown – a situation which means asset quality is a priority because old and high-cost mines might struggle to see through another tough year.

 

On the plus side of a tricky equation there are the expert optimists, such as those at Goldman Sachs, Morgan Stanley and ANZ Banking Group.

 

The Goldman team reckons the twin “bulk” commodities of metallurgical coal and iron ore will lead the resources pack this year. Morgan Stanley is more optimistic about the major base metals, copper, zinc and aluminium. ANZ echoes the Goldman view, with bulks leading the way, and with nickel the pick of the base metal pack.

 

Before considering in detail what those three well-informed investment banks see as the key trends for 2010, it should be noted they are not in agreement, except in terms of demand for the bulks, with the differences in opinion about base metals underlining the point that the year ahead is very much unchartered.

 

ANZ first.

 

Its key tip for China-driven commodity prices is for a 40% increase in the long-term contract price for iron ore thanks to rising steel production, tighter Chinese and Indian supply, and a buoyant spot market.

 

The bank acknowledged its iron ore price forecast put it at the “top end of market consensus ... but it could end up being conservative”

 

What caught the attention of the ANZ commodity team is the spectacular rise in spot market prices for iron ore which were (in mid-January) “a whopping 80 per cent above the current 2009 contract price”

 

ANZ’s hard coking coal tip is for prices to rise from $US150 a tonne to $180/t, roughly in line with recent spot market trades.

 

“The upside is China swinging strongly into a net importer of coking coal,” the bank said.

 

It has forecast thermal coal prices to rise from $US80/t to $95/t, copper to rise by 9% over 2010, aluminium to gain 8.5%, lead and zinc to add 7% and 10% respectively, while the nickel price is forecast to rise by 13.5%.

 

The bank’s commodity team said it was always hard to pinpoint the short-term nickel price due to the metal’s low liquidity and high volatility, but the price upgrade had been triggered by the rising production of stainless steel.

 

Morgan Stanley’s overall view of the metal market is that prices should, on average, be 32% higher in 2010 thanks to strengthening industrial production “driven by growth in China”

 

Peter Richardson, Morgan Stanley’s Melbourne-based analyst, said in a report carried by Bloomberg News that: “the economic outlook has improved materially in response to unprecedented fiscal and monetary stimulus initiated in 2009”

 

“We expect the strong and broad gains in base metal prices in 2009 to be sustained in 2010 after a period of excess importation in China,” Morgan Stanley said, “with a weighted average increase in US dollar prices of 32.4 per cent.

 

“However, in contrast to 2009, we expect price appreciation to be growth driven rather than liquidity driven.”

 

Goldman Sachs, and a fourth firm of expert observers, Schroder Investment Management, fall squarely into the supercycle believers club.

 

“Structurally, we believe that the bull market in commodities is very much intact,” Goldman said in its 2010 commodities outlook report.

 

That view was shared by Christopher Wykes, commodities product manager at Schroders when he told Money Observer in London that “we expect the bull market to continue due to increasingly constrained and limited supply, and greater demand from developing economies”

 

“That is not to say there won’t be volatility, but historically, bull markets in commodities run for 20 years, and as demand recovers we expect this one to be longer than average,” he said.

 

Goldman’s advice for such a supply-constrained world in 2010 is to focus on five key mineral commodities: metallurgical coal, iron ore, platinum, copper and gold.

 

“Our short-term preference for bulk commodities reflects the fact that steelmakers in industrialised countries are raising capacity utilisation at a time when seaborne coal and iron ore markets have already been stretched by elevated import demand from China,” the bank said.

 

“By contrast, in the early months of 2010 we expected base metal fundamentals to deteriorate because China’s restocking has essentially run its course and demand (outside China) is not yet strong enough to absorb the surplus.

 

“Copper remains the best of the base metals because of its supply constraints. We retain a positive view of precious metals. Platinum is the most supply-constrained of all the major commodities and the shortfall will become much more apparent as global car production recovers.”

 

The consensus view of the experts is that 2010 will be a year when investors should look more at the supply side of the equation, rather than demand.

 

China’s recovery is widely seen as being sustainable, with speed bumps. The US recovery will be slow and a drag on the overall global economy, but offset by a stronger performance in the emerging BRIC economies, Brazil, Russia, India and China.

 

Article originally published in the March/April 2010 edition of RESOURCESTOCKS.