>COMMODITY OUTLOOK: Bulks are Back (CITI)

■ Bulks are Back — Actually, they never went away. We have long held a bullish view of the fundamental outlook for bulk commodities.

■ For Bulks Persisting Chinese Imports — Factors which have boosted Chinese imports of bulk commodities – strong demand and constrained domestic supply - are likely to persist for at least the next two years.

■ For Base Metals — In China, apparent consumption has run ahead of underlying and we believe there are significant excess un-reported inventory in copper and nickel, although less so in other commodities. OECD demand will be the key to 2010. We expect improving demand and a restocking multiplier, but it will be concentrated in the second half. Investment flows accelerated further in early 2010, but are now slowing on USD concerns.

■ Two Risks are Torturing Markets — Firstly, sustained USD strength, if not backed by positive economic data, could trigger significant outflows of short term investments. Secondly China’s monetary tightening has raised worries about slower demand and rapid destocking, but here we believe the risk is less.

■ Copper's Still Shining — Constrained mine supply has been a persisting source of price support and continues to be so. On the demand side the picture is mixed. China’s apparent consumption is expected to slow to 8% in 2010 from 40% in 2009. But OECD demand will kick in but not until the second half. Thus we expect price to weaken in 1H, rebounding to US$3.50 in 2H.

■ But Coking Is Preferred — We retain our bullish outlook for coking coal and our forecasts of US$200/t for JFY10 (Coal: Back in Black, 22 September 2009). We retain our concerns on the changing prices structure of the market. However these concerns are more than offset by our views of continued robust Chinese imports, improving demand from traditional customers and supply constraints.

■ Thermal Smoking Hot — Chinese imports could continue to surprise on the upside over 2010 as domestic supply struggles to keep pace with demand. But China’s buying is not the only force pushing prices higher. Korean and Indian utilities are also acutely short, even though Europe is soft. We upgrade our JFY10 forecasts to US$105/t and see prices remaining nearUS$100 over the next three years.

■ Iron the Ore with More — Price activity in the iron ore spot market has been explosive. The outlook for domestic iron ore production in China is one of the key uncertainties in the iron ore market. We believe consolidation could also prove expensive and disruptive to iron ore supplies. We upgrade JFY10 forecasts to
+40% for fines and +50% for lumps.

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