Citi cuts commodity forecasts for 2009-10

Citi Investment Research has lowered some of its commodity price forecasts due to the U.S. financial crisis, slowing growth in China and disinflationary developments.

The division of Citigroup Global Markets stated in a Sept. 30 research report that its forecast for copper prices in 2009 and 2010 has fallen to US$3.65 per lb. (down from US$4.75 per lb.) and for aluminum to US$1.30 per lb. from its previous forecast of US$1.80 per lb.

It also expects a similar pattern to play out in the iron ore sector, with price moves of between +10% and -20% in 2009-10. Its previous forecasts for iron ore were price moves of between +30% and -0%.

“Conditions on-the-ground in metals are consistent with the headlines,” the report noted, “featuring slack demand, end-user de-stocking, higher inventories and lower merchant premia. Cyclically soft conditions seem likely in 2009.”

Calling aluminum a “disappointment,” Citi analysts explained that Chinese energy shortages have eased and smelter cuts have been less than advertised at the same time as demand from construction and transport is “imploding.”

Analyst John Hill and his colleagues Graham Wark and Paul Cheng pointed out that China makes up about one-third of global aluminum production and is at the top of the cost curve with average smelter costs of US$1.12 and as much as 30% of its capacity “sub-economic.”

“We continue to be believers in aluminum’s ‘power cost determinism’ in a carbon and energy constrained future, but catalysts have clearly been pushed out to 2009-10,” they wrote.

As for copper, supply-side constraints will help keep the metal in a situation of balance to slight deficit through 2010 with prices remaining “well above trough-cycle levels.”

If copper dips below the US$3.00 per lb. level, it comes dangerously close to the top cost curve range of US$2.40-$2.50 per lb.

“Replacement costs are probably more relevant to long-term prices, as suggested by five-year futures that are in the US$2.90 per lb. range,” the report stated.

In line with its forecast of lower commodity prices for aluminum and copper, Citi has lowered its 52-week target price for several companies on which it still maintains a buy rating.

Citi has lowered its 52-week price target on one of the world’s largest alumina and aluminum producers, Alcoa (AA-N), from $50 per share to $30 per share. Alcoa currently trades at about $22.58 per share.

In addition it has lowered its share price target on Freeport-McMoRan Copper & Gold (FCX-N), the largest publically traded copper producer with about a 9% share of the world’s mined copper.

Citi believes that Freeport, which owns the massive Grasberg complex in Indonesia and has various copper and moly producing mines in North and South America following its acquisition last year of Phelps Dodge, should trade at about US$90 per share over the next year, down from its original target price of US$138 per share. At press-time Freeport was trading at about US$56.85 per share.

The target price for diversified miner Teck Cominco (TCK.b-T), meanwhile, also has been trimmed. Citi dropped its share price target from C$55 per share to C$41 per share. The company currently trades at about C$30.22 per share.

In a separate research report published on Sept. 19, Citi downgraded its estimates for platinum group metals as well, citing weaker European growth that has hit car sales and platinum demand.

In August, Citi downgraded its forecast for European car sales from -3.3% to -4.5% for this year and from -0.5% to -3% for 2009.

The bank has also downgraded its 2009-12 growth forecasts for Europe by between 0.2% and 0.6%.

The outlook for U.S. car sales and economic growth isn’t any better.

“Although the US is primarily a gasoline market reliant on palladium-based autocatalysts, the market appears to have anticipated a spill-over of weakness into Europe, platinum’s largest market,” the report states.

“Mounting pressure on the U.S. auto market and the possibility that sales may decline to their lowest levels in 15 years have weighed heavily on rhodium and palladium prices.”

With the decline in PGM prices overall and given weaker demand and the likelihood of a balanced platinum market by 2009, Citi said they have revised downward their estimates for PGM prices this year and next by 14-36%.

PGM prices have fallen by 43-55% since the beginning of July since their peak in the first half of the year. Prices spiked in February due to South Africa’s power supply issues.

In a ranking of resources, Citi noted that its “favourite sub-groups” were coal, copper and gold. By contrast, steel, aluminum, nickel, lead and zinc “are flirting with surplus” and will be “more challenged.”