What to Watch in Commodities: Davos, Oil Risks, BHP, Copper

LAGOS (Capital Markets in Africa) – After the fanfare of the U.S.-China trade deal, commodities investors pivot this week to focus on policy, priorities, profits, and production. The first two of that quartet come from Davos. This year climate change looms large, an issue of central importance for carbon-based energy, the future of farming, and how funds are changing the way that they invest.

Earnings season brings numbers from copper giant Freeport-McMoRan Inc. just as investors take a more positive view of the metal. Separately, top miners BHP Group and Anglo American Plc will present production data and flesh out targets for 2020. And in energy, the spotlight is back on the security of supplies as rising tensions in the Middle East and North Africa have halted some output and exports from key OPEC producers Iraq and Libya.

The week is bookended by holidays in the top two economies. On Monday, U.S. markets are closed for the Martin Luther King Jr. holiday, while China goes offline from Friday for the Lunar New Year break.

A Mountain to Climb
Commodity investors will track Davos this week, with the Alpine jamboree for the elite set to be dominated by the challenge of climate change as never before. The issue is central to energy policy, food security, and the future of investing. Among attendees at the World Economic Forum’s annual meeting are President Donald Trump and activist Greta Thunberg. Watch your Twitter feed as decision-makers try to frame long-term issues with short-term commentary.

Planetary warming, record ocean temperatures and extreme weather such as the Australian bushfires are recasting global finance. BlackRock Inc., the world’s largest asset manager, has announced it’ll put climate at the center of its investment strategy and, appropriately, Chief Executive Officer Larry Fink will also be among the speakers. The event runs from Tuesday to Friday.

Risky Business
Oil traders have had plenty to keep them on their toes in the openings days of 2020 as the tension between Washington and Tehran spiked then faded, and now there are mounting concerns about supply disruptions in both Libya and Iraq. On Monday, Brent surged as much as 1.8% into the mid-$60s a barrel as investors weighed the shifting dynamics in the Middle East and North Africa.

Just last week, the International Energy Agency warned supplies from Iraq, OPEC’s No. 2 producer, are “potentially vulnerable” amid rising political risks in the country and broader region. Iraq temporarily stopped output at an oil field on Sunday, with supply from a second threatened. In Libya, production has almost ground to a halt after armed forces shut down a pipeline.

More Ore
Iron ore’s top suppliers are laying out the details of the 2020s expected supply revival after last year’s disruptions, with a rebound in cargoes that are seen weighing on prices. BHP, the No. 3 exporter, will set out production data on Tuesday after rival Rio Tinto Group flagged that cargoes could rebound to a record. Brazil’s Vale SA releases output statistics next month that may show the producer’s exports were eclipsed by Rio in 2019.

The three main shippers will add a combined 44 million tons in 2020, according to Bloomberg Intelligence estimates. Prices are expected to sag as a global deficit is erased, with Australia’s government forecasting a slump back to the $60s a ton from current levels in the $90s. Mining investors will also parse quarterly output figures due to Anglo American on Thursday.

Heading Underground
Analysts will be looking for an update on Freeport’s transition to underground mining at Grasberg, its flagship copper-and-gold mine in Indonesia when the company reports earnings Thursday. Last month, CEO Richard Adkerson said he expects the miner to double cash flow, boost copper and gold production and cut costs 25% within two years as Grasberg ramps up.

The Phoenix-based company boosted its 2019 capital expenditures twice last year, most of it earmarked for Grasberg and its Lone Star project in Arizona. Freeport is expanding output on expectations that the electric car revolution will boost copper demand, resulting in shortages. The CEO has said he expects copper prices to rise as trade tensions are resolved, and so far in 2020, the metal has gained ground following an almost 8% climb last quarter.

Hot Chocolate
The cocoa and chocolate markets will keep an eye on Barry Callebaut AG on Wednesday when the world’s biggest cocoa processor reports first-quarter results. Traders will be looking for comments on how cocoa demand is holding up with London futures at a three-year high, as well as the outlook for bean processing.

Data released last week showed fourth-quarter grindings jumped in Asia but fell in Europe and North America. Rising affluence and changing lifestyles in Asia are boosting demand for cocoa products used to make chocolate bars to ice cream, and India and China are seen as major drivers of consumption.

Bulls & Bears
Bullish views on copper increased for a second week as market sentiment improved on the signing of the first phase of the U.S.-Chinese trade deal, lower global copper exchange stockpiles, and a possible pickup in demand from China. Still, bulls failed to capture a majority among traders and analysts for the fifth week, the longest such streak since November and just as many respondents were neutral.

Soybean bears outnumbered other respondents as market watchers waited for China to follow through on its pledge to buy more U.S. agricultural goods following the trade accord. Among white sugar traders and analysts, bulls were more numerous than bears. Terminal subscribers can see surveys here.

Source: Bloomberg Business News