Morgan Stanley Lists Copper, Palladium As 2014 Outperformers; Forecasts $1,313 Gold

Chicago (Jan 17)  Among the metals, Morgan Stanley Friday listed palladium and copper among the commodities that it sees faring best in 2014.

Still, in the case of gold, Morgan Stanley listed a full-year forecast of $1,313 an ounce, which is above current prices. Morgan Stanley sees gold averaging $1,275 in the first quarter and $1,350 in the fourth. The full-year forecast in copper was $7,100 a metric ton, with the highest quarterly average at $7,300 in the final three months of the year.

Among the precious metals, other full-year forecasts include silver, $21, and platinum, $1,639. No specific price forecast was listed for palladium. Other base metals forecasts include aluminum, $1,700 a metric ton; nickel, $14,400; and zinc, $2,100.

Overall, Morgan Stanley said 2014 is likely to be a “challenging” year for commodities.

“Although the macro outlook appears to be improving, cyclical, fundamental and FX factors all point to another difficult year for spot price performance,” Morgan Stanley said. “We see opportunities within the broader complex, but investors may need to remain selective and nimble. As global growth rebalances, a number of secular themes are emerging that will put a greater focus on factor exposure. Moreover, with the beta trade likely challenged, individual commodity fundamentals, idiosyncratic risks and roll yields will be more important for alpha capture.

“Based on these factor(s) and fundamental screens, our top picks are palladium, corn, copper and live cattle. We are most bearish natural gas, gold and aluminum.”

In particular, Morgan Stanley said it favors commodities that are linked to reaccelerating, consumer-heavy developed markets. “Palladium screens well here,” the bank said.

Morgan Stanley said commodities tend to outperform equities later in the business cycle. Whereas equities quickly discount expected changes in fundamentals, commodities are physical assets that must first price to the current market environment, the bank said.

“Some positive signs are emerging, but key late cycle indicators -- e.g. inflation, rising capex, slowing incremental margins, etc. -- are lacking,” Morgan Stanley said.

Morgan Stanley said gold is likely to continue facing pressure from short-side positioning, real interest rate increases as the Federal Reserve tapers quantitative easing, and a flight from exchange-traded funds. “In our view, continued net central-bank buying and strong physical demand from China and India are not enough to offset those pressure points,” Morgan Stanley said.

Morgan Stanley said it sees “far greater upside” in platinum group metals.

“PGM metals are trading below their incentive price and primary supply remains constrained,” Morgan Stanley said. “In addition, we continue to expect demand growth from the global automotive emissions catalyst market.”
The firm looks for PGM supply to be “constrained,” with deadlocked wage negotiations in South Africa meaning a supply risk early in 2014. However, secondary – or recycled – supply is likely to keep increasing, Morgan Stanley added.

In the case of copper, Morgan Stanley said the combination of stronger-than-expected demand and a shortage of scrap suggests that an expected market surplus did not occur in 2013.

“We also think supply growth will disappoint in 2014-15, leaving the global market much tighter than most expect, posing significant upside risks to the price forecast.”