APEX FULL YEAR 2011: Deutsche Bank takes second place in overall leaderboard

The metals research team at Deutsche Bank took second place on the overall Apex leaderboard for price forecasts in base metals during 2011, with 94.1% accuracy across all six base metals traded on the London Metal Exchange.

The metals research team at Deutsche Bank took second place on the overall Apex leaderboard for price forecasts in base metals during 2011, with 94.1% accuracy across all six base metals traded on the London Metal Exchange.

For the full year, the team took third place in copper forecasts, with 96% accuracy, fifth place in zinc, with 94.2%, second in tin, with 92.2%, second in nickel, with 92.1%, and fifth in lead, with 93.9%.

The key to this success, according to Daniel Brebner, head of metals research at Deutsche Bank, is a focus on microeconomic factors, such as supply and demand.

“We’re looking at what kind of changes we’re going to see over the coming year on supply side constraints, costs, potential disruptions, and those kinds of things,” Brebner told Metal Bulletin.

“We also look at relevant data, not only on the global side, but for specific regions as well. China has clearly been very important, for example,” he added.

The team also looks closely at market expectations, Brebner said, and how these expectations might change over time.

“It’s joining the market’s anticipation of the balances [of supply and demand] with how we think they will evolve,” he said.

“Increasingly, what’s been important is the macro environment. It’s to do with how investors perceive risk, and how they perceive the way the debt situation will evolve in Europe and the USA. That leads to complications in how commodities perform, as they’re now a distinct asset class.”

Exposure to metals and other commodities, he said, has been viewed as a way to hedge risks associated with factors such as low interest rates and increased quantitative easing.

“It’s becoming much more complex, versus how things were ten years ago. There are extremes in leverage, particularly at a state level, which have led to risks becoming more apparent in terms of inflation or deflation,” Brebner said.

“That can create significant oscillations in asset values, especially for commodities. We’ve also had the evolution of China as a mature economy, which has resulted in significant consumption of commodities.”

And while the team makes forecasts across the London Metal Exchange, it does also look specifically at individual metals, Xiao Fu, a research analyst at Deutsche Bank, added.

“For example, nickel and copper are likely to outperform fundamentally in the near term, but we’re slightly more bullish on zinc and nickel over the medium term,” she said.

Zinc, furthermore, is likely to have strong fundamentals by the end of 2012, and into 2013, Brebner said, while nickel will be more interesting in the nearer term.

“I think nickel will have positive cyclicality, and there will be restocking. While we have a strong view for the complex for the [base metals] asset class as a whole, we do think there may be considerable differentiation,” he said.

“You can extract value by preferentially building exposure to things like nickel, versus copper or gold,” Brebner added.

In order to make forecasts for these metals confidently and accurately, furthermore, an analyst must have a certain amount of humility.

“When you take a view, you have to know when it’s run its course, and know when it’s incorrect so you can adjust it over time,” Brebner said.

“There are a significant number of unknowns out there that are difficult to account for, so you have to accept the possibility of being wrong and allow for that, rather than being stubborn.”

The process, he said, is a mental exercise, and is now focused on building contacts in China, as well as building sound economic models.

It also includes occasionally being creative in order to account for the important macro-economic decisions that are likely to be made over the coming months.

“It’s understanding that there are pressures that build up, so you can sometimes utilise regression or reversion for a metal,” Brebner said.

“It’s a combination of understanding and adjusting for your own fallibility, in addition to being detail-orientated, and extracting as much quantitative data as possible to build your model.”

For all that, however, Brebner added that he does not believe price forecasts drive the market.

“I think market forces are much more powerful than a group of analysts sitting in an investment bank,” he said.

“It’s not one analyst, or even a group of analysts. A change in forecasts over a period of a couple of weeks might exacerbate a move in commodities, but it won’t have much longevity.”

Claire Hack

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