MB APEX FULL YEAR 2011: Citigroup takes third in overall leaderboard

The metals research team at Citigroup came in third on the overall leaderboard for base metals price forecasts for the whole of 2011, with 93.4% accuracy.

The metals research team at Citigroup came third on the overall leaderboard for base metals price forecasts for 2011, with 93.4% accuracy.

The team also came fifth for the year for their copper predictions, with 94.7% accuracy; third in zinc, with 94.9%; third in tin, with 91.9%; and third in lead, with 95.9%.

In a closely fought battle, Ed Meir, formerly of MF Global and now of INTL FCStone, took the overall top spot, with 95.8% accuracy, while the team at Deutsche Bank came in second, with 94.1% accuracy.

“We start off by building a fundamental picture. We compare mine supply expectations, refinery capacity, refinery utilisation rates – we get a lot of data from looking at companies,” said David Wilson, formerly of Société Générale, who joined Citigroup towards the end of 2011, and is now director of metals research and strategy.

He added that Citi also looks at a range of data points on the demand side, including stock reduction expectations, and intensity of use expectations.

“It’s drilling down, looking at production rates, and what guides production rates, and then building a fairly detailed supply and demand picture,” Wilson said.

“On top of that, there are macro assumptions – GDP growth rate, exchange rates, expectations for fund flows.”

Heath Jansen, md and head of Citi Investment Research & Analysis (CIRA) metals, mining & steel team, added that there must also be strength of conviction to make a credible forecast.

“It’s really putting the research behind the idea. Sometimes, you’ll feel more or less convinced about one metal than another,” he said.

Another key factor in the team’s success is that it includes someone with a background in metals and mining, Wilson said.

When analysts have a working knowledge of either the consumer side or the mining side they are better equipped to understand how the industry works, and how to make accurate forecasts, he said.

“My background in mining has been beneficial in my role as an analyst, having that insight into how companies make key investment and production decisions for example,” Wilson said.

The biggest issue to contend with over the course of 2011, meanwhile, was the lack of supply in certain commodities, Jansen said, while the demand scenario has been relatively strong across the complex.

“As an example, demand for aluminium has been higher than copper, but copper has been the outperformer because of the lack of ability to bring in new capacity,” he said.

In the short term, price forecasts in base metals can be a driving force for the market, as factors such as shifting fund flows can cause instant reactions among participants, he added.

“It depends on the liquidity of the market. Arguably, in less liquid markets, such as tin or nickel, an analyst could have an impact,” Jansen said.

In the longer term, supply and demand will always be the most dominant factor influencing movements in the market, he said.

“A lot of macro hedge funds will often look in detail at market fundamentals. Some proactive funds will be looking at next year’s expectation for supply and demand. Their impact is to bring these expectations into today’s market,” Wilson said.

This is because investment demand has crept into the market more and more in recent years, Jansen added, and investors’ timeframes are very different from those of physical buyers.

What the market lacks is a strong conviction play from participants, Wilson said.

“We’re faced with problems in Europe, the slowdown in China, and improving mine supply, so the conviction story is not the same [this year],” he said.

Claire Hack