Copper as top commodity in 2011

Bank of America-Merrill Lynch sees copper as the top performing commodity of 2011, stretching to yet more record highs as demand from emerging market powerhouses places further strain on a projected supply deficit.

Gold prices are expected to peak at $1,500 an ounce next year, while crude oil, currently around $90 a barrel, should temporarily break above $100, the bank projected.

Sabine Schels, BofA-ML global commodities strategist, said at a presentation on Wednesday that commodity prices are expected to rise next year, driven by very robust economic growth in the emerging world and in spite of a weak growth outlook in developed economies.

Emerging economies such as China or Brazil will implement tighter monetary policy to contain inflation and allow for growth, which could act as a temporary headwind to the raw materials complex, she said.

But increased government spending on improvements to infrastructure and social housing, for example, should feed demand for copper, among other commodities, Schels said.

"Of course, the European debt crisis and also the inflation risks in China have recently tempered some of the hype around QE2 by the Fed, but we still believe that supply constrained commodities will do well in 2011," she said.

"Our favourite call across the spectrum is copper. We think copper will continue to go to new record highs and will average $11,250/t next year," she added.

Benchmark copper prices for three months delivery on the London Metal Exchange have risen by nearly 25 percent so far this year to record highs above $9,200 a tonne.

Copper, which is widely used in electronics, cabling and construction, has risen to all-time highs this year, fuelled by demand from top consumer China as well as by broad-based investment in commodities by funds.

GOLD, GAS, OIL AND OPEC

The 14-percent decline in the value of the U.S. dollar against a basket of currencies in the five months to November this year also acted as a key driver of gains in copper.

Now investor concern over the euro zone sovereign debt crisis has resurfaced with the financial bailout of Ireland, punishing the euro, the dollar has pared some of these losses.

However, the Federal Reserve's $600-billion bond buying programme and a government plan to maintain tax cuts to boost economic growth could further strain a yawning budget deficit, thereby undermining the dollar and boosting commodity prices.

With the dollar expected to decline and inflation pressures set to pick up in both the developed and emerging world, BofA-ML expects the gold price to extend this year's gains to reach a peak at $1,500 an ounce next year, Schels said.

For crude oil, the bank is predicting prices breaking above $100 a barrel, with the benchmark Brent crude futures contract averaging $88 a barrel next year.

"We do think OPEC in 2011 can no longer ignore the tightening in physical fundamentals," Schels said.

"There are really too many signals right now that suggest OPEC will have to increase production in 2011. Number one, inventories have come down across the board to five-year averages and two, we've seen a number of oil benchmarks moving into backwardation."

U.S. natural gas is the bank's favoured short position.

"The outlook will get worse before it gets better on the back of low demand and record production growth in the U.S. and record inventories," Schels said.

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