Commodity prices will deteriorate in the third quarter due to a slowdown in global economic growth, although wheat, coffee and some metals will be underpinned by on-going supply and demand disparities, according to Jacques van de Wal, head of sector and commodity research at ABN AMRO.

The bank has a neutral to negative short term commodities outlook, due to the impact of slowing growth in the US and emerging markets, as well as the Japanese disasters and high oil prices. But its two-year commodities view is generally positive, as the sector will be supported by strong Asian demand, which will increase global consumption and economic stabilisation, according to the bank.

The bank foresees sustained urbanisation and industrialisation in Asia, particularly in China and India, which is why it believes long-term demand will be upheld for both base and ferrous metals.  The price of zinc is set to escalate as demand for the metal will exceed supply until 2013, primarily supported by great demand from China as it needs to feed its exponentially growing construction and car manufacturing sectors.

Conversely, the bank predicts the price of copper to fall due to excess supply in the long term. While steel, iron ore and coking coal prices are all currently relatively high, and are predicted to remain so in the short to medium term, ABN AMRO expects these commodities will eventually weaken in value over the long term, again due to oversupply. The bank suggests this will come about because of stuttering demand as economies slow down, while new mining projects are set to boost supply of these commodities.

The gold market is saturated with investors, which poses significant downside risks. The bank expresses fears that, in this environment, if gold were to lose its “special touch”, or if the regulatory overhang were to alarm investors into reducing their holdings in the precious metal, any holding cutback would significantly impact the price of gold. “The main reason for buying gold because of its uncorrelated and safe haven status will then not fly,” says the bank in its quarterly commodities outlook report.

ABN AMRO expects the gold to silver ratio, which indicates how many ounces of silver it takes to buy one ounce of gold, to increase to around 45. The performance of silver is more exposed to the global growth cycle due to its numerous industrial uses, for example in solar panels, energy-efficient windows and its power to prevent bacterial growth, according to the bank, which is why it says that a global economic slowdown is likely to impact the silver industry more than gold.

The bank expects the divergence seen between WTI and Brent oil prices to increase further over the next year. It bases this prediction on a belief that non-OECD demand, predominantly from China, should support structurally higher Brent oil prices in the medium term, while WTI prices will not see any significant upwards movements as they have been capped because of the record stocks in Cushing, Oklahoma, as well as unconventional oil production from places such as Canada serving to further dampen the value of WTI, it says.

In agriculture, reductions in global supply from the world’s major producers will boost wheat and coffee prices, while rising global sugar consumption and a poor Brazilian harvest will drive price rises in the sector, says ABN AMRO.

“Commodity markets have taken a ‘glass half full’ attitude towards recent economic data. An adjustment of growth expectations could result in fears of lower demand and a drop in overall investor risk appetite. Commodity prices tend to correlate with equities in this environment and look comparatively expensive,” said Georgette Boele, head of FX & commodity strategy at ABN AMRO, in summary.