London, 10 December 2010

Morgan Stanley see most commodity prices moving higher in 2011 as global GDP, at an above-trend 4.2%, bolsters demand, led again by emerging market economies. After growing by nearly 5.0% in 2010, global GDP growth is poised to grow by 4.2% in 2011 — importantly, over 70% of this growth will come from the commodity-intensive EM, with China, India and Latin America poised to see GDP growth of 9.0%, 8.7% and 4.1%, respectively.

Growing demand, together with a tightening supply side, provides the fodder for our broad constructiveness across the commodity space. Declining inventories will not only lift spot prices but will also improve roll returns (as drawing inventories move markets from contango to backwardation).

Morgan Stanley are most constructive on crude oil, copper, gold, and corn and soybeans. They are least constructive on natural gas, live and feeder cattle, and zinc.

Morgan Stanley favourites: The need for increased OPEC production will lower spare capacity, sending oil prices above $100/ bbl in 2011, in our view. Copper, our favourite base metal, should continue its move higher as strong OECD demand growth and resilient Chinese demand are contained by supply downgrades. Corn and soybean prices both need to rise to ration demand — simply put, demand is running too hot given tight inventories and limited acreage. Gold will benefit from continued investment demand, stemming from a continued expansion in global money supply and lingering sovereign risks.

Risks: "Despite our constructiveness, we expect the ascent in price to be volatile. Lingering sovereign risks, fears of policy missteps in the EM, and bouts of USD strength will all present headwinds," say Morgan Stanley. Below is a commodity snapshot for 2011 (dated 10 December 2010).