Trends in selected commodity markets
Commodity prices continued declining in June, weighed down by the European sovereign debt crisis, bearish macroeconomic data, tightening policy in China and slowing manufacturing growth in emerging Asia. The World Bank non-energy price index declined by 1.7% m-o-m in June while the energy index fell by 0.6% m-o-m.
As in the previous month, those commodities more closely linked to the economic cycle, such as base metals, suffered the major impact of the complicated macroeconomic panorama with worries about the pace of the global economic recovery and a moderation in manufacturing growth in China and emerging Asia leading to slowing Chinese demand growth rates. Among the disappointing data for June is the further softening of the Purchasing Managers Index (PMI) for manufacturing in China, the drop in import demand for commodities, reflecting the eased growth of the fixed investment cycle and inventory correction in the industrial sector as well as slower growth in car sales for May.
This data is in line with government efforts to cool the economy, particularly the property market. Some analysts say that concerns about the overheating of the property market in China and the transmission to the whole economy with the consequence of the burst of a financial bubble are overblown, pointing to the insignificant share of fixed asset investment accounted for by private property construction and the low exposure of banks to the sector.
Likewise, a deceleration in the pace of high-value property construction in urban areas is likely to be more than offset by government plans to step up construction of low-income housing this year. Some analysts also argue that there is a kind of overreaction of the markets to the slowing growth in China because this is taking place from exceptionally high levels.
Concerning the US, the Conference Board's Consumer Confidence Index tumbled in June. Initial claims for unemployment insurance jumped by 13,000 in the week ended 26 June and the Pending Home Sales Index plummeted 30% to an all-time low during May. The June employment report showed a declining work week. The IMF estimates slower growth for the second half of 2010 and although the forecast for 2011 is unchanged, it is recognized that downside risks have risen sharply amid renewed financial turbulence. Therefore, the forecast relies on the sound implementation of economic policies aimed to bring up confidence and stability, especially in the euro area.
The World Bank energy commodity index (crude oil, natural gas and coal) decreased 0.6% m-o-m in June. The milder fall compared to last May was ascribed to a surge in US natural gas prices as crude oil prices dropped 1.2%.
Henry Hub (HH) surged 15.4% m-o-m on rising temperatures that fueled demand regardless of weak fundamentals as there are ample inventories, growing nonconventional production and surplus global LNG capacity.
The World Bank non-energy commodity index decreased 1.7% m-o-m in June with the base metal market being the worst performer.
As in May, the World Bank base metal price index was the major loser in June, falling 5.9% m-o-m. As already mentioned, the drop that took place across the complex was prompted by the burden of concern about the EM tightening policies and EU countries debt. The official China Federation of Logistics and Purchasing, PMI for manufacturing fell to 52.1 in June from 53.9 in May and 55.7 in April. As it has been noted, some analysts of the commodity markets hold an optimistic view about commodity markets, arguing that the concern for a slowdown of the Chinese economy is exaggerated since the previous economic growth rate was very high and these rates are
still healthy and more sustainable.
Copper prices decreased 4.9% m-o-m in June on concerns over moderating demand in China and the European public debt crisis. China’s copper imports slid by 9% m-o-m in May for the second consecutive month. Inventories declined at the LME.
Aluminium prices lost by 5.3% m-o-m in June as a result of growing supply and expectations of slowing demand in the second half of the year. Chinese imports of unwrought and fabricated aluminium products were down 72% y-o-y. Concerning storage, LME inventories dropped.
Lead prices fell 5.3% m-o-m in June owing to expanding production and slowing demand. China, which is the world’s largest lead consumer saw a 9% m-o-m decline in imports of lead and lead concentrate in May.
Zinc prices also sank 11.5% m-o-m in June owing to weakening demand mainly from China whose zinc ore and concentrate import declined 6% in May m-o-m.
Nickel prices tumbled 11.9% m-o-m in June. On the demand side, Chinese nickel imports declined 36% m-o-m in June. In addition the market was preparing for the traditional seasonal weaker activity. The decline in nickel prices took place despite some supply constraints.
Gold prices rose 2.3% m-o-m in June, essentially on safe-haven buying by investors.
Investment flow into commodities
Open interest volume (OIV) for major commodity markets in the US declined 2.1% m-o-m in June to 7,434,924 contracts. Investor mood became bearish in the middle of mounting negative macro-economic data which raised
concern about the pace of global growth or even of the possibility of a double-dip recession. Livestock, WTI and natural gas experienced the largest losses in the total number of contracts.
Non-commercial longs in major US commodity markets slipped by 2.9% m-o-m to 3,780,422 contracts in June while a rise in shorts of 1.4% m-o-m to 1,809,965 contracts caused net non-commercials as a percentage of open interest volume to rise from 27.8% in May to 26.5% in June.
Agricultural OIV increased by 1.1% m-o-m to 3,904,255 contracts in June. Noncommercial longs fell 2.4% m-o-m to 2,064,087 contracts, while shorts advanced 4.4% to 812,963 contracts in June, so the net length as a percentage of OIV fell from 34.6% in May to 32.1% in June.
OIV for precious metals rose 1.1% m-o-m in June compared to 706,911, growth of 8.5% in the earlier month. Non-commercial long positions increased by only 0.9% m-o-m to 435,131 contracts in June compared to a rise of 10.7% in May. As non-commercial short positions declined slightly by 0.9%, the net length as a percentage of open interest
volume remained almost the same at 29.4% in June.
Nymex natural gas futures open interest volume plummeted 5.1% m-o-m to 817,802 contracts in June. A fall of 3.8% and 4.5% m-o-m in non-commercial longs and shorts resulted in net length as a percentage of OIV dropping by 1.8% in June compared to - 2.1% in May.
Copper open interest volume gained 0.5% m-o-m to 133, 281 contracts in June after a dramatic drop in May. As a whole, the mood was bearish in the copper paper market with non-commercial longs declining 3.5% m-o-m to 82,910 contracts and shorts gaining 5.8% to 36,420 contracts in June respectively. Non-commercial net length declined from
38.8% in May to 34.9% in June. Copper has been one of the markets more disrupted by the negative macroeconomic environment due to the close links between industrial metals and the economic cycle.
The estimated dollar investment inflow into major commodity indices indicates a further decline of 4.7% m-o-m in June compared to 3.1% in the previous month. The risk aversion affected all the sectors in a similar way.
