Trends in selected commodity markets
The World Bank (WB) energy index rose by 6.5% m-o-m for a ninth straight month in April driven by the conflict in the MENA region. The non-fuel commodity price index increased by 2% in April compared to a 4.8% m-o-m fall a month earlier. Precious metals, some grains and few base metals partly offset a sharp fall in other commodities. The dynamics of the commodity markets experienced a strong change in the first quarter of 2011 compared to 2010 as a whole, especially in the fourth quarter of last year.
Following the broad-based good performance in commodity markets in 4Q10 due to strong fundamentals, an improvement in market sentiment and some supply concerns – all factors which were expected to last – most commodity markets plummeted that month owing to the mixed effects of the political problems in the MENA region and the direct consequences of the tragic events in Japan.
These events have had far reaching consequences on supply and demand of key commodities, and at the same time, other commodities have been influenced by the re emergence of pessimism about demand growth and prospects of the global economy. The market dynamics in April responded to similar factors from a month earlier such as the crisis in the MENA region, the triple disaster in Japan and the potential risk posed by higher oil prices for the global economy. Furthermore, there was some bearish news in April such as the interest rate increase in China for the third time since last October, and the lowered growth forecast for US and Japan posed by the IMF. These factors offset the weakening of the US dollar.
The WB energy commodity price index (crude oil, natural gas and coal) rose again by 6.5% m-o-m in April. Except for coal, the rest of the complex showed strength. Henry Hub (HH) natural gas prices reversed the fall the March, increasing by 6.8% m-o-m to $4.24/MMbtu. Most of the price increase took place at the end of April due to colder temperatures for consuming regions and the spring maintenance of a number of nuclear plants. Working natural gas in storage rose to 1.685 bcf as of 22 April, according to the EIA’s Weekly Natural Gas Storage Report. Stocks are 215 bcf below last year’s level and 11bcf below the 5-year average.
The EIA also expects record US natural gas production in 2011 of 63.32 bcf per day, and assuming demand to grow this year by 2.6%, this implies that in the absence of serious production cuts the market will continue in surplus.
The WB non-energy commodity price index recovered by 2% m-o-m compared to a decrease of 4.8% in March. There was a slight rebound in a few industrial metals but more of the support came from the grain complex and to a lesser extent soybean and soybean oil. Precious metals kept increasing, but at a slower pace.
Base metal prices rose a slight 0.9% m-o-m in April compared to a 2.9% m-o-m fall in March mainly on fundamental news, pessimism on demand growth and some mixed macroeconomic data. Prices in the base complex were pushed in diverging directions by market sentiment. Some observers argue that the falling trend in base metals has been exaggerated and some metals such as copper and nickel have strong fundamentals which may led to a revival once the macroeconomic fears rescind. Aluminium, lead and tin performed the best in April within the complex.
Aluminium prices advanced further by 4.8% m-o-m to around $2,678/tonnes in April, the highest price since August 2008. Despite the negative impact of the earthquake on aluminium demand in Japan with its aluminium-intensive auto sector, aluminium prices remained strong on the back of rising crude oil prices and associated higher production costs, and the risk premium added by the conflict in the MENA region, where several of the new and most important capacity smelters and projects are located. MENA’s share of aluminium production (8% of global supply) is the largest within the base metal complex.
Regardless of these bullish events, the aluminium market remains oversupplied with the production having increased by 7% to 6,248 kt q-o-q in 1Q11 according to the International Aluminium Institute, with London Metal Exchange (LME) inventories still very high. Prices may be driven in the short term by the situation in MENA and Chinese capacity restrictions, but the outlook is for softer prices.
Finally, aluminium stocks on the exchanges should be closely monitored due to historical low interest rates which have led to significant inventories of aluminium being held offexchange. A further rise in interest rates may cause stocking off-exchange to become unprofitable, causing a flood of stocks into exchange warehouses.
Lead prices rose 2.9% m-o-m to $2,700/tonnes in April but prices were very volatile reaching a 3-year high in the first 10 days of April, but declined thereafter. The price jump in early April followed the closure of the Magellan mine in Australia. Nevertheless, following the record prices and the cash to 3-month LME price-rise above US$50-70/t, stockists moved lead inventories to LME ware houses in order to sell and lock in profits causing a 10% increase in the LME inventories to stand at a 16%-year high.
It must be noted that lead inventories have risen by 50% since the beginning of the year. All major observers agree on the existence of market surplus in 2011.
Nickel prices saw a milder fall of by 1% m-o-m to US$26,408/tonnes in April compared to a sharp 5.5% drop in March caused by the earthquake in Japan. Nickel prices were supported in April by the combined effect of the global sell-off of LME base metals and the recovery of Japanese steel mills following the earthquake/tsunami natural disaster. Contrarily, news about some incoming projects may be a bearish factor, but nickel inventories declined by 4.9% m-o m to 120,317 tonnes in April and the nickel market is expected to remain in deficit for the rest of 2011 as the new capacities are not to come before 2012.
The outlook for nickel prices posed some uncertainties given that observers have different estimates of the balance in 2011 with the International Nickel Study Group projecting a 60kt surplus but others, like Brook Hunt, estimating a 30 kt deficit.
Zinc prices rose 0.9% m-o-m to $2.360/tonne in April, essentially on weak fundamentals. Zinc inventories at the LME increased by 5% m-o-m to 770,418 tonnes, a level not seen since 1995. The International Lead and Zinc Study Group (ILZSG), estimates that the market will be in surplus for the fifth consecutive year in 2011 by 200 kt, but Brook Hunt estimates a 450 kt surplus.
Copper prices dropped 0.1% m-o-m to US$9,493/tonne in April, compared to a 3.7% fall in March. Copper prices were again very volatile in the middle of bearish and bullish factors The 25 basis point-rise in the lending rate by the Chinese central bank – the fourth time since October – weighed on copper prices as did fears of the possible release of important Chinese stocks into the market, leading to a reduction in the deficit expected this year.
Codelco, the world’s major copper producer, expressed concern that high levels of copper held by China could become a source of instability for the market, but it is difficult to know if the metal will make its way to the market or not. It seems that the key driver for copper demand will be the Chinese policy to control inflation.
Tin prices rebounded by 5.8% m-o-m to $32,363/tonne in April despite record inventories at the LME owing to the crackdown on illegal mines in Indonesia and the application of the Dodd Frank regulation.
Gold prices posted another gain of by 3.9% m-o-m to $1,479.8/oz in April and silver jumped by 19% m-o-m to $42,80/oz supported by a combination of growing inflation expectations, a low US real interest rate and mixed sentiment concerning downside risks to the global recovery.
Corn prices jumped by 9.9% m-o-m to $319.3/mt in April reversing the drop in March which was due to the tragic events in Japan. Corn prices achieved an all-time high record on a bullish mood at the CBOT, a higher demand for feed exports and a strong demand for ethanol, as crude oil prices keep growing. Additionally, a weak US dollar and wet weather in the US has caused delays the corn planting adding concern to a market characterised by low inventories. The USDA raised estimates of corn production owing to expected better crops in Brazil, but the global demand forecast was also increased and ending-stocks are at a 15-year low. Although corn prices may drop from current levels, it is expected that they will remain high on strong demand.
Sugar prices at the US markets tumbled by 3.7% m-o-m to 84.3¢/kg in April basically on the removal of the Indian export ban. For the third consecutive month, sugar markets answered to mixed fundamentals. Despite lower production in China, higher supply is expected from Brazil, India and Mexico. In addition, many observers agree that after the effect of El Nino and La Nina last year, sugar production is expected to reach normal levels. The bearish mood of strategical investors at the ICE also added to downward pressure on sugar prices.
US soft red wheat (SRW) prices rose 3.9% m-o-m to $314.9/mt, after a sharp decrease a month earlier. Wheat prices gained support from weather conditions such as lack of rain in Europe and dryness in the US hard red wheat planting belt. However, prices declined by the end of April as positive news on production for this year was published. According to the latest USDA forecast, global stocks are still high at 183 mt. Uncertainties only come from the time when ban removals in the Black Sea countries are materialised.
Soybean prices hardly grew by 0.5% m-o-m to $556/mt in April, mainly on expected good production from Brazil and a bearish mood in the futures markets where investors thought that the wet weather in the US corn belt would force farmers to increase acreages of soybean instead of corn. News of lower demand for oil seeds from China and India also added pressure to the market.
Investment flows into commodities
Data from the CFTC indicates some recovery in the open interest volume (OIV) of major commodity markets in the US, as it moved up by 1.7% m-o-m to 8,567,002 contracts in April. The major gainers were agriculture and livestocks.
Long positions of money managers recovered, rising by 2.6% m-o-m to 1,868,288 contracts in April while shorts also increased by 1.8% m-o-m to 514,199 contracts. Thus, the net length of speculative positions went up by 4.4% m-o-m to 1354.089 contracts in April, and, as percentage of OIV, increased to 72.5% from 71.3 in March. This development partly reflected a recovery in the investors’ mood, one month after the tragic events in Japan.
Agricultural OIV increased by 1.6% m-o-m to 4,595,378 contracts in April. Money manager’s long positions recovered partly, and went up by 1.7% m-o-m to 987,812 contracts in April with shorts increasing 24.5% m-o-m to 200,317 contracts. Thus, the speculative net length declined by 2.9% m-o-m to 787,495 contracts, while speculative net length as percentage of OIV slightly moved down from 17.9% in March to 17.1% in April.
Precious metal OIV rose by 3.6% m-o-m to 666,977 contracts in March. Money managers’ long positions increased by 7.2% m-o-m to 244,354 contracts in April but the pace of growth slowed from 15% in the previous month; as short positions increased by 0.7% m-o-m to 11,579 contracts in April. Speculative net length witnessed a more modest increase of 7.5% m-o-m to 232,775 contracts compared to a 22% increase a month earlier. The money managers’ net length rose to 34.9% in April from 33.6% in March. The more modest activity of strategic investors may suggest that concerns over the macro events eased somewhat in April.
Nymex natural gas OIV rose by 1.7% m-o-m to 941,365 contracts. A recovery took place in money manager long positions, which rose by 6.4% m-o-m to 114,900 contracts in April while a strong 17% fall in shorts to 224,373 contracts left the speculative net length as percentage of OIV at minus11.6%, up from minus17.6% in March.
Copper OIV declined by 2.8% m-o-m to 134,902 contracts in April, down from a fourth straight month, although the drop moderated compared to March. Both speculative long and short positions declined again by 8.5% m-o-m and 5.3% respectively, but the trends softened compared to the previous month. Therefore, net speculative length fell from 16.8 percentage points (pp) in March to 15.4 pp in April.
