Trends in selected commodity markets
The World Bank (WB) index for non-energy commodities dropped by 2.7% m-o-m in December, compared to a 2.8% fall in the previous month, driven mainly by losses in grains. By contrast, the decline in base metal prices was relatively milder. The energy commodity index edged down by 1% m-o-m December. Commodity prices recovered modestly in November, but these decreased again in December amid high volatility, dramatically higher risk for global economic growth in OECD countries and deceleration in developing countries, especially China, the Euro-zone debt crisis, as well as still pending US problems. The WB energy commodity price index (crude oil, natural gas and coal) edged down by 1% m-o-m in December, due to huge losses across the complex.
The Henry Hub (HH) natural gas price fell by 2% m-o-m in December compared to 9% a month earlier. As in previous months, the HH natural gas price came under pressure from the high storage levels and milder weather. High oil, NGL & condensate prices have attracted capital to liquid-rich shales (the Marcellus in Pennsylvania and Eagle Ford in Texas — considered more a liquid than a natural gas play), boosting gas output despite low prices. However, natural gas prices at $3.13/mmBtu, are close to a secular bottom, given average mid-cycle breakeven costs for conventional dry gas of $4.19/mmBtu and very warm winter weather. Curtailed US production, mandated shutdowns in Alberta to protect well pressure in the oil sands and a somewhat stronger US economy should boost prices back over the $4 mark by late 2012 and in 2013.
Agricultural prices kept declining by around 3% m-o-m in December, impacted by a negative macroeconomic outlook. Grain prices felt the pressure of a bearish World Agricultural Supply and Demand Estimates (WASDE) report, which revealed higherthan- expected ending stocks. Chinese trade data for November was negative for some items, such as soybean and soybean oil.
Base metal prices declined by 1% m-o-m in December amid high volatility and worsening global macroeconomic conditions. Nevertheless, there were diverse trends in the complex. Some base metal prices on the London Metal Exchange (LME) showed a drop in December from the previous month. Copper prices fell by 0.2% m-o-m (2.5%). Aluminium declined by 2.8% (-4.6%) and tin prices plummeted by 9% (3.7%). Zinc also decreased by 1.6% (3.4%). Other metals like nickel and lead were able to keep the recovery from November, owing to tightened fundamentals. Despite the fall in base metal prices for December, induced by the gloomy outlook for Europe and concerns about China demand, which prompted bearish market sentiment and risk reduction, base metal prices were the best performer in relative terms as some metal prices were supported by strong imports from China in the previous month.
By contrast, inventories at the LME increased by 3.7% in December, but stock trends were also diverse with copper inventories and lead declining, while others increased. The outlook for base metals is closely tied to the performance of the Chinese economy, with a soft landing likely to sustain prices. There are some positive signs: After tightening credit conditions to contain inflation, China has shifted to a ‘pro-growth tance’, cutting the required reserve ratio for large anks by 50 basis points to 21.0% n 5 December – earlier than expected – and permitting more bank ending. A drop in ovember’s ‘Purchasing Managers’ Index’ to 47.7 – indicating contracting anufacturing activity – triggered this shift. Further easing is expected soon, given oderating food & onsumer price inflation, which stands at 4.2% in November, down rom last July’s three-year high f 6.5%, as well as decelerating property prices (+ 2.2% -o-y) and concern over ‘hot money’ outflows from China.
Copper prices experienced a mild drop of 0.2% m-o-m in December. This took place espite a % m-o-m drop in inventories at the LME duet to open arbitrage attributable o Chinese restocking. otal Chinese copper imports hit a record in November reaching 60 kt, overcoming the previous igh of 646 kt in June 2009. As already pointed out, here are also bullish factors such as labour roblems in Indonesia and Peru which are till affecting production. Copper showed a supply deficit n late 2011, with global onsumption exceeding refined metal production, and is likely to remain in deficit in 012, even with a 6% increase in global mine supply after a mere 0.4% increase in 011. orld mine output has increased only 1.1% per annum from 2007 in the face of apid demand rowth in China and ‘emerging’ Asia, lifting prices onto a higher plane. uch of the recent pickup in refined opper imports into China has reflected stockpiling y property developers for use as collateral for ank credits. However, China’s ndustrial demand should strengthen again next spring, with prices urging back to $4. opper prices could remain just under the $4 mark through much of 2013. vertheless, the severe problems in the economic outlook have been impacting opper demand ith emerging nations still the main source of demand.
Gold prices lost 5% in December compared to a 4.4% drop a month earlier due to ofter physical emand, the stronger dollar, low risk appetite and the lack of further Fed easures at the last ederal Open Market Committee (FOMC). Nevertheless, these re short-term factors and gold is expected o reach new highs due to uncertainties in he financial markets, sovereign debt, real interest rates nd inflationary pressures.
Investment flows into commodities
Investments into commodities decreased sharply in December on continued concerns bout the uro-zone fiscal crisis and approaching recession in the area as well as eceleration in emerging ountries and other worries related to the health of the global conomy. otal open interest volume OIV) in major commodity markets in the US fell by 2.4% -o-m to 7,209,999 contracts in December ompared to a 1.7% fall a month earlier. A % m-o-m drop in total long speculative positions ombined with a 11.8% rise in peculative shorts to leave speculative net length at 413,316 ontracts, 25% lower than in the previous month.
Agricultural open interest volume (OIV) decreased by 2.9% m-o-m to 3,661,630 contracts in December compared to a 0.7% fall in November. Money managers’ net long positions plummeted by 48.5% m-o-m to 127,027 contracts in December. This was the result of an 18% increase in speculative shorts and a 6% drop in longs.
HH natural gas OIV decreased by 6% m-o-m to 115,612 contracts in December compared to a 2% fall the previous month. Speculative net long positions increased by 12% m-o-m compared to an 11% drop in November, as shorts increased more than longs.
Copper OIV declined by 2% m-o-m to 123,298 contracts in November, compared to a 4.9% gain in October. The net-length of money manager positions rose by 7% in December compared to a 40% rise in the previous month, driven by a higher rise in longs than in shorts.
Gold OIV declined by 6% m-o-m to 423,266 contracts in December reversing the gains in the earlier month. Net long speculative positions declined by 14% m-o-m in December as a result of an 11.5% fall in longs and a 27.9% gain in shorts. The bearish sentiment came amid falling prices in December. Following a recovery in October, dollar investment inflow into commodities declined by 1% m-o-m to $114.9 bn in November. Except for crude oil, all the commodities considered saw an outflow of investment in November. In the case of gold, the dollar inflow remained the same in November compared to the previous month.
