Trends in selected commodity markets
The World Bank’s Commodity Price Index declined significantly in June m-o-m. Prices for energy dropped by 12% m-o-m compared to a 7.7% drop in the earlier month. The non-energy component lost 3.6% m-o-m compared to a 2.5% fall in May, the third consecutive decline. Food prices edged down 1.2% m-o-m compared to a 2.1% loss during the previous month, while gold prices rebounded by 0.6% m-o-m compared to a 3.6% m-o-m drop a month earlier. Base metal prices plummeted by 6.1% m-o-m compared to a 3.8% fall during in the previous month. Less affected were some agricultural commodities, due to dry weather. The same bearish factors that have weighed down commodity markets continued to exert pressure on prices in June: macroeconomic uncertainty, especially apprehension over the Euro-zone’s sovereign debt crisis, as well as slower-than-expected growth in China and India. A firmer dollar and growing risk aversion also added to pressures. It must be noted that recent commodity price declines are the steepest since the months following the Lehman crisis of 2008, which suggests markets are pricing in a further deterioration in Chinese economic growth and little progress with regard to the European debt crisis.
The Henry Hub (HH) natural gas price rose by 0.7% m-o-m in June compared to a 25.2% rise in May. Prices found partial support in the last week of June from slightly lower-than-expected consensus inventories. Short covering during the same week also contributed to the rally due to the wariness of some market participants of lower coal displacement during the summer. Major market observers agreed that if summer weather is expected to be a factor influencing demand, coal displacement will likely to be the key factor during the rest of the summer season, which is expected to offset the impact of the weather.
The agricultural price index fell 2.8% m-o-m compared to a 1.7% m-o-m drop during the previous month. As with most other commodities, agricultural markets continued being driven by macroeconomic factors and risk aversion. Nevertheless, this time, wheat and corn prices were the best performers, driven by dry weather and heat in the US Midwest and by Chinese imports for May. Data from the US Department of Agriculture’s World Agricultural Supply and Demand Estimates (WASDE) report favored corn. Concerning Chinese agricultural imports, May trade data reported that China’s net corn imports posted a strong increase of 608% m-o-m, while wheat imports rebounded on a monthly basis, reversing the easing of the previous month due to concerns over the impact of dry weather on China’s domestic wheat harvest. Bad weather led to Black Sea producers downgrading Russian and Ukrainian wheat crops and dry weather in the North China Plains also affect grain crops. The role of weather is so crucial to the outlook for grains that it completely offset the rather bearish implications of the USDA’s annual acreage report of 29 June, which reported a rise across 2012 of US corn, wheat and soybean acres, compared to figures published in its first survey-based estimate at the end of March.
The World Bank’s base metal price index plummeted by 6% m-o-m compared to a 3.8% drop m-o-m in May on worsening macroeconomic outlook. The drop took place across the whole complex with aluminium and copper declining by 5.9% and 6.7% m-o-m, respectively. Base metals prices declined despite falling inventories at the LME due to demand concerns given the deterioration of the macroeconomic front with the metals complex also suffering from increased risk aversion. Positioning has moved aggressively to the short side on pessimism about global demand and de-stocking in China. Aluminium and nickel prices were down further, regardless of supply cuts, given the continued macrolevel uncertainties, especially with regard to the European sovereign debt crisis and Chinese growth. Despite the shift in the Chinese government’s policies towards pro-growth measures, confusion remains regarding the direction of metals market dynamics, particularly for copper. Political measures announced by Indonesia (such as higher export taxes on raw materials like bauxite) also played a role with Chinese imports of aluminium and nickel avoiding a sharper price decline.
Worsening prospects for global growth, particularly concerning Europe and China, have led to a broad sell-off in base metals. Despite pro-growth government measures, confusion is still apparent in terms of the direction of metals market dynamics. Copper prices at the CBOT decreased by 6.7% m-o-m in June compared to 4% m-o-m during the previous month. This metal received a negative impact from a slowdown in the widening of spread between Shanghai Futures Exchange (SHFE) and the London Metal Exchange (LME), the softening of spot market activity and a modest rise in bonded warehouse stocks, suggesting that buying activity in early June had fizzled out.
Aluminium prices fell by 5.9% m-o-m in June compared to a 2% drop during the previous month. This metal was especially affected during the second half of June by poor macroeconomic data, declining energy prices and the announcement of power tariff subsidies in Henan, China. However, according to some market observers, even with the latest Chinese power tariff subsidies, global aluminium output growth is expected to remain weak. This, combined with an expected rise in consumption, may lead to a tightening of the aluminium balance (this has already been seen with significant, partly seasonal, draws in inventory in recent months). The combination of this tightening, an anticipated rebound in oil prices and Indonesian bauxite export quotas may set a bullish outlook for aluminium in 2H12.
Gold prices rose slightly by 0.6% m-o-m, which compared positively to a 3.6% decline during the previous month. Gold had struggled to re-establish its safe-haven status, but the major mover has been the physical market in the near term. Exchange Traded Products (ETP) holdings remain resilient, as buying has shown signs of life in China, but appetite in India remains soft in light of a weak rupee. The dollar’s appreciation against other major currencies continued weighing on gold markets during June.
Investment flows into commodities
Investments in commodity markets declined further in June affected by the ongoing unfavourable macroeconomic concerns, fears over the Chinese economic recovery and slow progress in finding a solution to Euro-zone sovereign debt problems. Total open interest volume (OIV) in major commodity markets in the US declined by 3% m-o-m to 8,176,422 contracts in June, compared to a 2.9% loss in the earlier month. Most of the markets felt the negative impact of persisting macroeconomic concerns.Total net long speculative positions fell by 10% m-o-m to 551,966 contracts in June, compared to a 22.5% decline during the previous month. Longs fell by 5.7% while shorts dropped by 3.1% m-o-m. Except for a gain in gold (1.2%), all markets at the US CFTC recorded an outflow in net money positions.
Agricultural OIV dropped by 2% m-o-m to 4,361,710 contracts in June, compared to a drop of 3.8% last May. Money managers’ net long positions in agricultural markets decreased by 11.5% m-o-m to 359,084 contracts in June, compared to a 25.7% drop in May. There was a combined decline in longs and shorts of 6% and 2% on a monthly basis, respectively. The decline in strategic investments for the whole sector was softer because some grains, notably corn, saw an improvement in prices.
The HH natural gas OIV fell slightly by 3.8% m-o-m to 1,178,401 contracts in June, compared to a decline 3.5% during the previous month. Money managers’ net positions increased by 9% m-o-m to a minus 65,562 contracts compared to a 29.7% gain in May on a rise of 5% short positions and 3% in longs.
Copper OIV rebounded by 1.9% m-o-m to 149,906 contracts in June compared to a 5.6% loss in May. Speculative net long positions plummeted by 348% m-o-m to minus 13,045 contracts in June, compared to a drop of 19.1% in May. The huge retreat in strategic investments was due to a 47.7% m-o-m rise in short positions.
Gold OIV declined by 1.1% m-o-m to 417,074 contracts in June, compared to a 5% gain in May. Tactical investments in gold were up 1% m-o-m to 86,778 contracts in June, compared to a 20% decline during the previous month. Short positions rose by 11.7% m-o-m while longs rose by 4%.
