Trends in selected commodity markets
In December 2012, energy and non-energy prices rose by 0.4% and 1.1% m-o-m, respectively. Agriculture prices declined by 0.6% m-o-m with food prices being down by 1.3% m-o-m. Precious metals fell by 2% m-o-m while base metals posted a sharp gain of 4.8% m-o-m. Some commodity prices, especially base metals, benefited somewhat from an improvement in the macroeconomic data released in November and December, particularly on renewed positive sentiment on China and US GDP growth. Nevertheless, the remaining macroeconomic uncertainties represent a risk. Chinese exports to the EU declined 7.9% in 4Q12, and strong risk aversion still remains. The total open interest volume (OIV) in major commodity markets in the US fell with almost all groups posting a drop, which points to a bearish and cautious investor mood. The base metal price recovery in the last weeks of November and December resulted mainly from short-covering and the outlook for 2012 relied especially on a sustained economic and domestic demand growth in China. So far, the fundamentals of base metals have shown little sign of strengthening.
The Henry Hub (HH) natural gas price index declined by 5.6% m-o-m compared to a 6.7% fall in November due to warmer-than-normal winter weather and weak fundamentals on the supply side, as stocks have been increasing. The agricultural price index decreased slightly by 0.6% m-o-m in December compared to a 2.1% drop in the previous month, with food prices retreating by 1.2% in December compared to a 1.9% fall in the previous month, due to strong price losses in grains, sugar and oilseed. Greater domestic supplies of grains in the coming months than had been expected in December weighed on these markets together with a selling off in the futures markets. Imports from China in November for corn declined 15% m-o-m and for wheat by 66.4% m-o m. Sugar imports also declined by 62% m-o-m and further weakness in the months ahead is expected, owing to record production of sugar in Brazil and good production in China. On a monthly basis, only cocoa, cotton, palm oil and soybean imports posted a rise.
ICE sugar prices reported major losses across soft commodities in early January due to ample supply, essentially due to high Brazilian production prospects. A third consecutive global surplus is expected in 2012-13, which is forecast at 5.1 mn tonnes, with high production in Brazil continuing to weigh on prices. Data from Brazil’s Unica reported that, as of 31 December, total sugar production rose by 8.4% y-o-y. Likewise, there was a 2.5% y-o-y rise in sugar output during October-December in India, according to the India Sugar Mills Association (ISMA). India, the world’s largest sugar consumer and the second-largest producer after Brazil, imposes a 10% tax on sugar imports. Nevertheless, recent reports from Reuters suggested that the government has no immediate plans to raise the tax on sugar imports.
The World Bank’s base metal price index went up by 4.8% m-o-m in December following a fall in November. Additional positive macroeconomic data on China and the performance of the US, as well encouraging signs coming from Euro-zone leaders and agreement on the US fiscal cliff, boosted a short-lived rise in prices for December. Base metal markets reacted to improving sentiment regarding Chinese and US growth. Nevertheless, falling foreign exports remain a challenge for Chinese growth in 2013. Chinese exports to the EU declined by 7.9% in 4Q12. Additional positive factors explaining the rebound of base metal prices in December were the reports that China is expected to soon resume stockpiling of base metals and expectations that China will announce a further series of stimulus measures, including a likely lowering of reserve requirements. Chinese industrial output, electricity production, retail sales, residential sales, fixed asset investment and consumer prices during November have been reported higher on a y-o-y basis. Concerning Chinese base metal imports for November, there has been a mixed trend in base metal imports from China for November. Copper demand remained weak with rising estimated bonded warehouse stocks. Furthermore growing base metal stocks in China, especially in copper, point to lower prices in 2013.
In the short term, base metals may increase on the chance to go short due to the outlook for surpluses in 2013. Nevertheless, ample inventories of several base metals in China make it very difficult to accurately forecast any demand improvement. There is an outlook for surpluses in the base metals markets for 2013, except for tin.
Gold prices also declined by 2.1% compared to 1.4% in the previous month, owing to a better macroeconomic outlook, weak Asian demand and a steep decline in ETP buying. Nevertheless, the outlook for 2Q13 is that a potential catalyst still exists that could lead to higher prices at the end of 1Q13 while the US fiscal cliff issue persists.
Investment flows into commodities
The total open interest volume (OIV) in major commodity markets in the US declined by 3.1% m-o-m to 8,001,675 contracts in December from 8,255,908 contracts in the previous month. Except for livestock, all market groups reported declines. An extremely bearish investor mood since the second half of the last year continued in most US commodity markets amid the remaining risks on the global macroeconomic front. Total net length speculative positions in commodities declined by 11.3% m-o-m to 692.825 contracts in December from 781,477 contracts in the previous month. Speculative long positions declined by 1.87% m-o-m to 1,624,154 contracts, while shorts rose by 6.8% m-o-m to 931,329 contracts.
The agricultural OIV declined further by 4.4% m-o-m to 4,143,808 contracts in December. Money managers’ net long positions in agricultural markets posted a 12.4% m-o-m drop (versus -27.1% in November) to 427,983 contracts in December. This was the result of a 7% rise in short positions to 474,470 contracts, and a 3.2% fall in longs to 902,453 contracts. The HH natural gas OIV decreased by 0.4% to 1,157,320 contracts, compared with a 1.7% loss in the previous month. Money managers’ net length became negative in December standing at minus 68,459 contracts from 11,064 contracts in November. A 31.2% m-o-m rise in shorts combined with a 5.6% fall in longs.
The copper OIV fell by 0.8% to 148,823 contracts in December, compared with a 1.9% drop in the previous month. Strategic investments in copper rose to 18,209 contracts in December from minus 741 contracts. Money managers’ net long positions decreased by 27.5% to 30,634 contracts. Shorts jumped by 39.9% to 18,855 contracts while longs also increased by 21% to 37,064 contracts.
The gold OIV dropped by 7.2% m-o-m to 431,607 contracts in December compared to a mild 0.6% drop in November. Strategic investments in gold declined further by 17.9% to 108,489 contracts. Shorts positions boomed by 93.5% m-o-m to 22,050 contracts while longs decreased by 9% m-o-m to 130,539.
