Trends in selected commodity markets
What to some extent has become visible in the current year in energy markets is
generally forecast to be observed in other commodity markets, i.e. the shift from
commodity demand in emerging and developing economies to industrialised
economies. This is in general an important development that at least for the short-term
is expected to continue. This shift in growth contribution, heralding the recovery of
OECD economies, coincides with the need of developed economies’ central banks to
consider at least a gradual reduction in their unprecedented monetary supply
measures, which were designed to support the current and ongoing recovery. Albeit,
OECD economies are expected to rebound from low GDP growth of around 1.2% in
the current year to 1.9% in the next year; recovery within this set of economies
remains uneven and therefore the strategy of central banks will differ across the globe.
In addition to the observation of a relatively stronger growth dynamic in developed
economies when compared with emerging and developing economies, inflation has
fallen to significantly low levels in advanced economies and is also experiencing a
clear deceleration in emerging economies, with the exception of India so far. While it is
expected to rise gradually in the near term, the level will still remain at close to 2%,
which is around the level major central banks are targeting. Average inflation in
advanced economies stood at only 1.2% y-o-y in September. Hence the fear of rising
inflation in past years has receded, and therefore the necessity of investing in the
commodities market to protect against inflation has also declined. This has been felt in
waning interest in gold, causing a significant price decline in the past months of around
25% since the beginning of the year. This was amplified by the rupee’s swift decline in
summer, which led to an increase in gold prices in India’s currency and a decline of
imports into the world’s largest gold market.
In referring to commodities as an asset class, it is important to highlight that the
ongoing expansion of monetary supply — particularly in the US — continues to lift the
equity market, while the correlation between commodity prices and increasing
monetary supply has largely faded. This may again be due to the fact that growth in
emerging economies has been significantly fuelled by central bank money from
developed economies. It has now become more attractive to invest this money in
higher-yielding markets at home. The phenomenon has become particularly visible in
India, where large foreign investment flows left the country over the summer and
moved into other economies. Basically all major emerging economies have been
affected, but particularly those with large current account deficits, i.e. India and Brazil.
This development has led to decelerating demand for commodities in these countries,
and while some demand pick-up has been observed in OECD economies, it is clear
that growth in these countries is less commodity-intensive because the services sector
plays a larger role — it is, for example, responsible for more than two-thirds of growth
in the US — and manufacturing is less commodity-intensive there. So given the
current dynamic it may be sensible to not expect a sharp rebound in commodity prices
as supply in almost all commodity sectors also seems to be well established. Hence, a
continuation of the current growth dynamic could even lead to some supply overhang.
While price behaviour over the last months has been different among the various
commodities, it has taken a relatively clear negative turn in November, with all the
major commodity sub-groups declining. Energy prices continued to decline and while
the average decline has been modest in agricultural and food-related commodities,
base metals were more significantly impacted as were precious metals, with both gold
and silver falling out of fashion. While some downside is currently apparent, continued
recovery in the major developed economies, a stabilisation of the economy in China
and an expected rebound in India should support demand for major commodities in the
near future. However, close monitoring of the supply side will be needed, too.
While energy prices have declined by 2.2% m-o-m in November on average, coal
prices have gone up, with the Australian coal benchmark rising by 3.6%; the third
consecutive monthly increase. Natural gas in the US declined slightly, by 1.1% m-o-m,
after achieving solid rises in previous months.
The agricultural and food sectors were relatively resilient, falling by 1.1% m-o-m and
0.9% m-o-m, respectively. After falling by 2.2% m-o-m, soybeans recovered by 2.1%,
matching almost all of October’s loss.
Base metal prices fell by 2.4% m-o-m in November, after an increase of 1.6% m-o-m in
October. The strongest gain came from iron ore, which rose by 2.8% m-o-m in
November.
In the precious metals group, the decline continued. Gold fell by 3.1% m-o-m in
November, after a decline of 2.4% in October, while silver fell by 5.3% m-o-m in
November, compared to a decline of 2.9% in October.
In November the Henry Hub (HH) natural gas price index ended lower as demand
declined in the residential/commercial and power sectors earlier in the month. The
index ended down 4¢, or 1.1%, at $3.63 per million British thermal units (mmbtu), after
trading at an average of $3.67/mmbtu the previous month. The combined effect of
reduced natural gas demand from residential and commercial consumers as
temperatures warmed in the Northeast, Midwest, and Southeast, as well as reduced
natural gas demand from electric generators, likely pushed the Henry Hub spot price
down for three weeks in a row, to its lowest point since the middle of August.
Prices remained relatively low for most of the month; in the last decade of the month
prices rallied as colder weather helped raise the cost of natural gas, which increased
on eight consecutive trading days from 19 November to 2 December, with the price
reaching $4/mmbtu, its highest level since 5 June 2013. There has also been a
reduction in seasonal price variations, seen when comparing the differences between
natural gas front-month contracts and spot prices. The premium that winter-month
futures contracts have over spot prices has diminished considerably in recent years.
Investment flows into commodities
The total open interest volume (OIV) in major US commodity markets decreased
marginally by less than 1% m-o-m to 8.7 million contracts in November. Cooper and
Precious Metal OIVs expanded sharply by 6.5% and 5.7%, respectively. Of the energy
indices, crude oil OIV dropped by a hefty 7.7%, while that of natural gas increased
marginally by about half a per cent. Gold OIV increased by almost 4%. The remaining
commodity OIVs grew by around 1%.
Total net length speculative positions in commodities decreased sharply by more
than 27% m-o-m to 625,161 contracts in November, almost reversing the previous two
months’ accumulative gains of 30%. Across the board, speculative commodity market
sentiments were bearish, except for natural gas. Money managers’ activities in copper
reflected deep bearish sentiments, turning net length into a net short position, as the
US Fed tapering concerns outweighed China’s latest demand figures. Meanwhile, in
the January–November period, China imported about 4.1 million metric tons of copper
and copper products, down 4.8% year-on-year, according to the General
Administration of Customs (GAC).
Agricultural OIV was up 1% m-o-m to 4,419,473 contracts in November. Meanwhile,
money managers’ net long positions in agriculture retreated sharply by over 37% to
263,838 lots in November. Speculators cut their net long position as agricultural
futures markets extended their decline to multi-week lows amid pressure from a supply
glut. Meanwhile, harvests in the US Midwest are stretching the system for moving
crops from fields to markets beyond its limits this year, driving up export costs and
crimping profits for both farmers and grain dealers. After years of drought, the bountiful
harvests may have come as a relief to America's heartland if not for the severe
transportation bottlenecks that have developed.
Henry Hub natural gas’s OIV increased by less than 1% m-o-m to
1,269,336 contracts in November. Money managers expanded their short positions by
60,287 lots to stand at net short positions of 66,526 lots, ten times more than the
previous month. This was driven by lower demand, which declined in all consumer
sectors earlier in the month.
Copper’s OIV increased 6.5% m-o-m, to 160,944 contracts in November, for the
second month in a row. On the other hand, a group of investors flipped their net length
positions into 11,749 net short contracts. Speculators reduced net longs as worries
that the Federal Reserve may decide to trim its $85 billion monthly bond-buying
stimulus hurt demand expectations for industrial metals. Copper is often viewed as a
barometer of global economic strength.
Gold’s OIV increased by nearly 4% m-o-m to 395,664 contracts in November.
However, hedge funds and money managers cut bullish bets in US gold by a hefty
35% m-o-m to 43,671 lots amid renewed fears of Fed stimulus tapering soon. The
price of gold fell broadly in November.
