Trends in selected commodity markets
According to the IMF the total commodity index increased by 7.4% in May m-o-m, which was entirely due to the rally seen in the crude oil and natural gas markets that resulted in an 11.3% monthly growth in the energy sector. By contrast, non-fuel prices declined by 0.8% in May compared to the previous month. Again, estimates of the World Bank for non-energy commodity price differ somewhat from those of the IMF, displaying a 0.35% rise in April from the previous month, which is due to the inclusion of fertilizer prices which are not considered within the IMF non-energy price index. Although fertilizers recorded lower growth than in the previous month (17.3%), the 12.50% growth rate in May is still respectable. This was due to the expansion of crop plantations in the Northern Hemisphere, capacity constraints, export taxes in China and higher crude oil prices.
The IMF energy commodity index (crude oil, natural gas and coal) grew further in May by 11.3% m-o-m, the highest monthly rate since April 2006 and 85% higher than a year ago.
The crude oil prices index provided by the IMF overcame all records in May jumping by 12.6% m-o-m, the highest increase since June 2005 and 88.6% above a year ago.
The US natural gas price continued growing by 10.7% compared to 8.2% in April m-o-m, reaching an average price of $11.12/mbtu which is 47.5% higher than a year ago. This development is essentially explained by record crude oil prices which were not counterbalanced by bearish factors such as quick storage refilling, greater drilling activity and weaker demand owing to warmer weather. Falling LNG imports also contributed to a bullish US gas market.
The performance of non-fuel prices worsened in May with negative growth of 0.8% prompted by a further decline in industrial metals, and still low growth in the food price index according to the IMF. The drop in the non-fuel prices index is milder when fertilizer prices are included.
Industrial metal prices saw further negative growth of 4.3% m-o-m in May, caused by similar factors as in the previous month such as growing inventories, temporary weaker Chinese physical demand due to destocking by semi-fabricators and the still ongoing uncertain macro-economic context and global demand. The solution of the strike at copper mines in Chile also added to the outcome.
Lead prices plunged 20.8% in May on a combination of very high stocks, weaker demand and growing production and secondary supply.
Nickel prices dropped further by 10.8% caused by the disappointing demand from the steel production especially in China and expectations of greater production for next year. Paradoxically LME stocks dropped by 6% in May to 48,522 tonnes.
Zinc fell by a milder 4.4% in May compared to 9.3% in April, supported by the shutting of smelting capacity due to the earthquake in China and some strikes in Namibia. Nevertheless, bearish factors remain such as rising LME inventories, falling zinc premiums both in the US and Europe and expected important growth in the next two years.
Copper prices declined sharply by 4.1% in May due to the end of the strike at Codelco in Chile, and a rise in LME stocks of 16,000 tonnes to 126,000 tonnes in May m-o-m. This was the first time during this year that LME stocks began to rise, although a lower rate of decline of LME inventories was reported last month. Estimates by the International Copper Study group which suggests that there is an 85,000 tonnes surplus in 2008 along with the decline in market premiums in various regions such as the US and China might suggest that the front end of the copper curve has appreciated. The three-month cash spread remains still in backwardation but the threat of persistent supply disruptions has not materialised into a shortage of refined materials. Therefore, LME copper cash prices may continue dipping below $8,000/t in the near term. Nevertheless, other analysts argue that the problems represented by recent power shortages are far from being overcome which, together which the escalating energy price, give structural support to copper and other metal prices.
Aluminum prices undertook a similar negative growth (2%) in May relative to the previous month. A fall in cash prices occurred at the beginning of May due to the dollar strengthening but a rebounding took place later on to stay near 2,860/t at the end of May. Some factors suggest that there is a supply-demand balance in the short term in the aluminum market as premiums have not increased, LME stocks have increased and Chinese production has recovered considerably since February’s snowstorm, according to the National Bureau of Statistics. On the other hand, the recent earthquake in China prompted some increase in prices, and being the most energy-intensive commodity, aluminum may increase this year again due to the power shortages and the impact of higher energy on production costs.
Spot gold prices recovered by 0.3% to stand at $ 912.5/oz in May on a monthly basis. Bearish factors were expectations of further dollar depreciation and investor interest, which seems to be the key price factor in 2008.
The IMF food price index saw a mild recovery of 0.5% in May m-o-m which was mainly due to a more modest decline in wheat prices of 9.2% as corn and soybeans also reported losses.
Corn prices showed a very volatile performance in May, dropping by 1.3 m-o-m but at $243.5/t it was 56% higher than in the same month last year. And corn prices have continued increasing in June. The release of 24 million acres of Conversation Reserve Plan land grazing published by the USDA, as a palliative to high feed costs, exerted some dampening effect on corn prices and returns in recent week, which is expected to have a minor effect on feed demand. Additionally, there is widespread concern over the impact of weather conditions on corn crops which may reduce yields. Corn prices have been supported by the bullish trend in crude oil markets and the decision of the US Congress to extend import tariffs on ethanol. Growing demand in the US food, fuel and feed sectors along with a rally in crude oil prices, strong Chinese demand, competing acreage allocation, and low inventories will encourage very high corn prices spot and futures.
Soybean prices kept dropping by 1.6% in May m-o-m but are still relying on falling stocks, Chinese demand and the bio-diesel industry.
Wheat prices plummeted 9.2% in response to USDA estimates of an 8.5% increase in global production from the 2008/09 crop year.
The outlook for corn and the grain complex as a whole remains positive for 2008 despite concerns about the worsening economic conditions.
Fertilizer prices kept growing by 12% in May from April. Urea and potassium chloride fertilizer prices rose 33.2% and 8.5% respectively in May. From last December, considerable surges of fertilizer prices in urea (66%), potassium (123%, and phosphate (145%), were reported. The performance was related to rising fertilizer production cost due to current energy prices, greater demand brought about by high grain prices and the 100-135% export taxes adopted by China.
Investment flow into commodities
Net-length in major non-commercial futures positions for the US commodity markets covered by the CFTC decreased during the first two weeks of May but it was followed by a sharp decline in the last week which continued during the first week of June. It seems that there has been a build of short positions especially in the crude oil markets, natural gas and some agricultural products.
The latest CFTC data for crude oil indicate that there was only a marginal increase in long non-commercials, while there was a faster build in short positions keeping the net speculative positions as percentage of total open interest at 3.7% in May compared to 3.9% in April. The level of fund involvement also appears very low compared to 8% achieved last summer when the WTI was below $80/b.
Agricultural speculative net length positions recovered in the first half of May, but declined in the second half of the month with a significant drop of 41,763 cts occurring in the week ending 27 May.
Wheat net non-commercial positions at the CBOT market showed a decline during May and ended at 0.5% of total open interest in the first week of June. A modest increase in longs was more than overcome by a larger increase in shorts.
CFTC data reported a growing investor interest in corn during May with longs increasing by 25,941 cts in May compared to April to stay at 463,131 cts in May, but short positions were cut by 2,858 cts to 132,245 cts. Therefore net longs as percentage of total open interest increased from 22.2% to 24.8%.
The trend in the commodity index trader (CIT), both in terms of net length and as percentage of the open interest volume, in selected agricultural markets. The trend in speculative investment in some agricultural markets differs from the trends estimated by the previous classification system used by the CFTC, indicating the more
modest role of non-commercial funds in the agricultural commodity markets as was highlighted in the previous issue of the MOMR.
