Trends in selected commodity markets
The World Bank’s commodity price indices reversed the strong decline posted in the previous month, with energy up by 5.6% and non-energy gaining 4.6% month-onmonth (m-o-m) in July. The recovery in some commodity prices, despite the fragile global economic situation, was essentially related to supply tightness emerging from extremely hot weather, especially in the US, that affected the food complex and US natural gas. The latter commodity and crude oil led the energy sector price rebound. Concerning the non-energy components, food prices jumped by 10% m-o-m, compared with a 1% fall the previous month, driven by the drought in the US that led grains and soybeans to recently reach record-high prices. By contrast, gold prices lost 0.6% m-o-m, while base metal prices slightly recovered by 0.8% m-o-m, following a 6.1% drop a month earlier. The same bearish factors that affected commodity markets the previous month continued to exert pressure on prices in July: macroeconomic uncertainty, especially apprehension over the Euro-zone’s sovereign debt crisis, slower growth in the emerging economies, a weak US economy and a firmer dollar were the main negative factors.
The Henry Hub (HH) natural gas price index increased by 16% m-o-m in July, boosted by short term factors, such as strong demand from the power-generation sector, due to the hot weather. This was able to reduce the overhang of natural gas in storage this year. Nevertheless, these are deemed temporal factors and a price correction is expected to come in September-October. The agricultural price index rebounded by 7% m-o-m in July (as against minus 2.8% a month earlier), as food surged by 10%, driven by wheat, corn and soybeans, especially in the US during that month, essentially due to the drought. The ‘La Nina’ phenomenon (South America) also had an impact on some agricultural markets, including soybeans. There were large downgrades to grain production in the Black Sea. The drought in the US led fundamentals to outweigh unfavourable macroeconomic factors. Grain prices jumped by 16% m-o-m, compared with 0.4% m-o-m the previous month, with corn and wheat posting gains of 25% each on a monthly basis; and soybeans and soybean meal increased by 16.8% and 16% m-o-m respectively for July. Grain and soybean prices found support in dryer-than-normal, hot weather in the US Midwest and in Chinese imports for June, with subsequent China Customs trade data showing remarkable increases in corn, soybean and sugar imports. China’s corn imports kept growing since the previous month, jumping by 354% to 528.6 kilotonnes on a monthly basis, while exports were weak. Thus, China became a net importer of corn in June. Chinese soybean imports continued the upward movement since March, rising by 31% year-on-year to 5.6 million tonnes. It is worth noting that there is concern over the possible negative impact of a spike in food price inflation on Chinese economic growth prospects. Wheat was also affected by unfavourable weather that led to Black Sea producers downgrading Russian and Ukrainian wheat crops, and dry weather in the North China Plains also had an impact on grain crops.
The World Bank’s base metal price index went up by 0.8% m-o-m in July, after a 6% m-o-m drop the previous month. Nevertheless, the base metal price performance continued to rely upon broadly bearish macroeconomic conditions, particularly the deceleration in emerging economies, the Euro-zone debt-crisis and a slowdown in global manufacturing. The whole complex suffered from uncertainties in global demand. Indeed, the key issue in base metal markets is the absence of positive economic data from important demand regions.
Copper prices at the Chicago Board of Trade (CBOT) were up 2% m-o-m in July due to tight \ supply, limiting the downside. On the role of Chinese imports, base metal imports decreased on a monthly basis. Refined copper imports were down 17% m-o-m, owing to delays in some contracted shipments and reduced spot demand. An additional negative factor was still weak arbitrage between Shanghai Futures Exchange (SHFE) and the London Metal Exchange (LME): higher stocks at the SHFE and bonded warehouse stocks increasing to 50 Kt from the five-month low in mid-June. There was also a move into contango of the nearby SHFE time-spreads, after remaining in backwardation for the past 2.5 months. However, there is no evidence of over supply in China and the physical premium is still firm. The outlook for copper, as for other base metals, will depend on the possibility of an improvement in end-demand in the second half of 2012.
Aluminium prices fell 0.7% m-o-m in July, after a 5.9% decline the previous month. The
improvement in prices was partly driven by higher primary aluminium imports from China,
due to favourable arbitrage between SHFE prices and the LME. Nevertheless, considering
that the majority of these imports came to Qindao port and that there was plentiful domestic
supply, it seems that these imports were guided by arbitrage and not by end-use demand.
Aluminium exports were affected by the negative economic situation in Europe.
The gold price fell by 0.6% m-o-m. This commodity continued to struggle to
re-establish its safe-haven status, but the major mover was the physical market in the
near term. The physical market was still soft, as buying was weaker in China, despite
which Exchange Traded Products (ETP) holdings remained relatively resilient. The lack
of further monetary stimulus by the US Federal Reserve Board (Fed) also weighed on
this market. The dollar’s appreciation against other major currencies continued putting
pressure on gold markets in July.
Investment flows into commodities
The rebound in commodity prices in July contributed to easing the strong risk aversion seen the previous month. The total open interest volume (OIV) in major commodity markets in the US declined by 2.6% m-o-m to 7,960,514 contracts in July, the third consecutive drop since May. Although some commodity markets, notably agriculture, reached important price gains, as a whole investors remained cautious, due to the fragile global macroeconomic picture.
Total net long speculative positions surged by 80% m-o-m to 1,007,637 contracts in July, after a 10% decline the previous month. Long positions increased by 9% m-o-m, which, combined with a massive drop of 32.8% m-o-m, resulted in net length, as a percentage of OIV, to rise from 6.9% in June to 12.7% in July. Following the price revival, the bulk of strategic investment was focused on agriculture.
The agricultural OIV decreased by 1.6% m-o-m to 4,292,581 contracts in July, after a 2% fall the previous month. Money managers’ net long positions in agricultural markets jumped by over 100% m-o-m to 739,597 contracts in July, owing to recent price gains, especially in grains, soybeans and sugar. Short positions plummeted by 47.6% m-o-m, while longs rose by 16.7%.
The HH natural gas OIV dropped by a further 4.9% m-o-m to 1,119,940 contracts in July, after a 3.8% drop the previous month. Money managers’ net positions increased by 127% m-o-m to 17,958 contracts, due to a rise of 5% in long positions and a decrease of 28% in shorts. Investors were encouraged by price gains due to extremely hot weather.
The copper OIV declined by 7.5% m-o-m to 138,610 contracts in July, following a 1.9% gain in June. Money managers’ net long positions were up 65% m-o-m to minus 4,526 lots. While short positions declined by 12.8% m-o-m, longs increased by 11% m-o-m.
The gold OIV rose by 1% m-o-m to 421,988 contracts in July. Strategic investment in gold fell by 8% m-o-m to 79,706 contracts. Short positions declined by 7.5% m-o-m, while long positions fell 8% m-o-m.