Trends in selected commodity markets
The IMF commodity price index increased by 5.6% m-o-m in October compared to 1.4% m o-m the previous month. The energy commodity price index increased by 6.3% m-o-m in October compared to 0.4% in the previous month. Non-energy commodities rose by 3.3% m o-m in October compared to 4% a month earlier. A substantial price rise took place in several base metals at the LME and important increases took place in agriculture and precious metal prices.
Grain prices remained at high levels in October, but there were some corrections in these markets related to the more bearish view from the supply side for some grains like wheat. Corn markets continued the rally seen in September rising by 14.3% m-o-m in October, supported by strong demand and a lower production forecast. As pointed out, US and global corn stocks remained tight and greater imports from China and Argentina have offset the decrease in US imports.
The growth in industrial metals prices improved in October, while conditions in these markets are still very dependent on the expectations of growth in the US and China. The IMF energy commodity index (crude oil, natural gas and coal) gained 6.3% in October compared to 0.8% m-o-m in September on the back of the recovery in WTI and Brent prices, which outpaced the negative performance of Henry Hub (HH) natural gas and coal prices.
HH natural gas declined further by 12% m-o-m in October. This compares to 9.7% the previous month, 14% lower than the same month a year ago. The market remained pressured by high production and weak demand, amid moderate temperatures, minimal tropical storm activity and larger-than-expected injections into already considerable stocks which, according to the US Energy Information Administration, are higher than the five-year average.
The IMF non-fuel commodity price index rose 4.6% m-o-m in October compared to 2.8% in September as a result of some corrections in the wheat markets, a drop in iron ore prices and some restraint in fertilizer prices which were offset by higher growth in some agricultural products, industrial metals and precious metals, silver in particular.
The IMF industrial metal price index gained 6.7% m-o-m in October. Except for nickel, all base metals considered registered a faster growth rate, led by tin. As a whole, base metals reacted positively to tight fundamentals, improved macro-economic news, the dollar devaluation against the Euro and further encouraging data from China like the higher-than expected PMI in October.
Tin was the best performer within the base metal complex, soaring by 16% m-o-m in October compared to 9.4% in September, and up 56% on a yearly basis, an all time record price. The factors behind tin’s boosted prices were the recovery in computer and cars industries during this year, fostered by public incentive plans and it is likely that the US quantitative easing may represent an additional source of demand for the tin market. Supply constraints also have been supportive of tin prices as coming on stream of new small capacities is not expected before the first quarter of 2011. Important capacities are expected only in 2012-2013.
Copper increased further by 7.2% m-o-m in October compared to 5.8% in the previous month due to the tight supply forecast published this month by the International Copper Study Group, which indicates a deficit in the copper market during January-July 2010. Demand was also healthy.
Aluminum registered an increase of 7.9% m-o-m in October on increasing demand of semi products since the beginning of the year as the production of these products remained healthy, despite the weaker final-user demand following the end of the automotive sector’s incentive measures implemented by many countries. Chinas’ production of semi-products (aluminum, used as a component of food packaging) went to record highs this year. Slower prices are expected only in 2011 due to high global inventories.
Zinc prices saw a rally from 5% in September to 10% in October due to a recovery in demand from the EU and China. Nevertheless, stocks at the LME are at high levels, so price corrections are expected.
According to the World Bank, agricultural prices saw an increase of 5.9% m-o-m in November compared to 4.2% in October due to tight fundamentals associated with high demand from China, bad weather conditions, public intervention, and poorer-thanexpected crops in the US. Likewise, the use of corn in the production of biofuel has also been an important factor.
Cotton is at a historically high price after rising 20.8%, fuelled by bad weather conditions and high demand from China together with lower inventories.
Corn increased 14.5% which reacted to lower production estimates, stronger demand and increasing demand for the biofuel industry. Thus, the market is in surplus and the final stocks were revised down by 2% compared to the last month. Indeed, the demand for corn has been increasing since 1995. Corn prices are expected to continue the upward trend next year as the biofuel demand is forecast to expand.
The soybean complex surged, fuelled by exports to China which is buying to increase stockpiles and due to the weaker dollar.
Gold prices rose by 5.6% m-o-m in October compared to 4.5% in September due to closing of the hedge book fostered by record prices in the later months. Furthermore, investors’ interest slowed as shown by a decline in the net length positions of the money managers at the CFTC. Silver also jumped by 13.9% m-o-m marking historic record levels owing to increased demand and the low ratio to the gold price in this year.
Investment flow into commodities
Open interest volume (OIV) for major US commodity markets went up 2.9% m-o-m to 8,216,690 contracts in October compared to 5% in September. Copper and WTI reported major gains while livestock saw important losses.
According to the CFTC, noncommercial net length declined by 2.8% m-o-m in October to 2,670,612 contracts. A drop of 1% m-o-m in longs combined with a 2.1% rise in shorts left the net-length as percentage of OIV at 60.6% in October, down from 61.8% in September. Net length of money manager positions showed a slower pace of growth in October (1.3% vs. 17.3% in September) which reflected a drop in some markets, such as agriculture and gold. This is explained by the selling of longs in order to take advantage of high prices as in gold and corn.
Agricultural OIV moved up by 3.9% m-o-m to 4,500,158 contracts in October, compared to 4.9% in September. Non-commercial net length declined from 46.5% to 43.9% of the open interest. Non-commercial long positions fell by 1%. The lower strategic investment in agricultural markets in September and October followed the strong activity in the previous months as a result of the the extraordinary price boom in the grain complex. Furthermore, the still booming prices in some agricultural commodities, such as corn, has led to some non commercial traders taking profits and closing strong positions. The same applies to wheat where the actors seem to be compensating their bullish and bearish expectations. Wheat saw corrections in October in the physical market.
OIV for precious metals decelerated in October, expanding by only 3.5% m-o-m to 771,486, compared to 11.3% the previous month. Non-commercial longs rose at a lower pace than shorts (2.7% vs. 4%). Therefore, the net length as a percentage of open interest volume saw a drop from 25% in September to 24% in October. There was a decline in net length of money managed postions in gold due to the closing of the hedge book induced by record prices seen in later months.
Nymex natural gas open interest volume dropped again by 1.2% m-o-m to 800,679 contracts in October. Non-commercial longs increased by 1.6% and short positions increased 0.5%, bringing the net length as percentage of OIV to minus 1.9% from minus 2.3% a month earlier.
Copper OIV rose surged 12.9% m-o-m to 160,573 contracts in October. Noncommercial net length increased by 9.3% to 64,075 contracts while net length of money positions rose by 28.1% to 32,391 contracts.
The dollar investment flow into commodities is estimated to increase by 17.3% m-o-m in October, with all subsectors recording ample gains.
