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Trends in Selected Commodity Markets - October 2012

Source: OPEC 11/27/2012, Location: Europe

In October, energy and non-energy prices fell by 2.4% and 1.6% month-on-month (m-o-m) respectively. Food prices dropped by 4.0%, base metals fell by 1.3% and gold prices remained the same at $1,746.6/troy ounce. The declining commodity prices were essentially due to strong concern about fluctuations in the global economic GDP growth rate and outlook. Commodity markets are closely leveraged to economic global activity in the short term, especially the slowing of Chinese GDP growth and its negative impact on the rest of Asia, the debt problem in the Eurozone and the still-fragile situation in the US and OECD. Highlights the strong correlation between selected commodity prices and Chinese economic indicators. Commodity prices have also been driven by macroeconomic factors, such as asset prices. Also indicates the strong positive correlation between commodity prices and the Dow Jones assets index. The mood among investors remains bearish and cautious, in expectation of a better macroeconomic outlook and a boost in confidence.

Despite the decline of commodity prices there was some positive news for the month, with a renewed optimistic view on China and US GDP growth, and the wait for better performances in the fourth quarter of 2012 and in 2013. Other streams of encouraging data were on the global manufacturing Purchasing Managers Index (PMI) and a rise in the indices of orders and output amid a collapse in the index of finished goods inventories, suggesting a positive signal that industrial activity was poised to rebound. Demand momentum in the USA and a stabilization of China’s growth would be a positive development for Emerging Market Asian exporters. Nevertheless, important regional divergences in the global performance reinforced the message that the recovery that was taking hold was constrained. Uncertainty, especially with regard to the Euro-zone’s sovereign debt crisis and setbacks for the Japanese economy, continued to weigh on commodity markets.

Sudden improvements in sentiment encouraged only short-term gains in commodities like base metals, owing to a lack of fundamental support and the global recession. Indeed, liquidity-driven rallies in commodities faded without fundamental support and on macroeconomic pessimism.

The Henry Hub (HH) natural gas price jumped by 16.7% m-o-m due to a positive turn in market sentiment that was related to the release of anxiety about storage in November, which represented a resetting of the natural gas market, when a return to normal weather could provide significant support to natural gas demand. However, the rally in prices was not backed by underlying fundamentals, as gas power demand remained price-elastic. The net non-commercial position for natural gas is now at its highest level since October 2007, while total futures open interest has increased by 11% since the end of September.

The agricultural price index declined by 2.95% in October (as against –0.12% in September), with food prices posting a 4% drop during the month (compared with –1% in September). Agricultural markets were affected by the pessimistic global economic outlook and some selling pressure. Grain prices remained largely the same in October as in the previous month. Only corn prices reported some modest gains. Wheat (US (hard red winter) rose by just 1%. Wheat prices posted more modest declines, amid concern about the dry weather in Western Australia and the US, as well as robust Chinese wheat imports for September. However, the latest World Agricultural Supply and Demand Estimates report forecast lower global demand for wheat. In the middle of October, grain prices were affected in a negative way by seasonal harvest pressure amid concern about the challenges facing the global economy. Weekly US Department of Agriculture Crop Progress data released at the start of the third week showed that 79% of the US corn crop had been harvested, as well as 71% of the soybean crop. While the pace of weekly progress slowed due to rain in mid-October, overall progress with the harvest remained at record highs. The soybean complex declined by around 8% in October, despite some increase in Chinese imports.

The World Bank’s base metal price index decreased by 1% in October, following the fading of the short-covering and the positive impact of the Federal Reserve Board’s and European Central Bank’s announcements in September. The complex was affected essentially by great uncertainty about the growth trajectory of China’s economy and its impact on metal demand. Shows a strong positive correlation between base metal prices and Chinese leading economic indicators, as well as base metal imports for China and London Metal Exchange base metals, especially during 2012. There are ample inventory of many metals in China, which makes it very difficult to accurately assess any demand improvement. September’s trade data for base metals was mixed. Refined copper imports increased by 17% m-o-m and 7% year-on year (y-o-y), as a combination of improved sentiment and a pick-up in financing activity led to increase buying. Primary aluminium imports fell by 35% m-o-m, although they were up strongly on a yearly basis (70%), with these inflows apparently being caused by the arbitrage and directed straight into bonded warehouses. Following a 9% m o-m rise in September, gold prices remained the same at $1,746.6/troy oz in October, amid concern about Chinese economic growth and a stronger US dollar. A discouraging factor was also lower demand in India, Iran and China.

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