Commodity Markets - Dec 12

Source: OPEC_RP121204 12/12/2012, Location: Europe

Trends in selected commodity markets
For November, commodity prices reported diverse trends. Energy and non-energy prices declined by 1.6% and 2.0% m-o-m respectively. Food prices dropped by 1.9% m-o-m, base metals fell by 3.3% and gold prices fell by 1.43%.

Commodity prices seem to have been relatively mute to some improvements in the macroeconomic data released in November, especially the renewed optimistic sentiment about Chinese and US GDP growth and the expectations of better performances in the fourth quarter of 2012 and in 2013. October macroeconomic data for China was slightly better than expected, with industrial production growth up to 9.6% year-on-year (y-o-y) versus 2% in September. Likewise, fixed asset investment growth continued to recover, picking up to 20.7% y-o-y. There was also 14.5% y-o-y growth in nominal retail sales, with robust consumer sentiment which may point to the stabilization of the Chinese economy.

Other encouraging factors were an improvement in manufacturing data out of China, Japan and even the Euro-zone, which pointed to a rebound in that global industry. Nevertheless, the base metal price recovery in the last weeks of November was related mainly to short-covering, and as fundamentals have shown little sign of strengthening, the rebound in this complex of prices was not expected to be sustained, since these markets were hampered by growing stocks in China.

The Henry Hub (HH) natural gas price rose by 6.7% m-o-m in November, compared to 16% in the previous month. Bearish factors were warmer-than-normal weather and weak fundamentals on the supply side, as production remained at very high levels.

The agricultural price index decreased by 2.1% m-o-m in November compared to a fall of 2.96% a month earlier, with food prices reporting a 1.9% drop, less than the fall of 3.99% in the previous month. In the last week of November, agricultural markets, especially grain prices, benefited from a better macro data release, bullish results of the US Department of Agriculture export sales data and weather concerns for some commodities. Grain prices remained almost flat in November. Corn prices recovered in the last week of November — supported by US corn export sales which were higher than expected for the week ending 15 November. It must be noted that, despite this, the lower trend in ethanol production continued, reporting a 7,000 b/d fall to 804,000 b/d in the last week of November from the previous week.

US wheat prices went up by 1.8% m-o-m in November. The gains were concentrated in the last week of November, supported by dry weather in the USA which had led to a historically low crop-rating.

In October, Chinese imports of agricultural commodities reported a mixed performance. Soybean and soy oil decreased by 18.8% and 13% on a monthly basis, while sugar and wheat imports fell by 33% and 42% m-o-m, respectively. On the other hand, corn imports from China went up by 15.4% m-o-m.

The World Bank’s base metal price index decreased by 3.3% m-o-m in November, despite the complex being supported by some positive macroeconomic news which boosted long-covering. Some of the positive macro developments in November were: the agreement by Euro-zone leaders to release the next tranche of aid to Greece and some positive comments about agreement on the US fiscal cliff; positive news about the Chinese economy, where the November manufacturing Purchasing Managers' Index (PMI) rose above 50, establishing a record for the last 13 months; and a recovery in the US housing sector for October, this being the highest recovery since 2008. Those facts alone should indicate a strong future demand for metals — but it seems that the metals market has also anticipated falling price factors, such as the building up of unreported stocks in China and the threat of a fiscal cliff in the USA. Nevertheless, ample inventories of several base metals in China make it very difficult to accurately forecast any demand improvement.

The situation in China regarding demand fundamentals should improve at a reasonable speed. This would enable a reduction of the significant excess of base metals built up during the year. Regarding this point, the latest signs suggest a relatively low demand performance — traders report that downstream consumers continue to buy on an “asneeded” basis. Furthermore, the trend for bonded copper warehouse inventories is higher in a month-on-month comparison, reflecting the ongoing financing of imports and also some export flow tolls. Generally, despite the upside indication in China's PMI for November, this has certainly yet to materialise among demand-led tightening fundamentals in the domestic market.

Chinese trade data for base metals were mixed again for the complex, with refined copper imports falling due to unfavourable arbitrage and rising production, as well as some technical problems in materialising imports from Chile. On the other side, primary aluminium imports rose by 22.5% m-o-m to 49,000 tonnes in November, up 407% from last year due to open arbitrage and they were directed straight into bonded warehouses. This, combined with exports falling to 4,000 tonnes, led to net imports of 45,000 tonnes, which added to the surplus in the domestic market.

Furthermore, the open interest for all the base metals at the London Metal Exchange seems to be falling relatively sharply, which might be reflecting some risk-off activities and further reductions of investors’ exposures.

Concerning aluminium, most traders continue to be explicitly bearish, regardless of the price rises in November due to the surplus in the market.

Copper prices declined further by 4.3% m-o-m in November from the previous month. The relatively poor performance of copper prices was related greatly to signals of weak domestic demand in China. The outcropping inventory in China was expected to be 675,000 tonnes of copper in Shanghai. Chinese copper imports fell by 21.7% m-o-m to 231,000 tonnes in October, the lowest level of the year so far, and 22% y-o-y. This fall was related to a 9% y-o-y increase in domestic copper production (according to National Bureau of Statistics data), unfavourable import arbitrage for most of September and a 31% y-o-y drop in imports from Chile to 79,000 tonnes due to a port strike in September.

Therefore, this is likely to cause a delay and reduce the demand recovery that could be expected from improved economic activity. This can be considered a risk to forecast prices for the first half of 2013.

On the supply side, according to Metal Bulletin, contract negotiations for copper are underway for annual treatment and refining charges, with BHP Billiton being reported to have started by offering a rollover of 2012’s levels of $60/t and 6¢/pound. It is expected that, while the mines continue to ramp up, mine supply will continue to improve and, as a consequence, there will be higher levels for 2013. Nevertheless, there are indications that the market is being speculative and therefore it remains uncertain whether $70/t and 7¢/lb will be reached. This can be shown on Codelco’s results for the last week of November. Its production fell by around 5% on a y-o-y comparison from January to September to reach 1.25 Mt (including Ango Sur and El Abra mines’ shares), mostly because of declining ore grades (including Chuquimata, which Codelco plans to turn into an underground operation). Despite this, the company has kept its output target for 2012 at 1.7 Mt, which would imply an impressive jump of about 30% for the third quarter of 2012, set against the average of the preceding three quarters.

According to the International Copper Study Group, the recovery in mine production continues: 6.4% y-o-y in August, compared with a 1.8% y-o-y decline in January. Despite this, refined production remains relatively weak. Output of refined products fell in August by 0.3% y-o-y, after a 0.5% y-o-y decline in July, and it is up by only 2% in the year-to-date. In August, usage was flat y-o-y, and this was geographically driven by European demand being down by 7%, although this was partly offset by an unexpected strong 5% y-o-y growth in the USA.

Gold prices also declined by 1.43% m-o-m in November. Gold prices have been moving up and down, due to geopolitical tensions and a growing appetite for risk with a recovering equity market performance and dollar strength. Nevertheless, a fragile physical market remains a bearish factor.

It is expected that a resolution to the US fiscal cliff, as well as the risk of reflation, will have a positive impact on the gold market. Since September 2011, gold has been trading within a constant range, leading to the question of whether the run of investors buying securities in anticipation of rising prices, which started in 2000, has finally come to an end. The flattish performance of gold prices can be explained partly by relative weaknesses in emerging market growth, equities and currencies against the US dollar. The emerging markets continue to represent almost 75% of the actual physical gold demand. The observed rally for gold that could be perceived in the last decade has overlapped with the rise of emerging market economies and the fast appreciation of their respective currencies against the US dollar. It can be observed that the currencies of the main emerging markets peaked shortly before gold during the summer and that afterwards they have been moving closely to each other. Some investors claim that emerging market growth has reached a low-point and that it will continue to move higher during 2013. Others expect a 5% foreign exchange appreciation in emerging market currencies versus the US dollar. This would break the emerging market currencies out of the ranges they have been trading since September 2011. These factors are expected to further continue supporting gold demand. In terms of price, moderate gains are expected — gold should reach $1,800 per ounce by the third quarter of 2013.

Investment flows into commodities
The total open interest volume (OIV) in major commodity markets in the USA declined slightly to 8,255,908 contracts in November from 8,262,448 contracts in the previous month. Except for livestock, all market groups posted declines.

As in previous months, a bearish investor mood continued in most commodity markets amid the uncertainties about the health of global economic growth.

Total net length speculative positions in commodities declined by 25.6% m-o-m to 781,477 contracts in November from 1,050,918 contracts in the previous month. Money managers’ long positions posted a 7.5% m-o-m fall to 1,653,782 contracts, while short positions boomed by 18.5 % m-o-m to 872,305 contracts.

The agricultural OIV posted a mild 0.1% drop to 4,336,769 contracts in November. Money managers’ net long positions in agricultural markets declined by a further 27.1% (versus 15.3% in October) to 488,767 contracts in November. Short positions rose by 33.2% to 443,586 contracts, while long positions dropped 7.1% to 932,353 contracts.

The HH natural gas OIV decreased by 1.7% to 1,161,994 contracts, compared with a 6.9% gain in the previous month. HH natural gas reported a 70.4% fall in money managers’ net length to 11,064 contracts in November. This was the result of a 7.4% drop in long positions, combined with a 4% rise in shorts.

The copper OIV decreased by 1.9% to 150,085 contracts in November, compared with a 4.5% gain in the previous month. Speculative investment in copper fell to minus 741contracts from 19,314 contracts in October. Money managers’ net long positions decreased by 27.5% to 30,634 contracts, while shorts jumped by 36.7% to 31,375 contracts.

The gold OIV dropped by a mild 0.6% to 465,104 contracts in November, compared with a 0.1% drop in October. Strategic investment in gold posted a 14.4% drop to 132,087 contracts, compared with a gain of 9.6% in the previous month. A 13.4% decline in long positions, with no change in shorts, took place.

During the last few weeks, it seems that investors have shifted their attitude towards risk to a slightly more positive one. The US dollar is weaker, the Chicago Board Options Exchange Market Volatility Index (VIX or ‘fear index’) has fallen to the lowest levels of the year, and the S&P500 is up by around 5% since the low point in the middle of November. Nevertheless, since the US fiscal cliff issue has not been settled yet and since many problems in Europe remain unsolved (for instance, a possible request for financial aid from Spain), investors continue to be cautious about the macroeconomic environment. Negative macroeconomic headlines, even in markets with strong fundamentals, can have a negative impact on commodity price trends. Therefore, until the year-end, results are expected to fluctuate in choppy trading. During the next few weeks, prices might fall, while increases are expected for early 2013.

The evidence that China’s economy has reached a bottom point is one of the factors positively affecting attitudes to risk — especially for base metals.

While copper prices have seen a 4% improvement from their low levels, the smaller and more volatile base metals, such as tin and nickel, have shown more impressive gains of about 8–9%. Conversely, most of the reported price gains have slight backing from individual market fundamentals and come mainly from short-covering and, to some extent, a more positive macro-environment.

Regarding commodity investment flows in recent months, gold seems to have become the main driver of commodity investments. Index investors have started to withdraw funds again.

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