Trends in selected commodity markets
The declining trend across most commodity prices witnessed in July month-on-month (m-o-m) continued in August irrespective of the specific conditions of each market. The IMF commodity index grew plunged 10.7% in August, down from 1.5% in the previous month. Both non-energy prices and energy prices showed negative growth of 5.8% and 12.6% m-o-m in August, respectively. Exceptions were fertilizers and sugar.
The energy commodity index (crude oil, natural gas and coal) sank 12.6% in August compared to last July on massive drops in all components. Crude oil price (Averaged Petroleum Spot Price) fell 13.6% m-o-m in August, dropping below $115/b and further below $100/b in early September.
US natural gas price was the worst performer in the energy complex sinking near 26% in August m-o-m owing to declining oil prices and greater domestic supply from the shale gas in Northeast Texas with expectations of even higher supply.
Coal prices dropped 12.5% m-o-m in August as a result of the sharp drop in crude oil prices, lower summer demand in Asia and Europe and the disappearing of port congestion at New Castle in Australia. Volatility for this commodity was very high.
Non-energy commodity showed negative growth of 5.8% m-o-m in July with a drop across all commodity prices, especially food, industrial metals and gold.
After a recovery in July, industrial metals fell 6.9% m-o-m in August, with all metals except nickel being affected on a monthly basis. This is explained by the worsening of the unfavourable global macroeconomic context characterized by weaker demand in the US and Europe’s fears of inflation in Developing Countries, the 5.2% dollar appreciation against the Euro and the seasonally slow period for demand. These factors have been encouraging long liquidation which exerted further downward pressures on prices.
Following gains in July, tin prices recorded the sharpest fall across the industrial metals in August (13.2% m-o-m) due to major long liquidation in July and August, together with weaker seasonal demand and bearish news from the exports with higher Indonesian exports in July- August. Nevertheless, the Indonesian government announced a plan to impose production limits to avoid falling prices next year.
Aluminum prices dropped 9.9 % m-o-m in August caused by bearish fundamentals, rising stocks due to positive world production growth of 7.1% and weak demand on the slowdown in OECD economic growth and in the industrial production in China during the Olympics. Copper declined 9.2% m-o-m in August owing to weak demand from China and the OECD related to the crisis in the construction sector. Copper inventories at the London Metal Exchange increased sharply in August, climbing by 28,476 tonnes to 157,461 tonnes m-o-m. In addition, a bearish sentiment in the futures markets led to long liquidation. The decline in copper prices took place despite some supply disruptions which indicates that price losses could have been worse.
Zinc dropped further by 6.6% in August due to rising inventories and output and weak demand from the galvanized steel sector.
Nickel prices declined 4.9% in August m-o-m which meant an improvement related to the 10.9% drop in last July. Despite weaker demand — lower Chinese imports — in the stainless steel sector and the sharp decline in world stainless steel prices in July. Some recovery took place in mid-August due to bullish supply-side news as the suspension of various investment projects.
The World Bank’s agricultural price index decreased 8.5% in August and the IMF food price index further declined by 7% down from -0.6% in the previous month. The major losses were the soybean complex and corn due to positive perspectives on production. The exception was sugar which increased by 18% fostered by unfavourable output expectations from Brazil and weather concern in India.
Gold price plunged 10.7% m-o-m in August owing to lower oil prices, the stronger dollar and shrinking demand for the metal as an inflationary hedge. Fertilizers remained an exception in the bearish scenery for commodity products. The World Bank Index rose 6.2% m-o-m in August down from 9.5% in July as on still healthy demand and supply constraints.
Investment flow into commodities
The open interest volume (OIV) continued to decline in August, according to the CFTC, in accordance with the sharper fall in commodity prices over the month and uncertainties in the global economy.
According to the CFTC data, speculative net length fell further in August m-o-m by 316,000 to 594,000 contracts and net length as percentage of the open interest fell from 11.9% in July to 8% in August and to 7% in the week ending 2 September 2008. Net length of non-commercials as percentage of OIV decreased in agriculture by 165,000 to 535,000 contracts m-o-m in August with the net length as percentage of OIV declining from 17% in July to 13.9% in August. Among the agricultural commodities more affected by long liquidation were corn and soybeans. Massive longs liquidation in copper sent futures net positions as percentage of the OIV further negative from minus 2.2 on 29 July to minus 12.1% on 2 September.
Precious metals net long declined sharply especially after 22 August, remarkably in silver and gold.
Deteriorating macroeconomic panorama and falling and volatile commodity prices have led to a bearish investment sentiment, which also reinforced the decline in commodity price. Tactical investors kept reducing their long positions in most markets, but it seems that these investors are waiting for the developments after the Olympics in China and the quiet summer season in the Northern Hemisphere.
An interesting point is that the data on commodity index traders indicate that the long positions of index traders have been rather stable over the last month, remaining between 26-28% as a percentage of OIV. This is mainly due to the fact that the category is mainly made up of institutional investors who are active in commodities for returns and diversification purpose.