Commodity Monthly – Close to the bottom

by: Georgette Boele , Hans van Cleef , Casper Burgering , Nadia Menkveld

  • Since the end of May the CRB index has declined by 6%. At first weakness in grain and soft commodity prices dragged down the CRB. Since mid-June substantial weakness in the Chinese yuan has spilled over to metal prices and this has weighed on the CRB index.
  • More recently, Chinese authorities have calmed the yuan and indirectly metal prices as well.
  • But a looming trade war between the US and China will continue to hang over commodity markets and the strong US dollar as well.
  • There is also a risk of further profit taking in net-long oil positions in the near term.
  • Therefore, we expect modest weakness for the CRB index in the coming months.
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Oil prices: Challenging times

  • OPEC will raise oil production by nominal 1mb/d. In practice, this means that net production will increase by roughly 600 kb/d to meet the rise in demand and prevent supply shortages
  • Oil prices hardly reacted as the market focus shifted from possible supply shortages towards the decline in reserve capacity. This shift in focus can be partly explained by the still excessive levels of speculative long positions.
  • For the near term, oil prices will be driven by opposing factors. The rise in production/exports by Saudi-Arabia and UAE is balanced by lower output in Venezuela, Iran and Libya. Worries regarding a possible trade war may trigger a correction lower towards USD 70/bbl for Brent in Q3.
  • In the longer run, supply issues will become even more critical. Unless demand start to weaken, higher prices could be seen in the course of 2019.

How low can it go?

  • Precious metal prices peaked in January and have fallen substantially since then.
  • Higher US dollar, looming trade war between the US and China, downward adjustment in eurozone outlook and the slide in the Chinese yuan have contributed to price weakness.
  • Weakness in precious metal prices is not over yet, but prices are close to the bottom.
  • In the near-term higher US dollar, Fed rate hikes and higher US Treasury yields are negatives as well as the technical outlook and a looming trade war.
  • Later in the year we expect US dollar and 10y US Treasury yields to peak, the fall in the yuan to come to an end and a significant escalation of a trade conflict to be averted. Therefore precious metal prices will probably recover.

Unsure investors translates into jumpy prices

  • Cautiousness amongst investors and the lower Chinese yuan caused base metal prices to decrease over the last couple of weeks. Because of the intensifying trade conflict between US with China and also EU, most investors took on a risk-off mode.
  • The recent release of positive macro-economic indicators – such as manufacturing PMI’s – could not settle the nerves of investors and volatility in prices remained high. Also, further weakness in new export orders in some major economies was enough evidence for investors to not change their view.
  • The level of uncertainty is high and this will dominate the base metal complex during the upcoming summer months. Next to that, with the upcoming seasonal slump in metals demand, prices are expected to stay soft. Also, a hawkish Fed and the stronger dollar during Q3 will contributed to price weakness. All-in-all, we project a neutral price trend for Q3.

Environmental steel production curbs

  • Global steel price increased by 10% since the start of 2018, which was mainly due to the strong rising prices in the US and Latin America. In the US steel (HRC) prices boosted by 41% on trade war tensions. Steel prices in Latin America increased by 11%. In other major steel regions – China, Europe and Russia – prices gained only 2% on average since 1 January.
  • Iron ore prices lost 14% in value since the start of 2018, while coking coal prices managed to increase. China demand for steelmaking raw materials is softening, mainly due to environmental policies imposed on steelmaking facilities. Prices soften also on the weakness in the Chinese yuan.
  • Uncertainty will remain high. Going forward, we expect global steel prices to soften on seasonal weak demand. Iron ore prices will drift lower, mainly because of sufficient Australian supplies. Steel production cuts in China will result in weaker demand for steelmaking raw materials.

Local dynamics

  • Prices of wheat were rising faster than expected due to the severe drought in Northern Europe, mainly in France and Germany: the biggest producers of wheat. The EU (28-countries) is the world biggest wheat producer and markets fear a lower output. The coming months have to point out whether these fears are justified.
  • Prices of US soybeans are lower than expected due to rising tension between China and the US, while Brazilian prices are on the rise. This reflects the dependence of China on Brazilian soybeans if the US soybeans are off limits.
  • Prices of cocoa are – as expected- decreasing since their highest point this year in May. Prices were on a rise due to fear of adverse weather conditions in Ivory Coast. Markets feared the diminishing oversupply could change into a shortage. However, ICO still expects an surplus of 105,000 tonnes in the current marketing year.