Commodity Blog

Archive for January, 2009

Gold N.Y. Spot $ 854.50
Silver N.Y. Spot $ 11.09
Lead LME Cash $ 0.5194
Copper LME Cash $ 1.4379
Zinc LME Cash $ 0.5577
Nickel LME Spot $ 5.19
Aluminum LME Spot $ 0.6877
Platinum N.Y. Spot $ 0977.00
Palladium N.Y Spot $ 199.00
Oil WTI Cushing $ 040.90
Natural Gas (Henry Hub)($/MMBtu) $05.89

USD-AUD $ 1.4112
AUD-USD $ 0.7086
CAD-USD $ 0.8437
USD-CAD $ 1.1853
EUR-USD $ 1.3730

Steel demand won’t recover before the second half and annual contract prices for iron ore will decline 20 to 40 percent, Fitch Ratings said.
Prices for steel and the raw materials used to make it may improve before then, Monica M. Bonar and Sean T. Sexton, analysts at Fitch in New York, wrote in a research note dated Jan. 2. Metallurgical-coal contract prices will fall about 20 percent, they said.
“Demand for steel should improve following the aggressive expansion of central bank liquidity provisions since early September,” the analysts wrote. A recovery would be led by China, they said.
Steelmakers are cutting output, jobs and investment as the world tips into recession. Luxembourg-based ArcelorMittal, the biggest steelmaker, plans to eliminate as many as 9,000 jobs and slash production by more than 30 percent.
“Earnings will generally be down substantially for the next 12 months from 2008, which benefited from a robust first- half,” the analysts said.

Gold N.Y. Spot $ 846.20
Silver N.Y. Spot $ 10.86
Lead LME Cash $ 0.4894
Copper LME Cash $ 1.4066
Zinc LME Cash $ 0.5604
Nickel LME Spot $ 5.62
Aluminum LME Spot $ 0.6872
Platinum N.Y. Spot $ 0931.00
Palladium N.Y Spot $ 183.50
Oil WTI Cushing $ 047.40
Natural Gas (Henry Hub)($/MMBtu) $05.40

USD-AUD $ 1.4017
AUD-USD $ 0.7134
CAD-USD $ 0.8260
USD-CAD $ 1.2107
EUR-USD $ 1.3587

The wild gyrations in commodities last year were a brutal reminder of how volatile and dicey this market can be, especially when the economy turns sour.

It was a classic boom-to-bust cycle. Prices that seemed to defy gravity in the first half had trouble finding a floor later in the year. Public uproar over rising costs was damped. As demand dried up, suppliers were forced to make painful production cuts. Investment gains that took years to build disappeared in just a few weeks.

All this is expected to leave a profound mark on commodities markets for years to come, and 2009 is expected to be another difficult year. The Dow Jones-AIG Commodity Index, a broad benchmark, finished 2008 with a 37% loss, the worst year since the index was launched in 1998. Oil fell 54% for the year to $44.60 a barrel, down $100.69 from its record settlement in early July.

Commodities kicked off the year on a strong note: On Jan. 2, the first trading day of the year, crude-oil futures touched $100 a barrel — the first time it had surpassed the three-digit mark — before settling at $99.62. With stocks weighed down by uncertainties about financial institutions’ subprime exposure, commodities gained favor among investors as an asset class they believed would help their portfolios weather the storm.

A rosy outlook for emerging markets like China and India, the primary driver of the commodities run-up for several years, kept traders flooding into the market. Investments that track a variety of commodities indexes gained 37% in the first half to $200 billion, according to the Commodity Futures Trading Commission.
Precious metals soared in March, in a flight to quality as Bear Stearns Cos., the nation’s fifth-largest investment bank, collapsed. Gold, a traditional investor safe haven, hit all-time highs of $1,003.20 a troy ounce and silver rose to $20.685 a troy ounce. Both platinum and palladium reached records in March, fueled by a severe power outage in South Africa that hurt production.

Corn and soybeans reached their all-time highs around late June due to severe flooding in Midwest, the U.S.’s main producing area.

Oil continued to move higher amid expectations that emerging markets’ insatiable appetite for energy would counter the economic slowdown in the U.S. Wall Street firms argued that global production couldn’t keep pace and one-upped each other with sensational forecasts. Goldman Sachs Group analysts shocked the market in May with a prediction that oil could reach $200 a barrel within two years. In June, Morgan Stanley called for oil to spike at $150 a barrel by July 4.

Morgan Stanley was close. Crude oil reached $145.29 a barrel on July 3, a 51% gain from the beginning of the year — the pinnacle of commodities’ 2008 surge.

Then the tide turned. Soaring gasoline prices in the summer led to less driving and had an effect on consumer spending. Politicians proposed legislation to curb speculation in the oil markets, which became an issue in the presidential campaign. Some market players were spooked by the prospect of stricter regulation and stayed away.

Entering the fall, commodities took another hit as the credit crisis worsened after the failure of Lehman Brothers Holdings. Prices of all assets plunged as hedge funds and investment banks liquidated their positions to shore up capital and reduce leverage.

Demand for basic materials weakened as the financial crisis spread and tipped the world economy into recession, and commodities’ downward spiral gained speed. Oil hit its low for the year, $33.87 a barrel on Dec. 19. The International Energy Authority predicted that global oil demand would shrink this year, for the first time since 1983.

The second half’s decline was so brutal that it wiped out gains commodities had accumulated since 2002. Oil hasn’t been around these levels since 2004. But some still showed gains. Cocoa jumped 31% and rough rice gained 13%. Gold rose 5.8%, its eighth consecutive annual increase.

“It’s very typical for commodities to have a late-cycle rally,” said Lawrence Eagles, head of commodities research at J.P. Morgan Chase & Co., speaking of the first half of the year. Although the U.S. recession began in December 2007, commodities rose for months before weakening demand besieged the market.
Many investors were new to commodities and rushed for the exits when prices started to tumble. “Some of the hedge funds had never experienced any substantial corrections in commodities, and they got caught up here, badly,” said Richard Feltes, director of commodity research at MF Global.

The commodities markets are likely to be even tougher in the coming year. Liquidity is a major concern, with the prospect of fewer players and tighter credit.

“We may see increased interest from end users hedging against price swings,” said David Goodman, co-head of global commodities at Merrill Lynch & Co. “This will not offset the gap left from the exit of several financial players.”
Worries about credit risk will continue to have an impact as lenders may require counterparties to post more collateral to guarantee transactions, which in turn will utilize more capital, Mr. Goodman said.
While demand continues to decline, there is evidence now that supply is contracting, leading some players to hope that prices may be close to bottoming out. Oil-producing countries, mining companies and steel mills recently announced massive production cuts, which could put a floor on prices.
But nothing is certain. On Dec. 17, members of the Organization of the Petroleum Exporting Countries agreed to slash another 2.2 million barrels per day from oil markets, but oil prices continued to fall and earlier announced cuts weren’t fully implemented.
The latest cuts were scheduled to take effect at the start of this year. It might take longer for demand to pick up and have an effect on prices. “The answer now depends on how long this recession will last,” said J.P. Morgan’s Mr. Eagles.

While TD Bank sees the commodities market starting to rebound in the second half of 2009, followed by more pronounced price increases in 2010, the World Bank believes that, over the long term, commodity prices will remain substantially below recent bull market highs.

“The commodity market boom has come to an end,” the World Bank says. This boom has been the most pronounced since 1900, and was caused by rapid demand growth which was not matched by supply growth. In a report entitled “Global economic prospects — commodities at the crossroads,” the bank says that the boom has ended because of slower GDP growth, increased supplies and revised expectations.

The World Bank does not agree with observers who say that the global economy is moving to a new era characterized by relative shortage and permanently higher commodity prices. Over the long run, commodity prices are expected to fall, but not to 1990′s levels, since such low prices will suppress exploration and new development in the resource sector.

Over the next two decades, GDP growth rates will slow down because of slowing population growth and moderating income growth, in turn putting a lid on commodity demand growth. Moreover, technological progress should improve the efficiency of both production and use of commodities, ensuring that supply keeps pace with demand.

The World Bank says that, while commodity prices are likely to be higher than they were in the 1990′s and early 2000′s, a period when prices were depressed by excess supply, “the recent peaks (in prices). .. are unlikely to be the new norms,” since demand is not expected to outstrip supply over the long term.

The World Bank sees a marked slowdown in growth rates in the coming year. The bank projects that in 2009, investment in developed economies will shrink 3.1%, while investment in developing economies will grow by 3.4% — a sharp pullback from the 13% growth seen in 2007. The bank forecasts that the global economy will grow by 0.9% in 2009. Developing economies are projected to grow by 4.5%, well below the 7.9% growth rate seen in 2007.

Phenomenal growth in China’s GDP has led to growth in metal intensity in the economy, defined as metal consumption per unit of GDP. This trend is explained by the boom in investment, manufacturing and exports in China. Currently, metal intensity in China is four times higher than in developed countries and twice that of other developing countries.

China’s metal intensity is expected to stabilize in coming years and then start falling as high investment rates in the economy moderate, and the movement of manufacturing capacity to China from the rest of the world likewise slows down. Another factor which will decrease metal intensity in China is the changing make-up of the economy, where the share of services will increase at the expense of construction and manufacturing.

If China’s metal intensity stabilizes and then falls in coming years, global demand growth for metals, which has exceeded GDP growth rates, should first decline to match GDP growth rates and then decline even further to below GDP growth. The World Bank forecasts that, between 2015 and 2030, the global demand growth rate for metals will be 2.7% per year.

Turning from metals to energy, the World Bank says that future energy demand growth depends heavily on the pace of technological innovation in the automotive sector. Energy efficiency in the transportation sector is key to moderating demand, since 75% of energy demand growth is projected to come from this sector.
The World Bank believes that the prospects for technological improvements in the automotive sector are good, using technologies such as flex-fuel, hybrid cars, plug-in hybrids, electric cars and hydrogen-powered vehicles. Together, these have the potential to double fuel efficiency. The bank believes that, by 2050, the market share of such innovative vehicles can reach 90% in the developed world and 75% in the developing world, which will help reduce dependence on oil.

The bank forecasts oil consumption to grow to 114 million barrels per day in 2030 from 87 million today. Energy consumption as a whole is projected to grow at a faster pace, since consumption of other energy forms (such as coal, natural gas etc.) will grow faster than oil demand.

“Over the next 20 years, supplies of extracted commodities are likely to remain ample,” the bank says. The pace at which supply in the oil and metals sector catches up with demand depends on how quickly the supply of labour and supply in the heavy and specialized equipment sector can be restored. Capacity in these sectors has been reduced by years of low prices and weak investment, leading to long delivery times and high costs.

Recent high prices have helped address these capacity constraints. With the current recession, and with lower commodity prices, investment demand has fallen, and demand for specialized and heavy equipment has fallen in tandem, as have equipment prices. Despite this, prices are projected to remain relatively high and there will be a backlog in equipment deliveries for the next several years.

Although more and more resources, both metals and energy, are extracted every year, which means that less and less remains, it is unlikely that resources will be exhausted anytime soon, the bank says. Historically, reserves of both oil and metals have tended to rise faster than the depletion rate through extraction. In the case of oil, reserves have tended to remain at 40 years of anticipated consumption. This is because, when companies tally reserves, they tend to include only resources that can be readily extracted, which excludes sizable known resources.

The bank expects that more resources will be discovered, even though they are likely to be lower grade or more remotely located, and therefore more difficult and costly to produce. Nevertheless, advances in extraction technology will likely offset these impediments. The long-term oil price is expected to be US$75 per barrel in real 2008 dollars, a level which will allow economic production from oil sands. The bank expects that the oil price will also average US$75 per barrel in 2009.

Even if the World Bank’s projection turns out to be partly wrong and certain resources do become scarce, the bank says that alternatives will start coming into play. For example, if the pace of oil discoveries declines, the rising oil price will make alternatives such as coal, nuclear, natural gas and renewable energy more attractive, as well as stimulate conservation and technological change. However in such circumstances alternative energy sources will also become more expensive.
The World Bank summarizes its forecast by saying that under reasonable assumptions the supply of commodities is likely to increase rapidly enough over the long run to meet anticipated increases in demand at prices that are lower than the current levels. (The report was issued on November 20, when commodity prices were somewhat higher than now.)

TD Bank economist Dina Cover focuses on short-term prospects for commodities. She has downgraded prospects for the global economy in 2009, projecting growth at a mere 0.5%. The U.S. economy will shrink by 2%, and growth in the Chinese economy will slow to 7.6%. Since the U.S. and China are the world’s largest consumers of many commodities, demand will be hit hard, particularly for oil, coal and industrial metals.

As a result, the TD commodity index is projected to fall by 15% from mid-December levels, for a 60% peak-to-trough decline, and it will bottom in the second quarter of 2009. This may drag the Canadian dollar further down, which should help cushion the effect of falling commodity prices on mining companies.

Energy and base metal prices will decline the most, since both consumer and industrial demand for these commodities will decline. Although some mining companies, notably zinc and nickel miners, have slashed production, demand has fallen much more, so prices will remain under pressure in the short term. For example, the oil price is now expected to bottom at US$30 per barrel.

As for gold, TD forecasts that fears about deflation and disinflation could put downward pressure on prices in the near term, but a projected drop in the U.S. dollar in 2009 will support the gold price.

The global economy will start firming toward the end of 2009 and into 2010, lifting commodity demand and prices. TD projects a 55% rebound in the TD commodity index by the end of 2010, led by more than doubling of the oil price to US$75 per barrel. Excluding energy, the index will rebound by only 22%. Commodity prices are not projected to reach their boom peaks, since global economic growth in 2010 is forecast at a lukewarm 3.2%, substantially below the 4–5% growth rates seen during the boom.

Another factor which will limit commodity price appreciation is lower investment demand, since other asset classes will also rebound, so they will compete for the same investment dollars.

TD projects that oil will cost US$45 per barrel in December 2009, rising to US$75 in December 2010. Thermal coal in Australia will cost US$65 in December 2009, rising to US$100 in December 2010. The silver price will be US$9.60 per oz. in 2009, rising to US$10.50 in 2010. Aluminum will cost US75¢ per lb. in 2009, rising to US$1 in 2010. Copper will cost US$1.50 per lb. in 2009, rising to US$1.80 in 2010. Nickel will cost US$5.15 per lb. in 2009, rising to US$6.50 in 2010. The zinc price is projected at US48¢ per lb. in 2009 and US70¢ in 2010. Uranium oxide is projected at US$52 per lb. in December 2009, and US$65 in December 2010.

TD forecasts that the only commodities which will see price falls between 2009 and 2010 will be gold and newsprint. The gold price is projected at US$815 per oz. in December 2009, falling to US$700 in December 2010.