Friday, June 19, 2009
Commodities prices rose in May but still to low from a year ago
Friday, 19 June 2009
Strength of commodities prices accelerated in May and this is one more optimistic sign that the worst has passed for the world economy. But despite the remarkable rise of May, basic commodities prices remain down by more than 40% from a year ago. The IMF commodity price index in May rose by 9.7% m-o-m compared to 4.1% in the previous month, but remained down by more than 40% from a year ago. Commodity prices were supported by energy prices which increased 16% m-o-m. Non-fuel commodity prices rose 5%, a slightly slower rate than the previous month.
The performance of commodity prices was supported by the favourable impact of new positive macroeconomic data and an improvement in investor sentiment. Nevertheless, it is worth noting that in some cases, notably industrial metals, the price increase is not based on fundamental factors. Persistent weak demand in the OECD and a possible reduction of Chinese metal imports in the coming months may cause prices to fall for this commodity group.
Contrary to the previous month, the IMF energy commodity index (crude oil, natural gas and coal) recorded a hefty increase in May of 13.1%, compared to 3% in April on the back of a 15.6% increase in crude oil prices (average petroleum spot price) compared to 7.1% in the previous month. At the same time, the Henry Hub (HH) natural gas price rose sharply by 9.6% in May while coal prices saw further losses. The HH gas price recovered by 9.6% in May, but remained down 66% from the same period last year. Prices experienced a strong rally during the first half of May due to the combined effect of greater power demand and higher-than-expected domestic production which maintained storage injections under the three-digit level. Nevertheless, prices fell in the following weeks due to weaker-than-expected US industrial production and rising inventories.
Non-energy commodity prices grew 5%, compared with 6% the previous month. Food prices, especially grains, pushed prices up but industrial metals saw a deceleration in growth. The industrial metal price index growth rate halved in May to 4% m-o-m compared to the previous month. This commodity group was affected by expectations of lower imports from China and persisting weak global demand, together with some supply response to prices. Some markets are still in surplus and London Metal Exchange (LME) total inventories continued to increase in May by 249,111 tonnes to stand at 5,205,910 tonnes, which suggests that a sustainable upward trend in prices will only materialize in the first half of 2010 when an
economic-led demand revival is anticipated for some industrial metals such as copper and zinc, the two tightest markets. For other markets, such as aluminum and nickel, a recovery may take longer due to considerable spare capacity.
Copper prices increased by only 3.6% in May, down from 17.7% m-o-m. A reduction of copper imports from China is expected in May due to better scrap availability with lower requirement of refined metals and weaker domestic prices due to high stocks, leading to a less favorable LME-Shanghai arbitrage. Although Chinese imports are estimated to remain high in May which may explain the mild decline in stocks at the LME, anemic demand from Europe and the ongoing problems of the US automotive and construction sectors weighed on prices and caused analysts to predict a recovery of the copper market only by the end of this year or the beginning of 2010. Indeed, the copper surplus in 1Q09 is seen at 197,000 tonnes, up 95,000 tonnes from the same period a year earlier.
Aluminium prices in May rose by only 2.3% m-o-m, comparing unfavourably with 7% growth a month earlier. Following an enormous surge from March to April, aluminum imports from China are expected to be lower in May owing to the huge increase in stocks since the beginning of the year – Chinese aluminium imports jumped by 118.5% during January-April 2009, compared to the same period the previous year. This expansion was partly encouraged by an attractive LME-China Shanghai arbitrage but record stocks have exerted downward pressure on domestic prices. Global demand remains weak with US car sales plummeting by 35% y-o-y and British car sales falling 28.5% over January-April of 2009, compared to the same period a year earlier. This explains the 362,862 tonnes climb in aluminum stocks at the LME to now stand at 4,002,110 tonnes, the highest level since the start of this year.
Lead prices witnessed a rise of 4% in May m-o-m compared to 6% the previous month. Lead markets benefited from some revival in demand from the lead-acid battery sector in China and other regions according to the International Zinc Study Group. Nevertheless, this was not enough to counterbalance rising inventories at the LME, which rose by 9,466 tonnes to 73,890 tonnes in May, the highest this year.
Zinc price growth halved in May to 7.5% compared to an April rise of 13.5% as a result of flattening Chinese demand and persistent problems in the automotive and construction sectors
elsewhere. Zinc imports from China seem to have declined in May which, together with rising inventories, led to an ease of LME-China Shanghai arbitrage. Inventories at the LME declined by 20,197 tonnes in May on a monthly basis, but this masks the fact that stocks rose in the second half of the month.
Nickel prices rose by 12.6% in May compared to nearly 17% a month earlier. Nickel prices performed better than other industrial metals due to the continuing high Chinese demand reflected in high imports in May owing to the attractive LME-China domestic arbitrage.
Demand from stainless steel mills in China also supported nickel prices. Outside China, nickel demand remains sluggish with demand from stainless steel orders having dropped 46% in the six months to March 31st.
The World Bank’s agricultural price index rose by 6.3% m-o-m in May compared to 4.9% in April fueled by grain prices and especially wheat on the back of weather-related concerns. The IMF food price index rose 5.8% in May – up from 4.8% in April. Gold prices climbed by 4.3% in May m-o-m after a 3.7% drop in the previous month amid supportive low real rates and a weaker US dollar.
