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Monday, September 21, 2009

Recovery in Risk Appetite Supports Commodities Prices

Monday, 21 September 2009

The IMF commodity price index jumped 7.6% in August, but was still 33.4% lower than a year earlier. Both energy and non-fuel commodity prices saw positive monthly growth rates of 5.8% and 8.8% respectively. The positive outcome was partly due to a 1.3% drop in the value of the dollar versus the euro and several supply constraints, especially in industrial metals and agricultural products. The recovery in risk appetite at the beginning of July continued stronger into August, despite concerns over US regulatory norms. However, according to recently published
CFTC data, index investors are not a key factor in explaining price development in any commodity market. The inflow of macroeconomic data as a whole remains positive for commodity demand and the recent moderation in commodity returns seen in late August may only represent a temporary phenomenon. Nevertheless, as already pointed out in our previous issue, more indicators on the real economic recovery, especially in the OECD region, are essential for the sustained recovery of commodity prices as Chinese demand is expected to ameliorate in 2H09.
The IMF energy price commodity index (crude oil, natural gas and coal) rose 8.8% m-o-m in August compared to 6.8% negative growth in the previous month reflecting a 10.8% gain in crude oil prices as the Henry Hub (HH) natural gas price fell 7.4% in August compared to a 10.8% drop in July.
The HH gas price plunged 7.4% m-o-m in August, 62% lower than a year earlier owing to sluggish industrial demand, strong production and large inventories.
Non-energy commodity prices rose 5.8% m-o-m in August which compared with a 0.7% drop in July. The favourable development was mainly ascribed to industrial metal prices as recovery in the food index remains fragile.
The industrial metal price index surged more than 12% in August, but volatility was very high. Prices for this commodity group increased mainly in early August supported by supply constraints, but dropped over the second half of the month amid improving macroeconomic data. Concerns remain on slower imports from China of industrial metals in 2H09 due to the high growth in 1H and a lack of recovery in global demand. Total London Metal Exchange (LME) inventories increased by 3.8% m-o-m in August compared to a rise of 3.2% in July.
Aluminium prices climbed 15.1% m-o-m in August compared to 5.5% a month earlier but as in other industrial metals markets high volatility was a feature during August. The price jump was realized mainly on signs of demand recovery from the auto sector. Aluminium prices increased during the first half of August on hopes of an economic rebound in the OECD countries based on positive macroeconomic signals such as the increase in the Manufacturing Purchasing Index in the OECD countries and the solid recovery in the Chinese economy where aluminium imports rose 177% y-o-y in July, according to the Chinese Ministry of Trade.
Nevertheless, global demand has remained very weak and the slight improvement has come from a very low level. The aluminium market, as other industrial metal markets,
has responded to doubts on economic recovery, especially in the US where automobile production still declined 34% y-o-y in July of this year.
The record levels of aluminium stocks at the LME testified about the weak global
demand for the metal. Although at a slower pace of 2% m-o-m, aluminium stocks
reached a historic record of 4,588,604 tonnes in August.
Copper prices increased 17.9% m-o-m in August mainly on supply constraints such as impending labor negotiations in the 2H of 1009. It must be noted that copper prices showed high volatility during August, increasing during the first half of the month on solid Chinese demand. Nevertheless, by the second half of August, the copper market became more cautious on the strength of the economic recovery in the OECD in 2H09
and LME copper inventories rose 9% to 292,726 tonnes in August compared to the previous month.
Nickel prices soared 20.9% m-o-m compared to 7.2% in the previous month amid extremely high volatility. Important supportive factors were strikes and production cuts since last July. It is expected that Canadian production will be cut by 35% y-o-y according to Brook Hunt. These positive factors were partly counterbalanced by a further stockpile at the LME with inventories having risen by 1% to 108,856 tonnes in August, m-o-m. Finally, backwardation in the nickel market finished due to an expected severe decline in demand outside China.
Zinc prices increased at the high rate of 15.1% m-o-m in August, but in the wake of the rest of the industrial metal complex, this price rebound was very volatile with no definite price trend. Zinc inventories at the LME jumped further by 20% in August m-o-m due to an estimated decline in demand in the OECD countries for 2009, which outpaced the increase in Chinese demand for the metal in August. Indeed, zinc imports from China declined 34% m-o-m in July
The World Bank agricultural price index only rebounded 4.4% m-o-m in August after
a drop of 3.9% m-o-m the previous month. The IMF food price index rose 1.5% m-o-m in August due to large gains in a few commodities such as sugar, rubber and vegetable oils. The grain markets continued remained bearish in line with bearish supply news from the US Department of Agriculture (DOA).
Gold prices rose 1.6% m-o-m in August, an improvement compared to the negative
growth in July driven by the dollar devaluation.