The performance of the commodity markets remains very impressive. Speculative activity is a major factor, and supply shortages, often the result of adverse weather conditions, are also providing considerable support; but there is clearly a view amongst both traders and investors that the general level of prices is too low, and that they will move higher. Over the longer-term that view is likely to prove to be justified. Commodity markets have been extremely volatile over the past month, rising strongly in the early part of the period, but falling back sharply towards month-end concerns about the effects of the austerity measures being introduced in Europe, and indications of a continuing slowdown in China, have combined to increase fears but for most of the past month traders and investors apparently decided that the gloom was overdone; and commodity prices also benefited from some “safe haven” buying by investment funds.
Base metal prices are still ending the month higher overall, but below recent levels, with the further sharp rise in the tin price as the outstanding feature; and food prices have also moved higher, with the continuing surge in wheat prices as the outstanding feature of these markets, to provide further support for the view that the era of cheap food is coming to an end. The gold price has also improved, as investors have sought “safe havens in the present storm”; but oil prices have fallen back.
Base metal prices are closing higher again over the past month. Zinc and tin prices still ended sharply higher, but overall improvements elsewhere were fairly modest.
Chinese demand remains a critical factor in these markets. It is this demand that has been the main driving force over recent months, and that has pushed iron ore prices to record levels and enabled other metal prices to recover from the lows of the recent recession.
Soft commodity markets have provided a mixed performance over the past month, but prices are generally higher. The exceptions have been the cocoa price, which has continued to fall as weather conditions in the Ivory Coast have improved, crop estimates have been pushed higher, and the effects of the technical squeeze created by the decision by Armajaro, the London-based hedge fund, to take delivery of around 7% of the world’s annual cocoa bean production last month, have eased; and soya-bean prices are also basically unchanged over the month. But elsewhere there has been a sharp rise in Arabica coffee prices, and a further improvement in the sugar price.
However the main interest over the month has been in the wheat market, after the massive price gains, and also in other grain markets. The most significant events during the month were the decision by the Russian authorities to ban the export of wheat and other grains until year-end because of the drought that has devastated crops and caused widespread fires across the country; and to ask other neighbouring countries to take similar action.
It is not yet clear how they will respond; but the action has already created widespread concern.
Russia was the world’s third largest wheat exporter last year, sending 18.3 million tons abroad, and so the decision to ban exports for the rest of the year has had a dramatic effect on prices. Attempts have been made to limit the price gains, with the US Department of Agriculture in particular indicating that US stockpiles of wheat are close to 30 million tons and at a 23 year high, and the UN Food and Agriculture Organisation insisting that global stocks are more than adequate to cope with the shortfall, even if other neighbouring countries join the Russian ban.
But these countries were expected to supply around one quarter of total global wheat exports this year, and so the panic conditions in the markets have not been significantly eased. Evidence of significant purchases of US grain by China for the first time in a decade have also added to the concerns about the availability of global supplies, and made it even more difficult to assess the full consequences of the Russian decision; but it seems unlikely that the surge in the prices of wheat and other grains in over.
After rising sharply in late-July and early-August, oil prices have subsequently fallen back towards the $70 per barrel level. There have been warnings from the International Energy Agency that “the short- term global economic outlook is highly uncertain, presenting significant downside risks to future oil demand growth”; there has been a cautious view of future oil demand from OPEC; and also a report from the US Department of Energy that US stockpiles of crude oil and refined products have risen to their highest levels since weekly records began in 1990. Much will depend on future demand in the US and in China; but the fundamentals do not seem to point to an early and sustained improvement in prices unless there is a serious deterioration in political conditions in the Middle East.
The swing in sentiment towards a more cautious view of global economic prospects, and the renewed concerns about sovereign debt defaults in Europe, have provided further encouragement for investors to seek “safe havens” in the present uncertain situation, and this has led to a significant rally in the gold price over the past month.
The dollar has recovered well from weakness earlier in the month, and so the fear of dollar weakness has not been a factor pushing the gold price higher this month. The evidence that the sovereign debt crisis is far from being resolved, and the indications of increased Chinese buying of gold, have all helped to push the price higher. The latest strength may well lead to a further period of profit-taking; but given the present international situation, it would be unwise to assume that the improving trend in precious metal prices is over.
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