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Last week can easily be called bearish week for commodities. Prices on exchanges for almost all commodities across all three sectors (energy, agriculture, metals) experienced a weekly decline. Among others, the price drop on a weekly basis occurred for natural gas (7 percent), oil (4 percent), gold (3.5 percent), cotton, coffee, and lumber (from 5.5 to 6.5 percent). This does not mean that the price of certain commodities did not increase on a weekly basis, such as palm oil (2 percent) or nickel (5.5 percent).
Key factors currently affecting commodities and the economy in general are geopolitics, central banks and monetary policy, the energy crisis, and fear of recession. The geopolitical situation in the world currently resembles a minefield that could lead us to stagflation in a very short period. The war in Ukraine is potentially at a turning point. Could the current Ukrainian counteroffensive bring the opposing sides to the negotiating table in the foreseeable future? This would open the possibility for achieving a ceasefire and stabilizing the situation, along with everything else related to the concept of “returning to the old/normal”.
To ensure the world is not boring, tensions are rising between Turkey and Greece. The Turks are amassing military troops at the border with Greece, and when that happens, anything is possible. Azerbaijan is taking advantage of the current Russian occupation of Ukraine and has launched a new attack on Armenia, while Iran and Turkey, as well as certainly Russia and the USA, are monitoring the entire situation. Renewed tensions between Israel and Syria. Some will say nothing new. Are these conflicts just an introduction to the black swan of all black swans – Taiwan?
Inflation in the USA in August was 8.3 percent (vs 8.5 percent in July). Expectations were that inflation would be 8.1 percent (realistically, whether it is 7.8 or 8.3 percent seems irrelevant). This put pressure on major indices, including the DJIA, S&P 500, and NASDAQ, all of which recorded a weekly decline, while the US dollar strengthened. Additionally, the percentage of people (40 percent now) who expect the FED to raise interest rates by 100 basis points on Wednesday has increased (and speculation also includes an increase of 125 basis points). The ECB has adopted the same policy as the FED (only with a 6-month delay), so it is no surprise that the market fears the continuation of an aggressive cycle of interest rate increases on both sides of the ocean that will last as long as necessary to bring inflation under control. The consequences of this are recession and economic slowdown, which will consequently lead to rising unemployment.
China as a Competitor to the IMF
Therefore, we should not be surprised by various estimates related to Europe and recession. BlackRock estimates that Europe is facing a severe recession, and that European energy suppliers may face margin calls in the trillions of euros. France is transforming from traditionally the largest exporter of electricity in Europe to a net importer due to lower than usual nuclear energy production.
The IMF warns that a harsh winter could lead to social unrest in Europe, and that major creditors must work to prevent a debt explosion. Current global debt is above 300 trillion dollars. China is emerging as a direct competitor to the IMF by providing loans to “weaker” nations around the world. The US Department of the Treasury’s debt amounts to 24 trillion dollars. Bank of America recently stated that the decline in market liquidity represents the greatest systemic risk to financial markets since the real estate bubble of 2007.
The price of oil on Brent is below the $90/bbl mark. Oil has been declining for the third consecutive week mainly due to fears of economic slowdown following interest rate hikes by central banks around the world. The price of gas has fallen to €180/MWh. Europe is trying to reduce its dependence on Russian gas, even attempting to impose a price cap on gas. Measures taken in this direction by the EC include additional taxation of profits from energy sector companies and rationalizing energy consumption.
Currently, the stock filling level is at 86 percent, which is above plan and slightly above the five-year average. Because of all this, Goldman Sachs estimates that gas prices this winter will likely more than halve and fall below €100/MWh by the end of the first quarter of next year, assuming normal winter conditions.
More than six months after the start of the war, the global crisis of artificial fertilizers threatens a decline in agricultural production, which could certainly have negative consequences for the most vulnerable countries in the world. According to the worst-case scenario, the FAO estimates that high fertilizer prices could reduce global grain production by more than 40 percent. Personally, I believe this is too pessimistic and unrealistic a scenario.
The USDA report from last week was a surprise for soybeans, where yields were estimated to be lower than market expectations. This is primarily due to weather (drought) in the USA. The rest was more or less in line with market expectations. Global wheat production is estimated at 784 million tons (+3.3 million tons vs August), corn at 1,173 million tons (-7 million tons vs August), and soybeans at 390 million tons (-3 million tons vs August). Ending stocks of wheat for the 22/23 season are estimated at 269 million tons (+1.2 million tons vs August), corn at 304.5 million tons (-2.2 million tons vs August), and soybeans at 99 million tons (-1.5 million tons vs August).
Falling Copper and Steel Prices
Regarding the EU, current estimates typically hover around 124 million tons for wheat, 52 million tons for corn, while oilseed production is estimated at around 31 million tons. In these estimates, corn is faring the worst, with its production decreasing with each new estimate due to unfavorable weather conditions in Europe. As for the export corridor from Ukraine, whose future remains uncertain, 165 ships have so far exported goods from Ukraine, totaling 3.7 million tons of goods.
On the CBOT, wheat is currently below $8.5/bu, corn remains above $6.5/bu, and soybeans below $14.5/bu. Rising inflation combined with potential economic slowdown is leading to increased fears of declining demand, so in this context, investors on the exchanges have used the price increase to take profits.
The price of copper has fallen below $3.6/lbs due to market expectations of an interest rate increase by the FED this week. The market fears that such a policy will suppress demand for metals. Producers hope that a reduction in stocks and currently lower production could still push prices upward. Steel prices have again fallen below the level of 3,900 CNY/t. Prices in the Chinese real estate sector continue to fall, while prices of new apartments are declining at the fastest rate since 2015.
New cases of the coronavirus and lockdowns in China for certain cities and regions further reduce demand and market activity, putting pressure on prices. At the same time, stocks in China have increased by 2.4 percent. The price of aluminum is again above the $2,300/t mark, slightly recovering from the lowest level in 17 months of $2,240/t reached on September 7. Concerns about low supply due to reduced production have raised prices.
