The Decline in Commodity Prices Continues Across All Exchanges, Situation in China Raises Concerns

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The decline in commodity prices continues across all exchanges, with oil, which has been falling for the fourth consecutive week, leading the way. Although last week was somewhat specific due to the American Thanksgiving holiday, it seems that part of the Black Friday frenzy has also affected the commodity markets. From Friday, November 4, until today, oil has fallen by nearly 20 percent on both of the world’s major exchanges, Brent and WTI. Many commodities are starting this week in the red. For some, this is due to increased volatility, while others are in a stabilization phase. The common denominator for all of them is uncertainty and the search for direction in the weeks or months ahead. The VIX fear index has fallen below 23, the DXY dollar strength index has dropped to 105, and the EUR/USD ratio has risen to nearly 1.05.

Concerns Regarding China

The situation in China is creating concerns in the market. The number of infections is rising again and is at record levels, with more and more dissatisfied individuals protesting against strict lockdown measures, while the likelihood of China reopening in the first quarter of next year is decreasing every day. As a result, oil prices on the exchanges are falling, which is why the price of corn and the soybean complex is down at the beginning of this week. The price of wheat is also falling, but not due to the drop in oil prices, rather due to price pressures coming from ships waiting for deliveries from the Black Sea. The drop in oil prices, nearly below $80/bbl reduces inflationary pressures and potentially alters the FED’s and ECB’s policies regarding further interest rate hikes. Investors are already expecting that at the FED meeting in December, the interest rate will be increased by only 50 basis points (after rising by 75 basis points in the last four months).

The ECB could do something similar. As a result of this optimism, the dollar has weakened. However, it should be noted that central banks are not as flexible and quick in making their decisions as the market or business entities. They are much more conservative in their policies and are more willing to wait with decisions and continue the interest rate hike policy longer than necessary, rather than risk inflation returning in six months. With the idea of higher interest rates, demand for commodities decreases, preventing speculators from starting to buy commodities and entering positions, thus prices are falling.

Bearish Trend

Rabobank predicts a bearish trend for many commodities in 2023, primarily due to recession, but also due to expectations of better weather conditions that should help increase agricultural production. Demand is increasingly influenced by the prospects of recession in 2023, even if agricultural product stocks in exporting countries are very low. Agricultural commodities reached record prices in May, among other reasons due to unfavorable weather conditions, lower stocks, the war in Ukraine, container shortages, and various measures to restrict food exports.

From May to October, prices on the exchanges fell by 18 percent due to the strengthening dollar, weak demand, improved container transport situations, the establishment of an export corridor from Ukraine, and some abundant harvests. However, agricultural product prices are still 50 percent higher than pre-pandemic levels, while climate remains a central focus. The easing of La Niña should allow some producing countries to increase production and replenish stocks. The stock-to-consumption ratio for grains (excluding India and China) is the lowest in history when viewed through consumption days. Global stocks of corn and soybeans could somewhat improve in the 2023/24 season, while wheat stocks are likely to remain somewhat low. Macroeconomically, Rabobank expects that global growth will fall to only 2 percent next year, and given that many economies are on the brink of recession, a decrease in inflation is expected.

Regarding economic indicators, the OECD is more optimistic than other analysts about the economic trend and does not expect a recession. The global economy should avoid recession next year, but the worst energy crisis since the 70s will lead to significant slowdowns, with Europe being the most affected. According to them, the fight against inflation should be a priority for politicians, and central banks should continue to raise interest rates. They predict that next year global growth will be 2.2 percent, and the year after 2.7 percent. They also estimate that the eurozone will grow at a rate of 0.5 percent next year, recovering in the following years with a growth of 1.4 percent. For the US, they also predict a growth of 0.5 percent next year, and 1 percent growth the year after. On the other hand, for China, they predict a growth of 4.6 percent next year, and 4.1 percent the year after. Due to tightening monetary policies and pressure from falling energy prices, inflation in OECD countries is expected to drop from over 9 percent this year to 5.1 percent in 2024. An old saying goes, “may you live and see.”

Uncertain Situation

The price of oil on Brent is close to $80/bbl, the lowest level since the beginning of the year. China and its demand do not offer optimism for the market, and additional pressure on prices arises from the fact that the US has granted Chevron permission to continue oil production in Venezuela. The market is also monitoring developments around G7 members and their plan to impose a price cap on Russian oil, although speculation that this cap could be set at a relatively high level reduces concerns that Russia will respond by cutting production. Some investors are cautious ahead of the OPEC+ meeting as it is expected to maintain limited supply, and may even reduce it further. Gas prices are at €121/MWh TTF. Gazprom will continue gas deliveries to Europe via Ukraine and has abandoned the reduction of gas supplies to Moldova, while retaining the right to reduce supplies if Moldova does not meet agreed payments for gas. The gas situation in Europe remains uncertain, although mild weather has significantly helped consumption/stocks so far. EU energy ministers have decided to postpone the introduction of a gas price cap of €275/MWh until mid-December.

Grains and Copper

Deliveries of grains from the Black Sea continue relatively stable due to competitive prices in the global market. The EC estimates corn production in the EU at only 53.3 million tons, which is why it has increased the import estimate to 23 million tons. Wheat exports are estimated at 34 million tons, while estimates for rapeseed production have been reduced to 19.4 million tons and sunflower to 9.3 million tons. As of November 20, the EU has imported 2.85 million tons of rapeseed (vs 2 million tons last year) and exported 13.6 million tons of wheat (slightly above last year). Top export destinations remain Algeria, Morocco, and Egypt. In Ukraine, the harvest of all goods for 2022 is estimated at 51 million tons (vs 86 million tons in 2021), which will negatively affect their export potential this season. In Argentina, due to drought, the sowing of all crops is significantly delayed, with corn and soybeans experiencing the slowest sowing pace in the last 20 years. Argentina is the world’s largest exporter of soybean meal. To encourage exports, Argentina is reactivating the soybean dollar. This is a special exchange rate (40 percent more favorable than the official rate) offered to soybean exporters. A total of $3 billion has been prepared for this purpose, and the measure will last until the end of the year. It is interesting to compare the movement of prices on the exchanges with the fundamentals. For wheat, the fundamentals are bullish, primarily due to low stocks almost everywhere in the world (except in Russia). Wheat stocks in the US are the lowest in the last 15 years, and the condition of newly sown crops is characterized by only 32 percent rated as good/excellent, the worst in the last 40 years. Global stocks (excluding China) are also the lowest in the last 15 years.

Australia is the only source of significant new quantities in the next 6 months, but with much less than expected milling wheat due to rain and floods. Wheat sowing in Ukraine is down 40 percent from last year, and next year’s harvest could be half of this year’s. Corn stocks (excluding China) are no better. For comparison, they are half of what they were in 2010. The corn harvest in Ukraine has slowed down, both due to weather and due to power shortages and high drying costs. As a result, a good portion of corn will remain in the fields until spring. So far, only 12 million tons have been harvested from 50 percent of the area, while yield estimates are at 27-28 million tons. For soybeans, the global stock situation is better, although in the US, strong demand for renewable energy sources significantly boosts demand for soybean oil, and soybean stocks there are at very low levels.

The price of copper is more or less the same, caught between low stock levels and slowing industrial production in China, as well as the recessionary outlook ahead of us. Steel and aluminum prices are also in slight correction and uncertainty about what will happen in the coming days/weeks. Generally, the story about metals is a story about China’s demand (and demand in general), macroeconomics, and economic potentials, as well as the question of whether a recession is coming or not, and only to a lesser extent is it about fundamentals, limited supply, and so on. As investor and market views change on these issues, so do the prices of individual industrial metals on the exchanges.