A Large Number of Commodity Prices Decline, Another Interest Rate Hike Seems Increasingly Likely

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Energy prices fell by 11.3 percent in May, led by natural gas in Europe (-25.2 percent) and coal (-17.4 percent), according to World Bank data. Non-energy commodity prices decreased by 3.6 percent, while agricultural product prices fell by 2.5 percent. Food prices dropped by 3.1 percent, led by a decline in edible oils and meal of 4.9 percent. Beverage and raw material prices fell by 1.4 percent and 0.5 percent, respectively. Fertilizer prices decreased by 2.2 percent, led by a 20 percent drop in DAP. Metal prices fell by 6.4 percent, led by zinc (-10.5 percent), iron ore (-10.4 percent), and nickel (-8.1 percent). Precious metals weakened by 0.5 percent.

The persistent rise in interest rates by major Western central banks has contributed to the worsening price decline. Importing countries, which are among the most indebted, have experienced a depletion of their dollar reserves and have therefore reduced purchases. Furthermore, except for gold, all commodities, with energy being the primary one, have incurred tariffs due to the higher cost of money. There are still many economic data points to consider, but another rate hike seems increasingly likely by the FED in June.

The ECB shares a similar view, although inflation in the eurozone has fallen more than expected, to 6.1 percent (which is still quite a high inflation rate). The market evidently accepts that it must follow what the FED has been saying all along, which is that fighting inflation (i.e., bringing the inflation rate back to two percent) is a priority. Alongside this, it seems that this recession on hold continues to shift towards the end of 2023. As a result, the dollar has the potential to strengthen further to a ratio of 1.05 for one euro.

Fitch warns that it may still downgrade the U.S. credit rating, despite resolving the debt ceiling. A failure to meet U.S. obligations may just be a matter of time. Households and the state are overwhelmed with debt. But what does history teach us in such cases? Dynasties go hand in hand with power and influence. Empires are often built on golden foundations, while declining powers, such as the Anglo-American, are usually buried in debt. Historically, gold has symbolized power due to its universal value, esteemed status, and broad recognition, regardless of ownership. It is the decentralized currency par excellence.

China continues to struggle, and although it is a factor that should never be overlooked, efforts to stimulate the economy seem quite limited. Poor Chinese economic data is forcing both stock and commodity markets to rethink the risks of recession. The Chinese economy, as such, heavily depends on exports, and when the U.S. and EU are grappling with their own challenges, China feels it acutely. Speaking of China, it plans to build at least 150 new nuclear reactors over the next 15 years, more than the rest of the world has built in the past 35 years.

The Recovery in China Remains Muted

On Sunday, after seven hours of talks, OPEC and its allies led by Russia, who hold 40 percent of the world’s crude oil, reached an agreement to reduce total production targets starting in 2024 by a total of 1.4 million barrels per day. Saudi Arabia will reduce production by an additional one million barrels per day in July as part of a broader OPEC+ agreement. This would bring the country’s production level to around nine million barrels per day, the lowest in several years, and Saudi Energy Minister Prince Abdulaziz bin Salman stated that he would ‘do whatever it takes to bring stability to this market.’

OPEC+ already has a reduction of two million barrels per day that was agreed upon last year, which is equivalent to two percent of global demand. In April, OPEC+ already decided, surprisingly, on a voluntary reduction of 1.6 million barrels per day, effective from May until the end of 2023. The lobby is facing falling oil prices and a looming demand shortage. Naturally, this news immediately reflected on oil prices, which at one point last week fell to $71.5/bbl before the announcement.

Currently, Brent oil futures have fallen to $76/bbl, after rising to $79/bbl on Monday. However, analysts suggested that new reductions may not have a significant impact as production levels in other OPEC+ member countries, including Russia, Nigeria, and Angola, remain high. Moreover, Russia has not committed to further production cuts, while the UAE has been allowed to increase production targets for the next year.

Regarding demand, investors continued to assess the prospects of economic and monetary policy globally, amid rising expectations that the FED will further increase interest rates. TTF gas has fallen by nearly €48/MWh or 63 percent since the beginning of 2023. An even more pronounced decline in coal prices has occurred. Newcastle coal futures, the benchmark for the largest Asian coal-consuming region, have fallen below $140/t, the lowest level since July 2021, representing a nearly 70 percent drop from the record high of $457.8/t reached in September last year.

The economic recovery in China remains muted, and industrial activity is subdued, particularly in manufacturing and construction, affecting demand for commodities. At the same time, domestic coal inventories in China have reached historically high levels due to low demand and significant imports. During the first four months of 2023, China experienced a modest increase of only 4.8 percent in raw coal production, while imports surged by a significant 88.8 percent. Outside of China, the drop in natural gas prices has contributed to Europe moving away from coal consumption. However, in India, coal imports increased by 22 percent, and coal production rose by 14.8 percent in the financial year that ended on March 31.

The food price index in May fell by 3.4 points, or 2.6 percent, compared to April, to 124.3 points. This is 22.1 percent below its highest level in March 2022. The decline reflects a significant drop in the price index for vegetable oils, grains, and dairy products, partially offset by an increase in the sugar and meat indices. The FAO grain price index fell by 6.5 percentage points in May to 138.6 points, which is 25.3 percent below levels recorded in March 2022, shortly after the Russian invasion of Ukraine. The FAO stated that international wheat prices fell by 3.5 percent in one month due to expectations for abundant global supplies in 2023/24 and the extension of the export corridor from Ukraine.

Wheat Prices Hit Lowest Level in Two Years

The previous week can be freely divided into two parts. Not only were we transitioning from month to month, but also due to price movements. In the first part of the week, there was a strong price decline, and in the second part of the week, a recovery. Last week, wheat futures on the CBOT fell below corn prices for the first time since 2013, reaching the lowest level in the last 29 months. A combination of lack of demand from buyers, liquidity issues, and large inventories pushed prices down.

In major producing countries, there are large inventories, and as the harvest approaches in Russia, the EU, and the U.S., supply is increasing. At the same time, many large importers do not have hard currency needed to purchase grain as rising interest rates have led them to spend the dollars they had on paying interest on loans instead of importing food. Thus, Egypt is delaying payments for grain, Tunisia has no dollars, Pakistan is in trouble, Turkey is struggling with a falling lira, Iran is at risk of running out of hard currency, and Bangladesh is seeking credit for grain from India as it has no dollars to buy it.

The end of the month prompted funds to cover enormous short positions, accumulated from January to date, which have devastated agricultural product values. Funds bought 44,000 contracts across the agri complex by the end of last week due to dry weather forecasts, high cash demand, and uncertainty in the Black Sea. This and weather (un)favorable conditions were the main drivers of price recovery in the second half of last week. Will this be the turning point of the downward trend? It depends on the weather, but it could provide support, at least until the end of June. In July, volatility has always been the highest of the year. Wheat prices have risen due to wet weather in the southern plains of the U.S. Wheat crops in the U.S. had already been affected by drought earlier, and now they are experiencing too much rain, raising concerns about quality.

Additionally, pressure on price growth is also coming from Ukraine’s complaint that Russia is generally blocking grain deliveries, particularly that it will block the movement of grain ships to the Ukrainian port of Pivdennyi. The blockade will last until an agreement is reached on reopening the ammonia pipeline. In the so-called corn belt, dry weather will continue for at least another week, with high temperatures and little rain. The same applies to soybeans. American forecasters have estimated limited precipitation and high temperatures that could potentially reduce crop yields. Because of all this, corn and soybean prices have risen. Canola prices have also slightly recovered, following the rise in palm oil prices as a result of the El Nino effect causing water deficits in Malaysia.

Gold Prices Increased

In Ukraine, the spring sowing has been completed, estimated at 12.25 million hectares. The Ukrainian Grain Association (UGA) estimates agricultural product exports in 2023/24 at 43.9 million tons, a decline of 22 percent compared to 56.4 million tons in 2022/23. The decline is due to lower production, but the estimate will only be realistic if the export corridor remains open.

Gold prices have risen to slightly above $1,950/t.oz at the beginning of the week, following a moderate weakening of the U.S. dollar and a slight decline in U.S. Treasury yields, after weak economic data in the U.S. solidified the view that the FED will pause its tightening cycle next week. Data indicate slow growth in the U.S. services sector during May, while new orders for industrial goods rose less than expected, and only due to increased defense spending. Nevertheless, gold prices remain significantly below the nearly record level of $2,050/t.oz on May 5, as traders expect that interest rates will need to remain elevated for a longer period in the U.S., Europe, and the United Kingdom due to persistent inflationary pressures.

Copper futures approached the $3.7/lbs mark, bouncing back from a six-month low of $3.5/lbs reached on May 24, as rising concerns about supply and expectations of government stimulus outweighed evidence of low purchasing activity.

Major market players continued to express concerns that copper supply may not keep pace with long-term demand expectations, as the metal is a key raw material for the transition to renewable sources. Copper inventories on the Shanghai Futures Exchange fell below 135,000 tons in May, the lowest this year, while those on the London Metal Exchange were below 60,000 tons, the lowest since 2005. Additionally, Chile estimates that this year’s production will plummet by as much as seven percent after a 10.6 percent drop in 2022.

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