Commodity Markets: Raw Material Prices Stabilized in February, Market Expects Further Slowdown in U.S. Growth

Raw material prices stabilized in February. Energy prices rose by 1.1 percent in February, led by oil which increased by 3.7 percent. Prices of non-energy products changed little, by 0.3 percent. Agricultural product prices rose by 1.2 percent in February. Food prices fell by 1.2 percent after a 4.1 percent drop in grain prices and a 4 percent drop in oils and meals. Raw materials rose by 0.8 percent, while beverages increased by 12.7 percent. Fertilizer prices rose by 1.8 percent. Metal prices fell by 1.9 percent in February, led by iron ore (down 8.4 percent) and zinc (down 6.2 percent). Tin prices rose by 3.9 percent. Precious metals weakened by 0.7 percent, led by platinum (down 3.4 percent) and silver (down 1.1 percent).

In the currency markets, the value of the dollar against a basket of currencies sharply fell last week, while the euro strengthened following messages from the U.S. and European central banks that they might soon start lowering interest rates. The dollar index (DXY) fell by 1.1 percent last week, to below 103 points, which is a bullish tailwind for dollar-denominated commodity markets. At the same time, the price of the euro reached a level of 1.0940 dollars. Bloomberg’s commodity index (BCI) is currently slightly up for the month of March. We will see if this will hold for the entire month.

This week, the main news will be CPI inflation data in the U.S. on Tuesday, which will be an important basis for the Fed meeting next week and the decision on interest rates. Expectations are for an unchanged 3.1 percent, but numbers higher than expected could raise fears that the Fed may take longer than expected to begin its easing cycle, putting pressure on yields, especially if the labor market does not slow down. We will see if some of these major catalysts ahead of us – including the Fed’s decision on March 20 and the USDA’s quarterly inventory report on March 28 – can bring some life back to these markets.

It is depressing to be a commodity investor

The macroeconomic environment is important for commodity futures and options. Changes in stocks, currency markets, and interest rates significantly affect market prices of commodities, including the prices of goods we consume daily. For example, consider the relationship between the S&P 500 index and today’s global market prices for coffee. As economic prospects improve, coffee traders often assume that consumers will drink more coffee, leading to price increases. This is just one example of how our daily commodities are closely linked to broader economic indicators.

Today, it is depressing to be a commodity investor. The ‘return’ that investors can expect from buying and holding a basket of diverse commodity futures has fallen to a four-year low of minus 3.7 percent. This negative carry return is driven by large global inventories, weak demand, and the belief that commodities are worth less today than they will be in the future. Today, it is more profitable for investors to invest in, for example, the S&P 500 index or 10-year government bonds.

Interestingly, China has sharply increased its budget for creating stocks of grains and oilseeds while increasing support and policies to stimulate agricultural products. It still makes you wonder if they are simply building reserves before moves on Taiwan or ahead of Trump. They are also working hard to increase agricultural efficiency, more subsidies for farmers, GMO advancements, seed technologies, etc.

On global markets, oil prices fell last week, losing a significant portion of the gains from the previous week, with monetary policy in focus for traders. Thus, Brent oil fell by 1.8 percent on a weekly basis and is trading around 82 $/bbl at the beginning of the new week, while WTI oil fell by 2.5 percent on a weekly basis and is trading below 78 $/bbl at the beginning of the new week. The market expects further slowdown in growth of the world’s largest economy, as well as consumption, so demand for oil should not increase either. Significant drops in oil prices were prevented by data on Chinese international trade, which were better than expected. This raised hopes that the recovery of the second-largest economy in the world is accelerating. Mainly due to geopolitical tensions in the Middle East, since the beginning of the year, the price of Brent oil has risen by almost 7 percent, and WTI oil by almost 8 percent.

Extended Suspension of Tariffs for Ukraine

Futures prices for European natural gas TTF fell below 26 €/MWh as large inventories and weak demand outweighed supply concerns. European gas storage is currently at 61.6 percent capacity, the highest level since 2011. February was significantly warmer in Europe, 3.3 degrees Celsius warmer than the average temperature between 1991 and 2020, marking the ninth consecutive month with a new global temperature record for this time of year. On the supply side, the Norwegian Nyhamna facility was shut down, reducing gas flow to Europe. Moreover, uncertainty is growing about how long the Freeport LNG outage will last. Initially, it was expected that full capacity would return by mid-February, but the timeline has shifted, first to the end of February, and now further to mid-March.

The European Parliament’s Trade Committee approved the European Commission’s proposal to extend the suspension of tariffs and import quotas for Ukrainian agricultural products until June 2025. An emergency brake mechanism is introduced in the sectors of sugar, poultry, and eggs if imported quantities exceed average levels for 2022 and 2023, but amendments to introduce the same brakes in grains and honey are simultaneously rejected.

The Commitment of Traders (COT) report this weekend showed that hedge funds have set historically large short positions in the U.S. soybean market, betting on price declines. However, last week saw several positive movements, including higher cash values, a weaker U.S. dollar, and improved Chinese demand, prompting some hedge funds to cover their short losses. This lifted soybean prices, leading to more hedge funds covering their positions, further escalating prices, which is a classic short covering scenario. Soybean prices rose by 3.1 percent on Thursday and Friday of last week, marking the largest two-day increase since last July. Concurrently, this is a textbook example of how hedge fund positioning can significantly impact commodity prices in the market.

Buyer’s Market Prevails

At CBOT, price movements last week were mixed. Thus, on a weekly basis, the futures price for the nearest wheat contracts fell by 3.6 percent, while corn rose by 3.5 percent, as did soybeans by 2.8 percent. At MATIF, prices for old crop wheat are approaching the level of 200 €/t, and new crop at 210 €/t, while the price of old crop corn is approaching the level of 180 €/t, and new is above that level. Looking at the price of physical goods in our most important export market, that of Italy, the prices of basic grains have not been significantly affected by this repeated price drop of derivatives, although it is still the so-called ‘Buyer’s market’.

Central banks’ purchases of gold have exceeded one thousand tons for two consecutive years. Analysts at ANZ bank predict that central bank demand for gold will remain high for at least the next six years. Central banks in developing countries could buy more than 600 tons of gold annually by 2030. Last week, we witnessed a historic peak of two leading products among decentralized products – gold and Bitcoin. Gold is on track to reach a level of 2,200 $/oz, while Bitcoin has broken the 70,000 $ barrier. Bitcoin is just a 10-year-old child, but gold has been beating inflation for 3,000 years and has survived the collapse of all empires.

Futures contracts for copper are currently trading around 3.9 $/lbs, which is close to the highest level in the last five weeks, driven by low inventories and supply constraints worldwide. Mine outages since December have worsened the inventory decline, affecting the profits of Chinese smelters and potentially reducing production. Copper inventories on the LME are at their lowest since August. Additionally, production at Codelco fell by nearly 16 percent year-on-year in January, while production from other producers in the country increased. On the demand side, China recorded a 2.6 percent increase in raw copper imports and a 0.6 percent increase in copper concentrate imports in the first two months of 2024, setting a new record for that period. Despite the slowdown in the Chinese real estate market, high hopes are placed on green energy sectors such as electric vehicles and renewable energy sources to stimulate demand.