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Commodity markets turn bearish as prices fall

The prices of almost all commodities in international markets are down since April. Metals have fallen less than agricultural commodities and oil, with some agri commodities at a multi-year low.

In this country, too, almost all commodity prices have fallen, either due to a high crop and supply or no buyers ahead of the goods and services tax (GST) or lack of confidence in outlook and low liquidity to store.

From April onwards, when the current financial year began, major agri commodities are down 10-25 per cent. Wheat has recovered a bit from a three-year low in April. Cotton is down 9.5 per cent from April but most of the fall (eight per cent) was in the current month, from its three-year high. Sugar, rubber, cocoa and coffee are down sharply, with cocoa a little up from a three-year trough in March. Brent oil is down 14 per cent this year. Base metals saw a sharp fall in April but are recovering and June has been better, though tin and aluminium have not participated in the recovery.
T Gnanasekar, Director, CommTrendz Research, said: “Commodity markets have been under pressure lately, thanks to robust equity markets. The fundamentals of commodities like crude oil are also weak, adding to the negative sentiment. Bullion remains volatile on the back of uncertainty over the prospect of future (US Federal Reserve) rate hikes but still remains supported at lower levels due to safe-haven appeal on the back of a weakening dollar and President Trump’s inability to push through growth reforms effectively.”

Agri commodity prices are suffering from large and ample suppy. The Dow Jones Commodity Index (DJCI) is year-to-date down 5.3 per cent and the S&P GSCI by 8.5 per cent.

Jodie Gunzberg, global head of commodities and real assets at S&P Down Jones Indices, says: “Sugar was among the worst-performing this year. This was due to devaluation of the Brazilian real against the dollar, as Brazil is the largest producer of sugar in the world. Oil prices fell due to the inability of the Opec (the exporters cartel) production cut agreement to reduce inventory levels in the market, especially with countries like Libya increasing production. The price of lead in recent weeks fell because of a decline in demand from battery makers.”

There are other reasons why agri commodities have sunk so. Jean-François Lambert, founder, Lambert Commodities, said: “Agri markets have become extremely efficient and agriculture is now a business, where climatic events or crop diseases seem to be under control, come rain or shine. In this context, traders in wheat, soybeans, cotton, etc, are therefore struggling to generate profits, which are by and large generated through supply disruptions (when demand is clearly forseeable, as linked to demography and economic development).”

The fall in metal prices was much sharper in the early months of 2017. However, that was a correction from a rally in 2016, especially in the last two months of the year when it became clear that Donald Trump would be US president and his saying he’d spend $1 trillion for infrastructure. Ahead of that being implemented, hedge funds built huge bullish positions and later booked profit. After that, metals haven’t found reason for an up-move.

Lambert says, “Metals are dependent upon a uniquely dominant consumer, China. The prospects of China are not bad but do not point towards an acceleration of growth. The government is more in a controlling phase (concerns over debt level, real estate bubble, anti-corruption and ring-fencing of large consortiums). So, the momentum for raw materials is not very positive. Add to this the huge stocks at Chinese ports and growing doubts about the Trump administration’s infrastructure plan; hence, the outlook for metals is unattractive.”

Even in oil, he says, hedge funds have turned largely bearish, from being strongly bullish. “Overall, the commodity complex is viewed as largely unattractive from an asset class perspective and underperforming bonds, shares or emerging markets. That might change if a geopolitical crisis was to burst (North Korea, Qatar) but this is largely discounted for now,” he concludes.