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OFFON

Gold and cocoa miss out on broad-based commodity rebound

05/11/2021 | 10:28am EDT

The commodity boom has been much talked about lately, especially its impact on inflation expectations. This gives us the opportunity to take a quick look at the situation in order to better understand this super-rally, which extends to most of the energy, industrial metals, precious metals and agricultural commodities segments.

Before embarking on this journey, which will take us from oil to soybeans, via copper and palladium, let us bear in mind that all the commodities mentioned below are denominated in US dollars. This implies that a fall in the greenback automatically makes them more attractive to buyers with a different currency, such as... the yuan! And the dollar has been weakening against its counterparts since April 2020, which is an initial factor supporting commodity prices. But as you can imagine, there are a lot of other parameters at play, and that's what we're going to look at, compartment by compartment.

 

Energy

WTI (+37.41%)

Brent (+34.33%)

Natural gas (+17.21%)

After a disastrous 2020 for the oil sector, whose US benchmark, WTI, had sunk into negative territory, it must be noted that oil prices have since rebounded, gleaning more than 30% since January 1. Finally, Brent and WTI are trading at their pre-crisis price levels, between USD 60 and 70. This spectacular rebound, almost unimaginable barely a year ago, is due to a recovery in demand, but above all to the cohesion of OPEC+, which has managed to maintain a consensus on maintaining production quotas. Saudi Arabia's great caution has also supported prices by allowing the market to foresee a rebalancing of supply and demand.

The upward trend also concerns natural gas, whose price has risen by nearly 20% this year. The main driving force behind this price increase is the fall in US production, which recorded its first decline since 2017 in the first four months of the year. A fall attributable according to the EIA to the increased competition of renewable energies.

 

Industrial metals

Tin (+59.5%)

Copper (+34.25%)

Aluminium (+27.8%)

Lead (+12.2%)

Zinc (+7.7%)

Nickel (+8.9%).

After a particularly good year in 2020 for the hard commodities segment, the metals rally is still in full swing, as evidenced by the boom in copper, whose price has surpassed its 2011 peak at USD 10,700 per tonne.

As you can imagine, economic recovery very often means an increased need for industrial metals. This is why copper is often compared to a barometer of the global economy. Stimulus packages, mainly focused on infrastructure and the transition to cleaner energy, are also a major support as they are extremely base metal intensive: copper, nickel, aluminium, tin etc.

In other words, demand is exploding, while at the same time supply remains limited, undermined by years of under-investment by the major mining companies. End-users are therefore willing to pay a lot of money to be supplied right away, pushing cash prices above forward prices, a market structure This market structure is called "backwardation" and perfectly illustrates the availability problems in the copper, aluminium and tin sectors.

Finally, let's mention the crazy run of iron ore, whose price is constantly rising. At over USD 200 per tonne, benchmark prices have reached record levels, mainly because supply cannot keep up with the pace set by Chinese steelmakers, who are on course to produce over a billion tonnes of steel for the second year running.

 

Precious Metals

Palladium (+19.2%)

Platinum (+16.5%)

Silver (+4.17%)

Gold (-3.5%)

Gold is posting one of the worst scores of the year, weighed down by the rise in real yields of major bonds. On the contrary, the metals commonly used in certain industries (automotive, electronics, etc.) are doing well.

Palladium and platinum share the top spot. Palladium, which is widely used by the automotive industry to manufacture catalytic converters, briefly exceeded USD 3,000 per ounce, a first in history. This price inflation is again the result of strong demand (from the automotive industry) while supply is lagging. In mid-February, Russian giant Norilsk Nickel, the world's largest producer, encountered problems at some of its mines in Siberia, exacerbating the gap between supply and demand. Platinum is also benefiting from demand from carmakers, who are tempted to use platinum instead of palladium to save money.

Silver, which has a more "mixed" profile as it is used in jewellery, by industries but also for investment purposes, is therefore performing more moderately.

 

Agricultural products

Lumber (+93.1%)

Corn (+59.6%)

Pork (+59.3%)

Wheat (+20.77%)

Soya (+20.4%)

Coffee (+19.2%)

Cocoa (-5.3%)

Within the broad family of agricultural commodities, I have repeatedly discussed the rally in the price of lumber, which has tripled since January 2020. Like metals, a demand shock, an unexpected consequence of the health crisis, is behind this price surge. On the other hand, supply has remained very timid, undermined by the slowdown in logging operations and the occasional closure of some sawmills in Canada. A supply/demand imbalance that, as you are beginning to know, can only be resolved by higher prices.

Grains and oilseeds have not escaped this bullish tide. The gargantuan demand from China, which is just recovering from swine fever, means that Beijing is replenishing its stocks of pigs but also of animal feed (corn, soya, etc.). The surge in domestic prices is such that imports are needed to limit their expansion. Consequently, the latest Chinese import figures are quite dizzying. 

Corn has reached an 8-year high of over 720 cents a bushel, while concerns about supply from major exporting countries persist. Unfavourable weather conditions could deeply impact yields in Brazil and it's not much better in the US and Russia, where cold temperatures are a concern.

Cocoa is a UFO in this segment. Production in Côte d'Ivoire, the world's largest producer, is expected to increase this year, pushing prices down. Despite the upturn in demand, there is no tension on the horizon regarding availability.


© MarketScreener.com 2021
Stocks mentioned in the article
ChangeLast1st jan.
AUSTRALIAN DOLLAR / CHINESE YUAN RENMINBI (AUD/CNY) 0.15% 4.717784 Delayed Quote.-5.93%
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) 0.37% 0.73179 Delayed Quote.-4.58%
BRITISH POUND / CHINESE YUAN RENMINBI (GBP/CNY) -0.16% 8.896775 Delayed Quote.-0.14%
BRITISH POUND / US DOLLAR (GBP/USD) 0.10% 1.38021 Delayed Quote.1.27%
CANADIAN DOLLAR / CHINESE YUAN RENMINBI (CAD/CNY) 0.19% 5.1008 Delayed Quote.-0.58%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.33% 0.79099 Delayed Quote.0.91%
CORN FUTURES (C) - CBR (FLOOR)/C1 -0.75% 529.5 End-of-day quote.3.93%
CORN?FUTURES (SETTLEMENT ONLY) (ZC) - CBR (FLOOR)/C11 0.00% 468.75 End-of-day quote.0.00%
EURO / BRAZILIAN REAL (EUR/BRL) 0.06% 6.205 Delayed Quote.-2.79%
EURO / CHINESE YUAN RENMINBI (EUR/CNY) 0.05% 7.5998 Delayed Quote.-4.63%
EURO / US DOLLAR (EUR/USD) 0.15% 1.17789 Delayed Quote.-3.23%
GOLD 0.57% 1765.18 Delayed Quote.-5.45%
INDIAN RUPEE / CHINESE YUAN RENMINBI (INR/CNY) -0.06% 0.087736 Delayed Quote.-2.00%
INDIAN RUPEE / US DOLLAR (INR/USD) 0.03% 0.013599 Delayed Quote.-0.58%
LONDON BRENT OIL -0.25% 75.41 Delayed Quote.42.98%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) 0.27% 0.7082 Delayed Quote.-0.67%
PALLADIUM 0.79% 2048 Delayed Quote.-17.36%
PLATINUM 1.46% 949.728 Delayed Quote.-10.96%
S&P GSCI ALUMINUM INDEX 1.06% 184.7818 Delayed Quote.45.28%
S&P GSCI COCOA INDEX 0.19% 104.517 Delayed Quote.2.31%
S&P GSCI COPPER INDEX 2 0.53% 670.6073 Delayed Quote.23.97%
S&P GSCI CORN INDEX 0.38% 436.5325 Delayed Quote.8.26%
S&P GSCI CRUDE OIL INDEX -0.08% 394.8261 Delayed Quote.45.88%
S&P GSCI GOLD INDEX 0.16% 1027.7133 Delayed Quote.-5.29%
S&P GSCI INDUSTRIAL METALS INDEX 1.07% 490.7414 Delayed Quote.29.10%
S&P GSCI LEAD INDEX -0.45% 332.3962 Delayed Quote.12.37%
S&P GSCI LEAN HOGS INDEX 3.05% 109.1805 Delayed Quote.2.81%
S&P GSCI NATURAL GAS INDEX -0.02% 250.4916 Delayed Quote.110.44%
S&P GSCI PLATINUM INDEX 0.47% 249.9467 Delayed Quote.-13.56%
S&P GSCI PRECIOUS METALS INDEX 0.09% 2314.467 Delayed Quote.-5.78%
S&P GSCI SILVER INDEX 0.61% 1127.6856 Delayed Quote.-10.10%
S&P GSCI SOY BEANS INDEX 0.16% 511.8604 Delayed Quote.-1.26%
SILVER 0.74% 23.1 Delayed Quote.-9.36%
SOYBEAN MEAL FUTURES (ZM) - CBE (ELECTRONIC)/C1 1.22% 340 End-of-day quote.-21.45%
UNITED STATES DOLLAR (B) / CHINESE YUAN IN HONG KONG (USD/CNH) -0.05% 6.4459 Delayed Quote.-0.70%
US DOLLAR / CHINESE YUAN RENMINBI (USD/CNY) -0.07% 6.4525 Delayed Quote.-1.43%
US DOLLAR / RUSSIAN ROUBLE (USD/RUB) 0.23% 72.5613 Delayed Quote.-2.09%
WHEAT FUTURES (W) - CBR (FLOOR)/C1 0.11% 713 End-of-day quote.11.20%
WTI -0.47% 72.248 Delayed Quote.46.90%