WILL 2019 BE AN UPHILL STRUGGLE FOR COMMODITIES?
Everything from gold, oil, iron ore and coffee endured a volatile 2018, but what are the factors that will affect their performance this year?
Commodities took a kicking in 2018 – with deep losses in everything from oil, coal and copper to coffee and sugar – so what’s in store for the 12 months to come?
There is a busy period ahead. The US-China trade fight will be in the news this week, with a US delegation arriving in Beijing yesterday. In addition, there will be more pointers on the macroeconomic outlook, with the World Bank updating its Global Economic Prospects report today and a speech from Federal Reserve chairman Jerome Powell on Thursday.
Golden opportunity
Gold bulls seized the initiative in the final months of 2018 and there is plenty to suggest the haven may hold up. Look for support for prices at a sixmonth high as the Federal Reserve goes way slower on rate increases, and investors seek protection from equity market turmoil and slowing growth.
There may be more supportive headlines near term. A golden cross – as the 50-day moving average tops its 200day counterpart – is close, and a few more tonnes added to exchange-traded funds will lift holdings to the highest since 2013. A December 11-19 survey of 20 analysts and traders reflected a positive tone, with the median estimate of $1,325 an ounce. Futures slipped on Friday after topping $1,300.
Oil’s fortunes
The standout feature in commodity markets last quarter was crude’s swoon from a fouryear high into a bear market. The drivers of the reversal were record US shale output, a clutch of sanctions waivers on Iranian flows, and a supply cut from Opec+ deemed by some as too little. Concern about a deteriorating global economic outlook gave bears further ammunition. After that drama, prices may recover, with supply risks underappreciated.
In 2019, watch for more losses in crisis-hit Venezuela as supply risks tumbling below 1 million barrels per day. On top of that, US waivers on Iranian cargoes are temporary, and not all may be renewed in May, according to Bloomberg. And do not underestimate Saudi Arabia’s resolve to make the cuts stick. Opec’s next meeting is in April, and prices may have regained some ground by then. The median Brent forecast tracked by Bloomberg is $68 per barrel, compared with about $57 at present.
Wired for success
Copper dropped every quarter last year in the worst run since 2015. The metal was hurt by concerns that global growth is slowing, and the US-China trade dispute. Still, investors may this year focus more on the supportive backdrop offered by industry indicators. Among these are global stockpiles tracked by exchanges, with holdings in London Metal Exchange sheds at a decade-low.
That drop has come as demand tops supply by some margin: 595,000 tonnes in the nine months to September, according to the International Copper Study Group. Miners highlight lower grades. And just as trade-war swings hurt copper in 2018, the same could be true in 2019 – but in reverse.
Should Washington and Beijing settle some issues, copper could gain. Prices recovered ground on confirmation of the talks. The median of forecasts tracked by Bloomberg puts the metal, which was last at $5,920 a tonne, above $6,400.
Slowing ships of soya beans
Soyabeans get a boost from any inkling of improving trade relations between the US and China, and that narrative should continue to dominate trading.
The oilseed rallied in late 2018 after a meeting between US and Chinese leaders resulted in the Asian nation resuming some imports of American beans. Traders, though, were disappointed by the extent of the purchases.
Farmers in America are hopeful the two nations will reach an agreement before the end of a 90-day truce.
The key question for trading desks remains whether China, the hitherto top US soyabean buyer, will agree to reduce tariffs on US agricultural products.
Brazil’s coming harvest is also a major factor: farmers there are looking at yet another
bumper year and that rush of supply would further suppress US prices, especially if China stays closed. Last week, Cofco, China’s leading food company, was asking for prices, according to sources. The enquiries were for February and March delivery, the sources said.
Cofco did not make any purchases, according to another source and it is still unclear if state stockpiler Sinograin bought any.
While most traders say they have not heard of any sales, consultancy AgResource, based in Chicago, said staterun buyers probably purchased about 1.5 million tonnes.
“It was a good start to 2019 for the beans,” said Charlie Sernatinger, global head of grain futures for ED&F Man Capital Markets in Chicago. “Shorts covered off of talk that China was coming back in to buy US cargoes and forecasts for Brazil went drier.”
That sinking feeling
After averaging almost $70 a tonne last year, iron ore is at risk of a drop. The staple, dominated by flows from Brazil and Australia, will face headwinds from a slower pace of expansion in China, with steel output likely at best to plateau. Policy decisions from Beijing – especially additional stimulus amid the trade war and conduct of the anti-pollution drive – remain wild cards. Adding to downward pressure, more supply is on the way, with Brazil’s Vale adding tonnes from the ramp-up of its S11D mine and as Anglo American restarts Minas Rio.Keep a close watch on the profitability of China mills and industry data from the mainland.
Profitability tanked in the final quarter of 2018 and the purchasing managers’ index is back at depressed levels. Heading into the year, Morgan Stanley was among the bears, warning of a return to global oversupply and prices at $62 this year.
Coal’s fluctuations
The slump in China’s purchasing managers’ index is likely to prove an unwelcome New Year’s gift to the world’s major exporters of coal.
The manufacturing gauge compiled by Beijing’s National Bureau of Statistics dropped to 49.4 in December, falling below the 50 level that demarcates growth from contraction, for the first time since July 2016.
The outcome was also below the 49.9 median forecast in a surveys, and the weakest reading in almost three years.
The problem for coal producers shipping to the world’s biggest commodity importer is that the PMI has a strong correlation to prices, once a lag of a month or two is factored in.
The Chinese PMI showed a solid uptrend from July 2016 to a peak of 52.4 in September 2017, a period that coincided with gains for the prices of thermal coal. At Australia’s Newcastle port, it enjoyed a strong run from June 2016 to November of that year, more than doubling to reach a peak of $110.73 a tonne.
Coal reverted to the usual seasonal pattern of peaks in the northern hemisphere winter and troughs in the summer, but prices remained above the 2016 lows.
A slowing in the Chinese PMI to 50.3 in February 2018 was matched by lower coal prices by March. But a recovery in the PMI to 51.9 by May resulted in coal prices regaining strength.
The issue for coal exporters such as Australia, Brazil and South Africa is that the Chinese PMI is now in an established downtrend, having peaked in May last year and fallen every month since, apart from a slight bump in August.
Coal has managed to hold up relatively well in that period, especially considering the rout in other commodities such as crude oil.
Newcastle coal retreated from its seven-year high of $119.74 a tonne, reached in July last year, but it only fell as far as $97.50 in late November, and has since then moved higher, to $99.74 in the week ended December 28.
The optimistic view in the market is that the authorities will do what is necessary to ensure that economic growth remains above 6 per cent in China.
It may yet be the case that China successfully stimulates its economy, or it may get a boost if its trade dispute with the US is resolved.
But unless there is some evidence to back up the optimistic scenario, coal prices would seem increasingly likely to weaken, in line with the PMI.