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What's Behind the Decline in Commodity Prices?

By  +Follow December 5, 2013 7:56AM
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On Thursday, Deutsche Bank (DB) hitched a ride on the bandwagon of investment banks fleeing the commodities space when it announced drastic cuts to operations in energy, dry bulk, agriculture, and base metals trading over the next two years.

The lender is not the only one fleeing from commodities, as the announcement comes on the heels of similar ones from other large investment banks like JP Morgan (JPM) , Barclay’s (BCS) , Goldman Sachs (GS) , UBS (UBS) , and Morgan Stanley (MS) , all of whom have apparently been scared off by a tightening regulatory environment (one that, it must be admitted, is at least in part of their own making); and even more so by the last three years of overall declining prices.

After a full decade of substantiall price gains commodities have slumped, and in 2013 the asset class as a whole is expected to underperform equities for the third consecutive year. The effects of this situation can be seen in a number of ways, but a look at the year-to-date performance of the S&P GSCI and Dow Jones UBS commodity indices is a good introduction, as both have traded lower in 2013 with respective losses of 2.6 and 10.6 percent. Furthermore, 10 of the GSCI’s components will end the year lower, compared to half that amount in 2012.

In any event, it looks as though the investment banks are following their own advice, as each one has come up with a variety of different forecasts for prices over the next few years that range from troubling to devastating. Putting aside, for the moment, that the largest international financial institutions may have more personal reasons for cutting back or even discontinuing trading in energy, metals, and agricultural products, their overall bearish outlook seems to be more or less justified by a convergence of three major factors.

 

Base Metals & Emerging Market Growth

China is the first of these. Since the early 1990’s, China has set the standard for eye-popping economic growth rates. The country has managed to lift millions of citizens out of poverty over the last couple of decades, and massive investments in infrastructure and development have made it the world’s number one importer of energy, and base metals like iron ore and copper.

Aside from the interruption of the financial crisis, the global economy had become quite comfortable with yearly GDP growth in the double digits.

This growth has been on the decline since its re-peak in 2010, falling to below 8 percent this year. For mining companies like BHP Billiton (BHP) and Rio Tinto (RIO) , this reduction to a still rather impressive GDP growth rate could mean that China will be buying less of their iron ore and copper. Since the turn of the millenium, however, stockpiles of these metals were often not large enough to keep up with demand, which kept prices high. If Chinese growth slows down even more, it could mean serious trouble for base metals in 2014.

 

Quantitative Easing & The Great Taper

Another factor that has been contributing to commodity price movement this year is the Federal Reserve’s massive fiscal stimulus program, or rather, fears that the Fed will soon begin gradually reducing its $85 billion monthly in treasury spending. If the Fed begins the dreaded “taper” by the end of March 2014, as many expect it to, the biggest victims will undoubtedly be gold, and to a lesser but still significant extent, silver.

Gold prices have spent the greater part of the year tanking, as is well known, largely because the yellow metal is being seen less and less as the “safe-haven” investment, and this has left it in. The implementation of QE itself did not contradict the metal’s 12-year bull market, at least until 2013 when the bull market for equities really ramped up. With many assuming that treasury spending would be around for a long, long time, there was less perceived need to hedge against risk.

Now, however, tapering is more or less expected by early next year. But a rebound in gold prices is by no means a given. Indeed, one of the Fed’s conditions for beginning the draw-down of stimulus spending is for inflation and the unemployment rate to meet specific targets.

 

Oversupply- Soft Commodities & Energy

The growing backstock of base metals like iron ore and copper is the result of a more mature and reasonable growth rate from major emerging markets like China, but there is also a glut in soft/agricultural commodities, and grain prices have been hit almost as hard as precious metals; corn prices have been cut almost in half. As of October, sugar supply exceeded demand by nearly 5 million tons, soybean production is rapidly approaching all-time highs, and record crops in major producing countries like Brazil and Vietnam are hurting coffee.

In fact, it seems that the only crop currently having a banner year is cocoa, increasingly consumed by developping economies, and in shortage due to the ravages of bad weather in major producing regions. In the US, retail chocolate prices are up about 7 percent over the last month, a clear sign that the higher costs are being passed down to the consumer.

The supply-demand balance in oil and gas stockpiles is also tilting in favor of oversupply, largely the result of substantial and unprecedented increases in US shale production. The difference here is that we may not see prices go down, at least not just yet. While the US and, increasingly, other nations develop unconventional resources putting more product out on the open market, a number of volatile political situations throughout Africa and Western Asia have been hitting major producers (ie- Libya, Nigeria, Sudan, and, potentially, Iraq), providing a temporary balance.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.


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Results for DB
Cryptogenesis
24 Oct 14 11:30:16
@lexvandam $DB going to pass the stress test by a wide margin from our analysis. What is your take on that #ECB stress test due on Sunday??
V.S. Schulz
24 Oct 14 11:04:53
@zipjet $DB managed to do without aid in 2008/2009 and has since increased their capital ratios by quite a bit. Not as weak as many think.
Cryptogenesis
24 Oct 14 11:01:13
$DB a #BUY. Buyers of banks should hedge by going short the #France $EWQ and #Germany $EWG etfs. Hedge by buying weak #Europe bank puts.
Cryptogenesis
24 Oct 14 10:57:54
$DB is best bank stock in Europe to buy at the moment. Capital raise already completed and had a year to clean books before #ECB stress test
Cryptogenesis
24 Oct 14 10:56:05
$DB rated a BUY @Crypt0genesis. Our firm believes the stock is worth $40.00 in the next 3 months or sooner. Going to pass #ECB stress test.
Stock Moo
24 Oct 14 10:36:43
$db: Deutsche Bank announces litigation costs of EUR 894 million in third quarter 2014 http://t.co/dHorieCosa
Andrew Titche, CPM®
24 Oct 14 07:35:25
RT @krollbondrating: KBRA Affirms Invitation Homes 2013-SFR1 https://t.co/w06UAIJugo #KBRA #CMBS #RMBS $DB
Hedge AccordingLy
24 Oct 14 07:00:41
$DB “@Reuters: Deutsche Bank braces for $1.3 billion in U.S., UK Libor fines: sources http://t.co/wWFHPFzfLi”
Andrew McCreath
24 Oct 14 06:44:31
#Bloomberg reports 25 of #EuropeanUnion 300 banks in the stress tests #AQR will fail #forex @BNN $DB
Dividend Master
24 Oct 14 06:40:51
$DB $CS $JEF Sanford B / Cantor $WFC Susquehana $GS waving the BUY flag on $AMZN results
axle
24 Oct 14 06:22:16
$DB Deutsche Bank passes ECB stress test by wide margin - sources http://t.co/kbP1nKG8Ev
wininstocks2014
24 Oct 14 06:20:06
DB 31.75 Stock Charts $DB Deutsche Bank AG (NYSE) Last Updated: 10/24/2014 08:20:07 DB Stock Chart - 1 Month h http://t.co/fIWGSQJemf
axle
24 Oct 14 06:14:57
$DB Seeing some Reuters headlines that DB passed ; I am starting to build a position
US Banking News
24 Oct 14 06:06:52
Deutsche Bank Receives Consensus Hold Rating from Analysts $DB http://t.co/nfHwfxjgfy
Kroll Bond Ratings
24 Oct 14 06:04:06
KBRA Affirms Invitation Homes 2013-SFR1 https://t.co/w06UAIJugo #KBRA #CMBS #RMBS $DB
NASDAQ
24 Oct 14 03:08:25
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/hD0LrgxCYD
NASDAQ
24 Oct 14 03:08:24
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/YsOYxeQ2B4
NASDAQ
24 Oct 14 03:08:23
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/Wx8OotVYI8
NASDAQ
24 Oct 14 03:08:20
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/0Ilj7BFPaB
NASDAQ
24 Oct 14 03:08:19
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/sIqXpnTpJk
NASDAQ
24 Oct 14 03:07:10
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/NiOfpBHce3
NASDAQ
24 Oct 14 03:07:09
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/WFmizO9h4O
NASDAQ
24 Oct 14 03:07:08
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/RbPfUbF466
NASDAQ
24 Oct 14 03:07:06
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/A8ZWe84Gci
NASDAQ
24 Oct 14 03:07:05
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/dyUuR3Vxdk
NASDAQ
24 Oct 14 03:07:04
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/C9qR0XS9Ss
ronin245
24 Oct 14 02:42:12
$YELP who's this analyst @ $JPM that keeps pumping this cr@p? $C $JEF $DB they sure won't quit, can we have a collective "Yelp Sucks" ?
RAMSEY WILLIAMS
24 Oct 14 00:42:07
Global banks ready for Fed tests http://t.co/2pMWMtFmCr $C, $HSBC, $SAN, $RBS, $DB
Jen Kerins
23 Oct 14 23:34:50
RT @DeutscheBank: MT @DBAmericas: $DB is proud to support #VOWS. Keynote speakers for the @VeteransonWS conference have been announced http…
Deutsche Bank
23 Oct 14 23:30:04
MT @DBAmericas: $DB is proud to support #VOWS. Keynote speakers for the @VeteransonWS conference have been announced http://t.co/sdSPlBhNvB
erica jayne
23 Oct 14 20:26:13
Fed details 2015 stress test details $DB http://t.co/uBquE6lBLB
Bidness Etc
23 Oct 14 18:30:15
Deutsche's Patrick McEnerney doesn't think very highly of US regulators' new rules http://t.co/sOpsklSJqO $FNMA $FMCC $DB
JoaquimAgustiCoderch
23 Oct 14 18:12:08
Fed details 2015 stress test details http://t.co/Z86TCQOKLX $DB $BAC $C $GS
Deutsche Bank
23 Oct 14 15:52:25
$DB is proud to support #VOWS. Keynote speakers for the 4th annual @VeteransonWS conference have just been announced http://t.co/8zndfuTHoB
Darlene S Williams
23 Oct 14 15:31:35
@DailyFXedu @DSWZONEPICKTICK @SQUARE @INTUIT @CNBCE_BUSINESS @FOXBUSINESS @BLOOMBERGTV @BBCHEALTH @INTERNATIONAL @SAEINTL @NASDAQ $DB $XLF
Quantpost Financial
23 Oct 14 13:49:55
$BAC $C $GS News: "Fed details 2015 stress test details $DB $BAC $C $GS …" http://t.co/ZOrLlG4KH6 Board view: https://t.co/lrbE4dnoyE
MarketCurrents
23 Oct 14 13:49:53
Fed details 2015 stress test details http://t.co/NNUMSalGtC $DB $BAC $C $GS
Market Newswire
23 Oct 14 11:46:41
Citigroup Buys Deutsche Bank's Energy, Metals Trading Books - October 23, 2014 - http://t.co/ixF0GIV7fI $C $DB #stock #trading #markets
Fish4Bucks
23 Oct 14 11:44:33
60m $DB Upper Trendline Pressure 31.990 #futures #stocks 02:44:19 PM http://t.co/WZwETG8am0 Signals based o... http://t.co/WZwETG8am0
Fish4Bucks
23 Oct 14 10:52:22
60m $DB Upper Trendline Pressure 31.940 #futures #stocks 01:52:11 PM http://t.co/WZwETG8am0 Signals based o... http://t.co/WZwETG8am0
NASDAQ
23 Oct 14 10:46:03
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/ZenSii5lkR
NASDAQ
23 Oct 14 09:34:26
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/ASP1DTdBJM
Myrollingstocks
23 Oct 14 08:11:05
We are watching $DB http://t.co/E8QVzH4yev
Fish4Bucks
23 Oct 14 08:07:41
60m $DB Upper Trendline Pressure 31.880 #futures #stocks 11:07:31 AM http://t.co/WZwETG8am0 Signals based o... http://t.co/WZwETG8am0
NASDAQ
23 Oct 14 07:43:08
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/CcL2cMdfIh
BLUESPIDER
23 Oct 14 07:27:10
$DB representative believes it is unlikely that any German banks will fail the stress tests
Stock Moo
23 Oct 14 06:55:18
$db: Veterans on Wall Street™ Announces Keynote Speakers for Fourth Annual Conference http://t.co/WTlsO9Yqzk
NASDAQ
23 Oct 14 06:03:34
$DB - Veterans on Wall Street™ Announces Keynote Speakers for Fourth Annual Conference http://t.co/8UGbsxdYOn
wininstocks2014
23 Oct 14 03:58:50
DB 31.13 Stock Charts $DB Deutsche Bank AG (NYSE) Last Updated: 10/23/2014 05:58:49 DB Stock Chart - 1 Month h http://t.co/JgpbMwG3G3
BrutusMaximus
23 Oct 14 02:52:56
current long positions : $CS, $DB, $YELP, $MCP, $RIG, $DO, $WLT, $USO, $CORN, $JJG, $GLD, $SLV , $TBT, $VXX
				
				
By  +Follow December 5, 2013 7:56AM
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