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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.

Results for DB
Nikolay Ryazantsev
19 Apr 14 21:05:51
RT @DBAmericas: $DB’s Chief US Equity Strategist David Bianco discussed what’s driving the market volatility on @CNBC http://t.co/U0Zudgb6Rx
Jamie
19 Apr 14 06:47:09
RT @prudencehardi: #EpicMobClothing ☯Gain Followers ☯RT This ☯MUST FOLLOW ME I FOLLOW BACK ☯Follow everyone who rts ☯Gain #BELIEBER $db=
mainer4444
19 Apr 14 06:47:05
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Onlayder8a
19 Apr 14 06:46:01
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Jacqueline
19 Apr 14 06:46:00
RT @prudencehardi: #EpicMobClothing ☯Gain Followers ☯RT This ☯MUST FOLLOW ME I FOLLOW BACK ☯Follow everyone who rts ☯Gain #BELIEBER $db=
Likolmop43194
19 Apr 14 06:42:00
RT @prudencehardi: #EpicMobClothing ☯Gain Followers ☯RT This ☯MUST FOLLOW ME I FOLLOW BACK ☯Follow everyone who rts ☯Gain #BELIEBER $db=
Courtney
19 Apr 14 06:41:50
RT @prudencehardi: #EpicMobClothing ☯Gain Followers ☯RT This ☯MUST FOLLOW ME I FOLLOW BACK ☯Follow everyone who rts ☯Gain #BELIEBER $db=
Oilklolmfa9
19 Apr 14 06:41:48
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Nilkongaig9813
19 Apr 14 06:41:43
RT @prudencehardi: #EpicMobClothing ☯Gain Followers ☯RT This ☯MUST FOLLOW ME I FOLLOW BACK ☯Follow everyone who rts ☯Gain #BELIEBER $db=
Miguafi8
19 Apr 14 06:41:39
RT @prudencehardi: #EpicMobClothing ☯Gain Followers ☯RT This ☯MUST FOLLOW ME I FOLLOW BACK ☯Follow everyone who rts ☯Gain #BELIEBER $db=
Limponfa8
19 Apr 14 06:41:07
RT @prudencehardi: #EpicMobClothing ☯Gain Followers ☯RT This ☯MUST FOLLOW ME I FOLLOW BACK ☯Follow everyone who rts ☯Gain #BELIEBER $db=
Jeff Lewis
18 Apr 14 15:41:50
RT @RudyHavenstein: *Analysis: Deutsche Bank to divest Las Vegas Cosmopolitan Hotel to concentrate on gambling business. http://t.co/FKtqL…
Brewokr
18 Apr 14 12:35:37
Limit a for each loop in a #tag #cloud: I have the following tag cloud. $rows = $db->… http://t.co/4uxPzhwEdY
Carl Rahn Griffith
18 Apr 14 11:54:52
RT @RudyHavenstein: *Analysis: Deutsche Bank to divest Las Vegas Cosmopolitan Hotel to concentrate on gambling business. http://t.co/FKtqL…
Rudolf E. Havenstein
18 Apr 14 11:50:45
*Analysis: Deutsche Bank to divest Las Vegas Cosmopolitan Hotel to concentrate on gambling business. http://t.co/FKtqLwZNFS $DB
HovnoKod.cz
18 Apr 14 05:35:00
#php Len tak si citam zdrojak, jedneho menej uspesneho projektu. - HovnoKod 2280: do { $db_connect=MySQL_C... http://t.co/jAAzwWTCBc
TACHIRA LIBRE !!!
18 Apr 14 02:41:36
RT @DBAmericas: $DB’s Chief US Equity Strategist David Bianco discussed what’s driving the market volatility on @CNBC http://t.co/U0Zudgb6Rx
iskender halil
18 Apr 14 02:26:31
RT @DBAmericas: $DB’s Chief US Equity Strategist David Bianco discussed what’s driving the market volatility on @CNBC http://t.co/U0Zudgb6Rx
Deutsche Bank
18 Apr 14 02:25:58
RT @DBAmericas: $DB’s Chief US Equity Strategist David Bianco discussed what’s driving the market volatility on @CNBC http://t.co/U0Zudgb6Rx
ronin245
17 Apr 14 22:54:40
$ATHN 3/3 was upgraded to $224 @ $DB those pimps Duetsch bank, have pumped the tops just about everything out there, lol
Stock Herald
17 Apr 14 20:01:04
$DB: Todays Top Performers In Banking http://t.co/h7s4J4z317
Informer
17 Apr 14 19:45:12
$DB: Todays Top Performers In Banking http://t.co/mfkoi2zDfz
MarketNews
17 Apr 14 19:40:30
$DB - Todays Top Performers In Banking -> http://t.co/eaRFQHcyAT #stock #stocks #stockaction
Stock Herald
17 Apr 14 17:52:06
$DB: Moodys ABCP rating actions ending April 14, 2014 http://t.co/8tqNPSpl3e
MarketNews
17 Apr 14 17:40:19
$DB - Moodys ABCP rating actions ending April 14, 2014 -> http://t.co/khyldkfeko #stock #stocks #stockaction
Olikmnof8a
17 Apr 14 15:38:44
☯Gain Followers ☯RT This ☯MUST FOLLOW ME I FOLLOW BACK ☯Follow everyone who rts ☯Gain #Love #FOLLOWBACK #FOLLOWBACK $db-
Deutsche Bank
17 Apr 14 13:00:16
$DB’s Chief US Equity Strategist David Bianco discussed what’s driving the market volatility on @CNBC http://t.co/U0Zudgb6Rx
Informer
17 Apr 14 10:22:36
$DB: A Wall Street Transcript Interview with Randall Abramson, CFA, CEO and... http://t.co/7qMmZ42lfF
matt
17 Apr 14 10:03:55
RT @macroaxis: $DB Fairly down. Lost over 1% after closing. Reports 69.50 times book value per share http://t.co/QtDVMVPESq
Macroaxis
17 Apr 14 10:01:06
$DB Fairly down. Lost over 1% after closing. Reports 69.50 times book value per share http://t.co/QtDVMVPESq
SNN Team
17 Apr 14 09:53:19
$DB - A Wall Street Transcript Interview with Randall Abramson, CFA, CEO and... -> http://t.co/NmPp0rXAsT #stock #stocks #stockaction
Jacob Hamblin
17 Apr 14 09:42:46
@investmonger “@valuewalk: Credit Suisse Group AG (ADR) (CS) Posts Dismal Q1 Earnings http://t.co/E9ekJyHEQv $CS $BCS $DB $HDB”
ValueWalk.com
17 Apr 14 09:34:20
Credit Suisse Group AG (ADR) (CS) Posts Dismal Q1 Earnings http://t.co/4BhlQxco2U $CS $BCS $DB $HDB
BradTrader
17 Apr 14 09:22:04
$DB A Wall Street Transcript Interview with Randall Abramson, CFA, CEO and Portfolio Manager of Trapeze Asset Management Inc.: A...
Jake13
17 Apr 14 08:29:08
$TZA Buy or Sell Opinion Click here to find out if $TZA is a buy hold or sell. Watching these stocks. $IWM $DB http://t.co/creGdIYR8G
BradTrader
17 Apr 14 08:27:34
$DB Credit Suisse Posts Dismal Q1 Earnings http://t.co/o4K1SsDjHO
Stock Herald
17 Apr 14 08:18:34
$DB: Deutsche Asset & Wealth Management Hires Chris Guttilla http://t.co/f20WJT9TCa
MarketNews
17 Apr 14 08:10:21
$DB - Deutsche Asset & Wealth Management Hires Chris Guttilla -> http://t.co/5jm0h7oT7z #stock #stocks #stockaction
Stock Herald
17 Apr 14 08:06:23
$DB: Credit Suisse Posts Dismal Q1 Earnings http://t.co/i1mnbEfxIX
MarketNews
17 Apr 14 07:55:30
$DB - Credit Suisse Posts Dismal Q1 Earnings -> http://t.co/0xq7vtzYsm #stock #stocks #stockaction
BradTrader
17 Apr 14 07:21:02
$DB Deutsche Asset & Wealth Management Hires Chris Guttilla http://t.co/wx9bF0FWh2
Sammy Lee
17 Apr 14 06:19:38
RT @valuewalk: Deutsche Bank Seeking To Exit Casino Business... In Las Vegas http://t.co/771rvLaNdB $DB
Alan Arturo Day G.
17 Apr 14 06:17:49
Deutsche Bank is looking to sell the @Cosmopolitan_LV - super beautiful property on the strip with lots of appeal. $DB $DBK #vegas
Mark Melin
17 Apr 14 06:03:32
RT @valuewalk: Deutsche Bank Seeking To Exit Casino Business... In Las Vegas http://t.co/771rvLaNdB $DB
ValueWalk.com
17 Apr 14 06:03:12
Deutsche Bank Seeking To Exit Casino Business... In Las Vegas http://t.co/771rvLaNdB $DB
BradTrader
17 Apr 14 04:12:35
$DB Is Deutsche Bank's Huge Forex Business in Trouble? http://t.co/BGCGM4dqOo
BradTrader
17 Apr 14 04:12:34
$DB Will This Price Target Reduction Hurt P.H. Glatfelter (GLT) Stock Today? http://t.co/26LTv3d2V8
Andreas Cseh
17 Apr 14 04:10:30
@Lavorgnanomics Deutsche $DB is TRYING to Sell Sell Sell it's Las #Vegas #casino http://t.co/b7yQYV256i @GazdasagTV http://t.co/VKCJGZkwl0
BradTrader
17 Apr 14 04:07:05
$DB Moving Average Crossover: Great News for Deutsche Bank (DB)? http://t.co/ZGt3v34z6f
BradTrader
16 Apr 14 22:51:38
$DB Sabre announces pricing of initial public offering http://t.co/pPz741bJnT
				
				
By  +Follow December 5, 2013 7:56AM
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