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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
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
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23 Oct 14 10:46:03
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/ZenSii5lkR
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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
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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
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23 Oct 14 06:55:18
$db: Veterans on Wall Street™ Announces Keynote Speakers for Fourth Annual Conference http://t.co/WTlsO9Yqzk
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$DB - Veterans on Wall Street™ Announces Keynote Speakers for Fourth Annual Conference http://t.co/8UGbsxdYOn
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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
Stock Signaling
22 Oct 14 16:01:16
After Hours Price Advances: $DB $RSO $PH $ORLY $PII $CIE $TSCO $CLR $FTNT $LNCO $MKTO $INFN $CSLT $ACTG $CAR http://t.co/Vtx6dLy0Nw #analyst
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22 Oct 14 14:34:03
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/MPck5iqzOL
DWDyck
22 Oct 14 13:22:58
@canuck2usa yep, and $MS & $DB significant turn down today too; $USO & transports ($IYT) leading down
Dividend Master
22 Oct 14 11:54:02
It only took a run from $95 to $37 to see $DB go from BUY to HOLD & PT from $115 to $43 on $DDD #FaceToPalm
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22 Oct 14 11:43:04
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/VuD3m3dW5I
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$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/re2cn0NEuS
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22 Oct 14 09:54:34
$db: Deutsche Bank Launches Program to Support Community Development in Underserved U.S. Regions http://t.co/S4FzdLXkS8
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22 Oct 14 09:06:07
$DB - Deutsche Bank Launches Program to Support Community Development in Underserved U.S. Regions http://t.co/e64xFTvc5k
Charles Penty
22 Oct 14 08:29:45
RT @ElisaMartinuzzi: $DB failing the stress test? Some think so Deutsche Bank at Risk in ECB’s Stress Test, Analysts Say http://t.co/bfSSHF…
Elena Logutenkova
22 Oct 14 08:10:27
RT @ElisaMartinuzzi: $DB failing the stress test? Some think so Deutsche Bank at Risk in ECB’s Stress Test, Analysts Say http://t.co/bfSSHF…
MARK GILBERT
22 Oct 14 08:04:03
RT @ElisaMartinuzzi: $DB failing the stress test? Some think so Deutsche Bank at Risk in ECB’s Stress Test, Analysts Say http://t.co/bfSSHF…
Edward Evans
22 Oct 14 07:58:21
RT @ElisaMartinuzzi: $DB failing the stress test? Some think so Deutsche Bank at Risk in ECB’s Stress Test, Analysts Say http://t.co/bfSSHF…
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22 Oct 14 07:55:26
$DB failing the stress test? Some think so Deutsche Bank at Risk in ECB’s Stress Test, Analysts Say http://t.co/bfSSHF9EcT
ronin245
22 Oct 14 07:46:46
$DDD said last yr at CES show when momo's pumpd this pig up near 100, this yr competition wud kill them, $DB 105 target gets the big "LOL"
Jamie Dexter
22 Oct 14 07:12:20
@SolAestus @RikusMaximus I once heard good advice: The more fundamental a thing, the shorter its name should be. Thus: $db but $thisLocalVar
HotKeyTrading
22 Oct 14 07:00:04
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22 Oct 14 05:27:30
RT @dan_freed: . @BenLawsky to focus on cybersecurity in dinner next week 2 b attended by general counsels for $JPM $DB $BAC http://t.co/w…
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22 Oct 14 05:27:06
. @BenLawsky to focus on cybersecurity in dinner next week 2 b attended by general counsels for $JPM $DB $BAC http://t.co/w8lqTg5mGR
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22 Oct 14 00:51:09
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Elena Logutenkova
22 Oct 14 00:50:57
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IeyCortney484
21 Oct 14 23:32:34
☯Gain Followers ☯RT This ☯MUST FOLLOW ME I FOLLOW BACK ☯Follow everyone who rts ☯Gain #bestfandom2014 #Love #ANDROID $db#
HotKeyTrading
21 Oct 14 19:00:12
Gap Ups: $SMFG $CNL $HPT $PNM $SCOK $ALGN $POST $LII $RCI $SAN $DB $SANM $NCR $SWFT $WAL http://t.co/Vv2VEn80mr #nasdaq #investors #trading
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21 Oct 14 12:59:38
Algorithmic trading: OPEN Oct/21 SELL: $NOG $GOOG $PKG $BHI $TS $AVP $WRES $ETE $VIMC $REXX $STO $DNOW $THI $GOOGL $RF $AVGO $ERIC $APA $DB
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21 Oct 14 11:04:02
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/2lw7hZt3By
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21 Oct 14 10:53:50
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21 Oct 14 07:52:10
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21 Oct 14 05:02:43
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Bill Hine
21 Oct 14 03:57:14
$DB may forfeit 10% of its book value in forex-rigging probe. Banks frontrunning clients? Really? $BCS $UBS http://t.co/05SPMsoKsn
bribedDuck
21 Oct 14 03:47:14
@theflynews stupid $DB analyst, who downgrade $AAPL, was fired ;)
Gary Kendall
21 Oct 14 03:22:02
FX fines could reach $41 billion globally with $DB likely the biggest according to Citi analysis http://t.co/F38uXpBPpi
Joshua Roberts
21 Oct 14 02:57:23
Citi $C buys $DB's energy and metals book... NOTHING TO SEE HERE! http://t.co/JYlejwW8ah http://t.co/HJ68EFl74B
				
				
By  +Follow December 5, 2013 7:56AM
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