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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
Gavin Parks
30 Jan 15 16:57:14
RT @Uldis_Zelmenis: Only European bears around. $DB: European ETFs – record inflows since May 2012 http://t.co/5WHJx30tKZ
Uldis Zelmenis
30 Jan 15 16:54:57
Only European bears around. $DB: European ETFs – record inflows since May 2012 http://t.co/5WHJx30tKZ
Adam Samson
30 Jan 15 12:38:05
$DB expects a 'balanced compromise’ in Greece-Euro negotiations, but can’t rule out 'political accident.’ Flowchart: http://t.co/WhDIxbYgmj
Market Int Center
30 Jan 15 11:41:33
Potential Deutsche Bank $DB Trade Has 5.78% Downside Protection ( http://t.co/EXIIDoYpeG )
StreetAuthority
30 Jan 15 11:00:33
European QE is here and I'm looking for a pop in these companies $DB $CRARY $VLKAY $LVMUY http://t.co/mt1NeXD7Zc
ProVesting
30 Jan 15 10:36:08
$DB: 4 Stocks To Benefit From European Quantitative Easing: http://t.co/Fc7Tg1WX2v
Deutsche Bank
30 Jan 15 08:01:45
#KeltieFerris mixes ragged squares, florescent color, sprayed-on fields and hazy dots #HerlandExhibit $DB http://t.co/aARI6idnkN
ValueWalk
30 Jan 15 07:32:31
Diversified Banks Should Spin-Off Retail Divisions http://t.co/kKXayaGuYb $JPM $BAC $C $CS $DB $HSBC $UBS http://t.co/3XMO6fEd5o
alpe pinnazzo
30 Jan 15 07:28:12
$DB Deutsche's London office under FCA supervision http://t.co/lmq7xsSqd7
mark dalmore
30 Jan 15 07:23:44
RT @TBLtraders: Citigroup Inc. has become the world’s biggest currency trader by dethroning Deutsche Bank AG http://t.co/1uqMrfqxgZ $C vs …
Traders for ROI
30 Jan 15 07:20:07
Citigroup Inc. has become the world’s biggest currency trader by dethroning Deutsche Bank AG http://t.co/1uqMrfqxgZ $C vs $DB Retweet
Andreas Cseh
30 Jan 15 07:20:04
#DeutscheBank $DB target "raised" to $0.00 #Fraud #Greece http://t.co/sCwfduUUUV @boerseonline @Finanzen100 @SZ_Geld http://t.co/xG0PB7lbc5
MookTrader
30 Jan 15 06:53:01
$CBI tanks on $DB analyst comments due to Vogtle project delays
v_vCakeMoney
30 Jan 15 06:43:27
Just an FYI on $DB's positive $GOOG commentary.. $DB ran Google's recent offering so they're rooting for an uptick. #justsaying
NASDAQ
30 Jan 15 06:00:46
$DB - Deutsche Bank México informa sobre cambio de presentación en su Balance General dentro del rubro de http://t.co/G9LKfZOzjJ
StockNewsWires
30 Jan 15 04:56:03
$DB: Deutsche Bank (DB), Progressive (PGR), Prospect Capital (PSEC ...: http://t.co/wJYhLgPAuv
Langan Stocks
30 Jan 15 03:10:33
$MERP P/E Ratio Click Here: http://t.co/8VCYPUOl0j Also See: $CRHKY $DB $AVID $QCLN ~
Andreas Cseh
30 Jan 15 01:04:13
#Orban airs thoughts on #Merkel - Let #Hungary buy #Germany's #bankrupt banks $DB $CRZBY http://t.co/BfLBS9FkOI @JTrittin @Lavorgnanomics
Raguna_aku
29 Jan 15 21:24:42
public $user = 'web59'; public $password = 'n2Vuw8KK'; public $db = 'usr_web59_1'; public $dbprefix = 'qg6yt_';... http://t.co/9k0HgYQ9mN
ткаченко татьяна
29 Jan 15 21:00:56
RT @HedgeLy: Deutsche Bank: Russia Preparing To Use Energy in Economic War $DB | http://t.co/yiMPuSAUNo http://t.co/qgkevYxIfs
Pfeifer
29 Jan 15 20:12:09
RT @HedgeLy: Deutsche Bank: Russia Preparing To Use Energy in Economic War $DB | http://t.co/yiMPuSAUNo http://t.co/qgkevYxIfs
Hedge.Bz
29 Jan 15 20:08:28
Deutsche Bank: Russia Preparing To Use Energy in Economic War $DB | http://t.co/ue6BZjzrto http://t.co/hyoJffkvce
HLy
29 Jan 15 20:08:27
Deutsche Bank: Russia Preparing To Use Energy in Economic War $DB | http://t.co/yiMPuSAUNo http://t.co/qgkevYxIfs
Heather
29 Jan 15 17:59:18
$DB had good earnings, I think it's a good play for the Euro QE
Tom Loffman
29 Jan 15 15:19:40
Biggest gainers today large caps: $NOW 7.21% $COH 6.80% $IRE 6.34% $CL 6.00% $APD 5.88% $BA 5.83% $ALXN 5.78% $SWK 5.59% $DB 5.37%
Ali Aba
29 Jan 15 14:07:24
RT @TheDealNewsroom: .@DeutscheBank swings back to black as review continues http://t.co/sJGe79FfFp $DB http://t.co/k8OPR7JoSi
Will Willitts
29 Jan 15 14:06:08
RT @TheDealNewsroom: .@DeutscheBank swings back to black as review continues http://t.co/sJGe79FfFp $DB http://t.co/k8OPR7JoSi
Leandro Cezimbra
29 Jan 15 14:04:22
RT @TheDealNewsroom: .@DeutscheBank swings back to black as review continues http://t.co/sJGe79FfFp $DB http://t.co/k8OPR7JoSi
Kumar Kollipara
29 Jan 15 14:02:39
RT @TheDealNewsroom: .@DeutscheBank swings back to black as review continues http://t.co/sJGe79FfFp $DB http://t.co/k8OPR7JoSi
Abraham VanVarenberg
29 Jan 15 13:51:22
RT @TheDealNewsroom: .@DeutscheBank swings back to black as review continues http://t.co/sJGe79FfFp $DB http://t.co/k8OPR7JoSi
Octaviano  Tatau
29 Jan 15 13:50:49
RT @TheDealNewsroom: .@DeutscheBank swings back to black as review continues http://t.co/sJGe79FfFp $DB http://t.co/k8OPR7JoSi
Warren Decuir
29 Jan 15 13:48:51
RT @TheDealNewsroom: .@DeutscheBank swings back to black as review continues http://t.co/sJGe79FfFp $DB http://t.co/k8OPR7JoSi
Deutsche Bank
29 Jan 15 13:48:01
RT @TheDealNewsroom: .@DeutscheBank swings back to black as review continues http://t.co/sJGe79FfFp $DB http://t.co/k8OPR7JoSi
361 Capital
29 Jan 15 13:30:13
A good earnings day. Earnings Stocks ↑: $JBLU $VAR $RYL $FLEX $COH $CL $PHM $APD $SWK $ALXN $DB $DOW $ABT $NOC $ATK $MJN $PSX $TMO $F $FB
US Banking News
29 Jan 15 13:12:00
Deutsche Bank announces earnings. $0.41 EPS. Misses estimates. http://t.co/48c5fyNtCk $DB #DB
ProVesting
29 Jan 15 13:06:04
$DB: Deutsche Bank (DB) Issues Earnings Results, Misses Expectations ...: http://t.co/e7riX7kTAZ
Sleek Money
29 Jan 15 13:05:12
Deutsche Bank $DB Issues Earnings Results, Misses Expectations By $0.07 EPS http://t.co/mejn01tRkE
NASDAQ
29 Jan 15 12:49:05
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/oSOkzn0bic
NASDAQ
29 Jan 15 12:46:09
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/xn7KSV4JM2
NASDAQ
29 Jan 15 12:46:06
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/4zzycQEFap
NASDAQ
29 Jan 15 12:40:23
$DB - Free Writing Prospectus - Filing Under Securities Act Rules 163/433 (fwp) http://t.co/HjwJSutOQU
TraderMinute
29 Jan 15 10:52:42
Once Europe QE takes hold I think we could see $DB at $35 to $37 in coming quarter
NASDAQ
29 Jan 15 10:47:05
$DB - Greek Markets Steady as Banks Rebound -- 2nd Update http://t.co/sMyS0hmq2X
SIMON
29 Jan 15 10:34:11
@BlueFielder $DB all day long baby
stockmarketnow
29 Jan 15 10:23:40
RT TheDealNewsroom: .DeutscheBank swings back to black as review continues http://t.co/qCtyonlvLc $DB http://t.co/YR7ufaa76p
TheStreet
29 Jan 15 10:13:36
RT @TheDealNewsroom: .@DeutscheBank swings back to black as review continues http://t.co/sJGe79FfFp $DB http://t.co/k8OPR7JoSi
ProTradersNews
29 Jan 15 09:56:04
$DB: Deutsche Bank Earns Sell Rating from Bankhaus Metzler (DB): http://t.co/8b8RnVilIv
InterCooler
29 Jan 15 09:48:49
Deutsche Bank Earns Sell Rating from Bankhaus Metzler $DB http://t.co/so0xmAgCGu
Media Sentiment
29 Jan 15 09:06:16
$DB received a new alert. Find out why at http://t.co/5lwmDm2SCs #stocks #daytrading #trading #mkt #NYSE #NASDAQ #markets 355
Market Int Center
29 Jan 15 09:04:28
Deutsche Bank $DB Showing Bearish Technicals ( http://t.co/dNN9vGyDgb )
				
				
By  +Follow December 5, 2013 7:56AM
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