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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
TipRanks
27 Nov 14 16:29:35
1-star analyst Arun Melmane from Canaccord Genuity rated $DB w/a HOLD. Arun has a -0.2% avg rtrn http://t.co/XMTaPgQ5wf #NYSE #stocks #DB
Dylan GD
27 Nov 14 12:49:14
RT @fdwphp: Aydua en Configurara chilistats [error en $db_prefix] #php http://t.co/fkVi6KnXLj
Foros del web / PHP
27 Nov 14 12:31:06
Aydua en Configurara chilistats [error en $db_prefix] #php http://t.co/fkVi6KnXLj
Sarcasm Bot
27 Nov 14 08:24:48
$DB This stock is worth about $30.00 per share.
NASDAQ
27 Nov 14 07:16:12
$DB - Deutsche Bank Closes Down Physical Precious Metals Trading Operations http://t.co/YrX9nqILly
Large Void Bot
27 Nov 14 07:00:48
Popular: $BB.CA, $JAKK, $USD, $DB, $CONE, $PVH, $IEV, $KRE, $BCE, $IRBT, $MMC, $CLX, $IRWD, $ENDP, $INFI, $CL, $ILMN, $BRK.A, $NTES, $POST
alpe pinnazzo
27 Nov 14 06:11:34
$DB Deutsche Bank closes down physical precious metals trading operations - DJ, now goes to Trafigura,Glencore or even better Minmetals??
Jake13
26 Nov 14 22:29:14
DB Year to date has changed -31.84% percent. +2.94% in the last 30 days. $DB Deutsche Bank Ag Full breakdown L http://t.co/jl1lxR0q2A
Jake13
26 Nov 14 22:28:52
$DB DB Stock year to date has changed -31.84% percent. +2.94% in the last 30 days. $DB Deutsche Bank Ag Full break http://t.co/nKaVOfzRjI
NASDAQ
26 Nov 14 15:32:23
$DB - Correction to Air-France KLM Hedging story http://t.co/A382ZfXhBZ
NASDAQ
26 Nov 14 13:42:16
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/K8zzeE21b3
NASDAQ
26 Nov 14 13:07:54
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/Vs3oBuqdb4
NASDAQ
26 Nov 14 12:49:06
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/YciELXnM43
NASDAQ
26 Nov 14 12:31:09
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/5pFScPWVqa
NASDAQ
26 Nov 14 12:26:02
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/M0dGfYncEE
OTPicks.com
26 Nov 14 12:19:48
http://t.co/NYsxQOU64w clayton: DB 32.92 Deutsche Bank Ag $DB added to my watch: clayton http://t.co/YyIQngc0gy http://t.co/NYsxQOU64w
NASDAQ
26 Nov 14 12:10:05
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/eAWJaWi2zh
NASDAQ
26 Nov 14 12:04:09
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/ffxxGu5iHe
NASDAQ
26 Nov 14 11:58:02
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/nEA53QJA8q
clayton
26 Nov 14 11:53:26
DB 32.92 Deutsche Bank Ag $DB added to my watch list. Right now with DB I am watching the last price 32.92 Hig http://t.co/irVXFTIUVu
clayton
26 Nov 14 11:53:04
$DB DB 32.92 Deutsche Bank Ag $DB stock added to my watch list. Right now with DB I am watching the last price 32. http://t.co/qE6Xay7Y7b
Investing Insight
26 Nov 14 11:44:19
BreakoutStocks: New breakout highs for $BIDU, $FXI, $FB, $TMUS, $DB, $HTZ http://t.co/hGp2fU4DYu
me, myself & stocks
26 Nov 14 11:24:34
RT @BreakoutStocks: New breakout highs for $BIDU, $FXI, $FB, $TMUS, $DB, $HTZ http://t.co/EJVP0SFctC
MarketFaceToday
26 Nov 14 11:23:01
RT @BreakoutStocks: New breakout highs for $BIDU, $FXI, $FB, $TMUS, $DB, $HTZ http://t.co/EJVP0SFctC
Top Breakout Stocks
26 Nov 14 11:22:53
New breakout highs for $BIDU, $FXI, $FB, $TMUS, $DB, $HTZ http://t.co/EJVP0SFctC
Market Int Center
26 Nov 14 10:59:21
Deutsche Bank $DB Showing Support Near $32.09 ( http://t.co/vIxQib6QQq )
Lucky Jimmy
26 Nov 14 10:43:28
DB Stock up +1.29% percent Today $DB High is at 32.99 and the Low 32.88 with current volume of 834,844. Deutsc http://t.co/wNHf5tWtEN
Lucky Jimmy
26 Nov 14 10:43:06
$DB DB up +1.29% percent Today $DB Stock High is at 32.99 and the Low 32.88 with current volume of 834,844. Deutsc http://t.co/DDte9FNXHI
Investors Hangout
26 Nov 14 10:25:43
leahanne: Volume Alert - DB 32.95 Deutsche Bank Ag $DB Hit http://t.co/WlMBHmYRfd
Investors Hangout
26 Nov 14 10:25:41
leahanne: Volume Alert - DB 32.95 Deutsche Bank Ag $DB Hit http://t.co/keznjEZds8
leahanne
26 Nov 14 10:22:49
Volume Alert - DB 32.95 Deutsche Bank Ag $DB Hit a high today of 32.99 Closing the day 10:29 at 32.95 +0.45 +1 http://t.co/37NJzh3Khx
Mook Trader
26 Nov 14 10:05:05
$DB rates $BDX a hold rating. just came out
ValueWalk
26 Nov 14 09:13:37
Libor Market: Regulators Misses Deadline on Individual Fines by @MarkMelin http://t.co/60jBdLeafW $DB $RBS
jim50
26 Nov 14 07:17:17
DB Gapped up +0.33 $DB Last Price 32.93 Day High 32.97 Day Low 32.94 Change +0.43 Volume 94,270 Today 98 stock http://t.co/lJ94p87Lkz
jim50
26 Nov 14 07:16:55
$DB DB Stock Gapped up +0.33 $DB Last Price 32.93 Day High 32.97 Day Low 32.94 Change +0.43 Volume 94,270 Today 98 http://t.co/w2MTrUZ67H
ClosingBell
26 Nov 14 07:11:05
Equities tagged #oversold - $AEM $BBG $BIS $BSBR $CAM $CIEN $CIG $CUR $DB $DRV http://t.co/DA7ArwRYjF
Media Sentiment
26 Nov 14 06:40:04
$DB received a new alert. Find out why at http://t.co/5lwmDm2SCs #stocks #daytrading #trading #mkt #NYSE #NASDAQ #markets 120
Sunrise Trader
26 Nov 14 06:33:13
RT @BlueFielder: $DB : Continuing a strong march North
Cameron
26 Nov 14 06:30:24
$DB : Continuing a strong march North
Fish4Bucks
26 Nov 14 05:54:01
60m $DB Upper Trendline Pressure 32.770 #futures #stocks 08:53:52 AM http://t.co/lSMcM5bjRW Signals based o... http://t.co/lSMcM5bjRW
Troy Kuhn
26 Nov 14 04:18:57
Regulators Order Bank Of America‘s Merrill Lynch International Unit To Improve Risk Management. http://t.co/YOkzFZ6SHj $BAC $DB
Fish4Bucks
26 Nov 14 03:53:50
60m $DB Upper Trendline Pressure 32.770 #futures #stocks 06:53:41 AM http://t.co/lSMcM5bjRW Signals based o... http://t.co/lSMcM5bjRW
Quantheta
26 Nov 14 00:59:56
#SENTISHIFTUP $SPY $DRWI $HA $PX $DB $MBLY $USD $DGX $SYY $NDX #quantheta #sentiquant
Jake13
25 Nov 14 23:28:13
DB Year to date has changed -32.63% percent. +1.75% in the last 30 days. $DB Deutsche Bank Ag Full breakdown L http://t.co/1TA7s94Tmt
Jake13
25 Nov 14 23:27:51
$DB DB Stock year to date has changed -32.63% percent. +1.75% in the last 30 days. $DB Deutsche Bank Ag Full break http://t.co/cbyCOI3ggV
chartguy89
25 Nov 14 23:18:25
DB 32.50 Deutsche Bank Ag Stock Charts $DB Last Updated: 11/25/14 Last price: 32.50 Total volume: 2,800,804 DB http://t.co/5nc1hlS9dk
chartguy89
25 Nov 14 23:18:09
$DB DB 32.50 Deutsche Bank Ag Stock Charts $DB Last Updated: 11/25/14 Last price: 32.50 Total volume: 2,800,804 DB http://t.co/fZ7ZAvQv27
NASDAQ
25 Nov 14 23:03:44
$DB - Air-France KLM Cuts Amadeus Stake to 2.2% in Hedging Deal http://t.co/1JjhspBTC2
Jessica Jerreat
25 Nov 14 16:54:49
RT @DBAmericas: $DB supports @pressfreedom and the brave journalists honored tonight #IPFA http://t.co/AUhm13iTSQ
Deutsche Bank
25 Nov 14 16:54:04
$DB supports @pressfreedom and the brave journalists honored tonight #IPFA http://t.co/AUhm13iTSQ
				
				
By  +Follow December 5, 2013 7:56AM
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