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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
GavinGreenberg
24 Apr 14 00:06:39
$DB: Beach-Vacation Trading Shows Russian Brokers Gaining From Crisis http://t.co/v8uIi8fyc5
StockNewsNet
24 Apr 14 00:00:38
$DB - Beach-Vacation Trading Shows Russian Brokers Gaining From Crisis -> http://t.co/bBKANS9BP4 #stock #stocks #stockaction
DSinden
23 Apr 14 23:11:18
RT @moved_average: $DB Deutsche Bank said to be facing pressure from large investors to raise addl capital-FT http://t.co/Ldjhxd8u2N
Informer
23 Apr 14 23:09:08
$DB: Deutsche Bank rethinks US strategies http://t.co/iXBZyqw2TQ
Stock Herald
23 Apr 14 23:01:14
$DB: Deutsche Bank rethinks US strategies http://t.co/oaY2z4CY0x
Stock News 24
23 Apr 14 22:49:26
$DB - Deutsche Bank rethinks US strategies -> http://t.co/MwzZD7FEnc #stock #stocks #stockaction
Ioan Smith
23 Apr 14 22:49:20
$DB Deutsche Bank said to be facing pressure from large investors to raise addl capital-FT http://t.co/Ldjhxd8u2N
Informer
23 Apr 14 22:01:37
$DB: Asset managers snap up riskier coco bank debt http://t.co/QhxiBM0OSU
GavinGreenberg
23 Apr 14 21:39:34
$DB: Russian Brokers Gain From Crisis, Profits So Rich Theyre Trading From ... http://t.co/v8uIi8fyc5
Scott Spencer
23 Apr 14 21:37:33
$AAPL 7.89% AH at $566 with 7-for1 split coming... $GILD at $74 with $DB maintain buy with $135pt... http://t.co/RGKGSuqI9W
GavinGreenberg
23 Apr 14 21:34:33
$DB: Asset managers snap up riskier coco bank debt http://t.co/wzwjQrcPtL
MarketNews
23 Apr 14 21:25:35
$DB - Asset managers snap up riskier coco bank debt -> http://t.co/qdDK0KzupH #stock #stocks #stockaction
Stock News 24
23 Apr 14 21:19:16
$DB - Russian Brokers Gain From Crisis, Profits So Rich Theyre Trading From ... -> http://t.co/5yTrkEuvsg #stock #stocks #stockaction
StockNews24
23 Apr 14 20:06:24
$DB - Numericable set for record junk bond issue -> http://t.co/JENhqgYcY2 #stock #stocks #stockaction
BradTrader
23 Apr 14 18:12:20
$DB Russian Brokers Gain From Crisis, Profits So Rich They're Trading From the Beach http://t.co/m8BzjKZfrF
BradTrader
23 Apr 14 18:06:11
$DB db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) to Release Its Tax Reserve Back to the Fund http://t.co/nnZIG7TAdl
BradTrader
23 Apr 14 17:22:04
$DB CNOOC Limited Announces Pricing of Guaranteed Notes Offering http://t.co/LiXa3mkgyH
Stock Herald
23 Apr 14 17:06:37
$DB: db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) to Release It... http://t.co/rMlYwyexQA
Stock News 24
23 Apr 14 16:49:12
$DB - db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) to Release It... -> http://t.co/r9rnvDZBXR #stock #stocks #stockaction
Stock Herald
23 Apr 14 14:24:08
$DB: British Financial Regulator Adds Two Senior Advisers http://t.co/aoAzMplbF6
James Rogers
23 Apr 14 13:58:20
RT @AntoineGara: I bet the champagne bottles at $GS $DB are popping! $AAPL will finance the $30b increase to buybacks/divs. Better than ano…
Antoine Gara
23 Apr 14 13:57:55
I bet the champagne bottles at $GS $DB are popping! $AAPL will finance the $30b increase to buybacks/divs. Better than another CLO deal!
StockNews24
23 Apr 14 13:36:38
$DB - British Financial Regulator Adds Two Senior Advisers -> http://t.co/0cHFSrI5Kf #stock #stocks #stockaction
lizwaite
23 Apr 14 12:49:49
RT @rcwhalen: Deutsche Bank under pressure by investors to raise capital - http://t.co/UWbMtEw7tt http://t.co/rgFXntY2d8 @FT $DB Now here …
BradTrader
23 Apr 14 12:38:08
$DB Deutsche Bank lags behind peers in capital rankings http://t.co/U5bkh6tbzd
BradTrader
23 Apr 14 12:21:14
$DB Numericable set for record junk bond issue http://t.co/6LAm5nH4KY
WKRB News
23 Apr 14 12:05:48
Deutsche Bank Downgraded by UBS AG to Neutral $DB http://t.co/b4eCUU9oTE
BradTrader
23 Apr 14 11:53:06
$DB Asset managers snap up riskier coco bank debt http://t.co/PeLZRd76XJ
Deutsche Bank
23 Apr 14 11:35:28
$DB Senior US Economist Carl Riccadonna talked earnings season with @MariaBartiromo on @OpeningBellFBN http://t.co/l3QSQ165Ik
BradTrader
23 Apr 14 11:30:43
$DB Beach-Vacation Trading Shows Russian Brokers Gaining From Crisis http://t.co/m8BzjKZfrF
Christopher Whalen
23 Apr 14 11:26:38
Deutsche Bank under pressure by investors to raise capital - http://t.co/UWbMtEw7tt http://t.co/rgFXntY2d8 @FT $DB Now here is a surprise
Jamtrades
23 Apr 14 11:01:37
@RX2Dude if $DB - Deutsche bank had upgraded $xom... I would have gone long
The Fly
23 Apr 14 10:44:40
$DB Deutsche pushed by investors to increase capital, FT says: Full Story http://t.co/NNCwh1lhuh
StockNews24
23 Apr 14 10:21:02
$DB - Numericable Raises $10.9 Billion in Junk Bond Offering -> http://t.co/CXKhBzf0eq #stock #stocks #stockaction
Stock News 24
23 Apr 14 10:19:09
$DB - Deutsche Bank under pressure by investors to raise capital -> http://t.co/fbEnQZPCYX #stock #stocks #stockaction
stocknews247
23 Apr 14 10:17:17
$DB - Deutsche Bank lags behind peers in capital rankings -> http://t.co/xC3KllZdep #stock #stocks #stockaction
Ciprian
23 Apr 14 09:38:03
$DB vs $DAX which will perform better this year? http://t.co/btqAtTCob8 index arbitrage $STUDY http://t.co/l9FJA3oUzL
Livevol Community
23 Apr 14 09:00:03
HIGH CALL VOLU $EWM 9565% $EEP 1323% $BZH 1252% $SWK 437% $MCD 397% $DB 368% $INFY 364% $SWKS 343% http://t.co/D6zLlKlLNO
Research for Traders
23 Apr 14 08:40:46
#Deutsche Bank recortará personal en varias ciudades de #LatAm $DB #stocks
Kroll Bond Ratings
23 Apr 14 08:38:58
KBRA CMBS: COMM 2014-CCRE17 Pre-Sale Report https://t.co/hXimwazcvt #KBRA #CMBS $DB
Ciprian
23 Apr 14 07:18:27
$DB chart: $DB vs $DAX tree drivers bullish pattern forecast #spreadchart. http://t.co/wIXIPFzJS5
TradingView
23 Apr 14 07:18:27
$DB chart by @CiprianPopaIoan: http://t.co/25lA6YqmBY $DB vs $DAX tree drivers bullish pattern forecast #spreadchart.
BuySideDesign
23 Apr 14 07:10:51
Goldman loses four Asia prime brokerage execs to rivals- sources $GS $DB $CS $EWH http://t.co/1LVarKgYE3
CHFA
23 Apr 14 07:04:55
Deutsche Boerse's Clearstream buys hedge fund custody business http://t.co/K5zke3FAap $DB #hedgefunds
LpznMooney
23 Apr 14 06:45:51
$DB just put a 135 PT on $GILD
Market Int Center
23 Apr 14 06:41:31
Potential Deutsche Bank $DB Trade Has 3.82% Downside Protection ( http://t.co/Q5rvRAcw65 )
Boaz Boulstridge
23 Apr 14 06:40:34
$DB Numericable set for record junk bond issue http://t.co/D1hQkjNgKI
Dividend Master
23 Apr 14 06:31:20
@TraderAnnon you do realize when $MS $GS $C $UBS $BAC $DB show up as top holders that includes all retail accounts at those firms ?
StockNews24
23 Apr 14 06:21:26
$DB - Numericable Set to Price Huge Junk Bond Offering -> http://t.co/AJzGh33UbD #stock #stocks #stockaction
StockNews24
23 Apr 14 04:51:37
$DB - Good News: Wages Are Rising, and Inflation Is Still Low -> http://t.co/bJWIAvgPna #stock #stocks #stockaction
				
				
By  +Follow December 5, 2013 7:56AM
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