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What's Behind the Decline in Commodity Prices?

By  +Follow December 5, 2013 7:56AM
Tickers Mentioned:

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
18 Sep 14 19:46:08
$MBLY $MS said $TM developing DA chips w/Toshiba 2015 no impact, but also gave hold w/trgt $51 & $DB dowgraded to $53 if paying attention
Austin Deric
18 Sep 14 14:36:23
@GuyAdami good way to play #FX volatility are the main dealers $DB $C
18 Sep 14 12:50:27
$DB At 35.8$ resistance I had mentioned. Move above strengthens view that bottom in place. ~$39 likely next resistance. Bullish med-longterm
Bill Clegg
18 Sep 14 10:12:54
Is $DB ready to stop being a crap investment?
18 Sep 14 10:08:51
RT @WallStJesus: $DB worth noting, another bank that saw #WG place hefty bets on this month .. http://t.co/Y2cWqKvNXq
18 Sep 14 10:08:34
$DB worth noting, another bank that saw #WG place hefty bets on this month .. http://t.co/Y2cWqKvNXq
18 Sep 14 10:03:13
60m $DB Upper Trendline Pressure 35.870 #futures #stocks 01:01:58 PM http://t.co/WZwETG8am0 Signals based o... http://t.co/WZwETG8am0
18 Sep 14 09:35:44
60m $DB Upper Trendline Pressure 35.867 #futures #stocks 12:35:33 PM http://t.co/WZwETG8am0 Signals based o... http://t.co/WZwETG8am0
Aamir Chaudafeller
18 Sep 14 08:01:08
Went in for SeekingAlpha 3rds, caused a stir - 'Buy Deutsche Bank On Cheap Valuation And ECB Action' - http://t.co/dFjei8WeuG $DB
18 Sep 14 07:15:03
60m $DB Upper Trendline Pressure 35.710 #futures #stocks 10:14:52 AM http://t.co/WZwETG8am0 Signals based o... http://t.co/WZwETG8am0
Barry Scott
18 Sep 14 07:06:13
$BABA main bookrunner index $C $CS $DB $GS $MS $JPM (Money for Nothin' ETF posted 9/17) having a great start as fins love 10-y 2.625%
18 Sep 14 07:04:05
60m $DB Upper Trendline Pressure 35.710 #futures #stocks 10:02:59 AM http://t.co/WZwETG8am0 Signals based o... http://t.co/WZwETG8am0
mark dalmore
18 Sep 14 06:52:22
Closing $CS $DB $GSK
Media Sentiment
18 Sep 14 05:53:07
$DB received a new alert. Find out why at http://t.co/5udYd0Ofs6 #stocks #daytrading #trading #mkt #NYSE #NASDAQ #markets 124
Market Int Center
18 Sep 14 05:50:26
Deutsche Bank $DB Showing Bullish Technicals With Resistance At $35.58 ( http://t.co/11cf12awp4 )
Analyst Ratings
18 Sep 14 05:06:56
Get the latest ratings for $TXN $BKH $DB $PACB $ERJ in your inbox with ARN Daily http://t.co/nSJuDsYidj
Don Gulfo
17 Sep 14 22:01:29
Video: Priceline Plans Debt Offering After Big Acquisitions http://t.co/yEdpoi66Rr #IBDNews via @IBDinvestors$PCLN $CTRP $DB $RBS $WFC $$GS
Market Newswire
17 Sep 14 15:31:01
Auxilium Adopts Poison Pill in Response to $2.2B Endo Bid - http://t.co/jwqDLBlpnV $DB #headlines #stocks #wallstreet
Market Int Center
17 Sep 14 12:26:24
Potential Deutsche Bank $DB Trade Targets 4.91% Return ( http://t.co/0RQOfjV9IH )
17 Sep 14 11:45:06
$DB ups $X Px to $60 Did the global economy explode and tons of steel supply come off the market at the same time?
17 Sep 14 11:31:40
60m $DB Upper Trendline Pressure 35.380 #futures #stocks 02:31:06 PM http://t.co/WZwETG8am0 Signals based o... http://t.co/WZwETG8am0
Barry Scott
17 Sep 14 10:42:58
$BABA main bookrunner (Money for nothin') mini ETF = $DB $C $CS $MS $GS $JPM could work as swing trade long $YHOO $IPO $XLF $SPY $FB
Thomas Bruni
17 Sep 14 08:32:51
European financials tough 2014 so far. $DB trying to put a small bottom. Inverse H+S and pos momentum divergence. http://t.co/6TVfrEFtaP
Carlos Carrasco
17 Sep 14 06:42:35
Buy Deutsche Bank On Cheap Valuation And ECB Action $DB http://t.co/aDRdyMgttD
Dividend Master
17 Sep 14 06:38:41
$DB economist out predicting a 10% depreciation in Euro will have huge positive impact for EU & only modest negative on USA & Japan #OhSure
US Banking News
17 Sep 14 06:06:59
Deutsche Bank Receives Consensus Hold Rating from Analysts $DB http://t.co/4gNtuALHn8
Evener Investment
17 Sep 14 05:19:14
RT @SeekingAlpha: Buy Deutsche Bank On Cheap Valuation And ECB Action http://t.co/v6yKg4GgVn $DB
Bidness Etc
17 Sep 14 05:12:54
Shipping stocks were closed in the green yesterday - http://t.co/xFwpXDKbzz $DB $BDIY $DRYS
Seeking Alpha
17 Sep 14 05:11:49
Buy Deutsche Bank On Cheap Valuation And ECB Action http://t.co/v6yKg4GgVn $DB
17 Sep 14 01:34:15
still long : $CS, $DB, $NKE, $TITN, $USO, $CORN ,$JJG, $GLD, $SLV, $SCCO
16 Sep 14 19:40:38
RT @RudyHavenstein: "At a global aggregated level deflation has been non-existent over the last 80 years." - $DB
Michael Scott
16 Sep 14 16:57:00
RT @MarketCurrents: Reporting errors continue to plague Deutsche Bank http://t.co/WijG7iMtlF #premarket $DB
Day Trade Alerts
16 Sep 14 16:55:42
RT @MarketCurrents: Reporting errors continue to plague Deutsche Bank http://t.co/WijG7iMtlF #premarket $DB
Day Trade Alerts
16 Sep 14 16:54:34
RT @sobata416: the rise and fall of modern empires - $DB: *China's got next ;) h/t @zerohedge http://t.co/GK5Zyomc2a
Perl 5 Porters
16 Sep 14 15:51:17
[perl5] https://t.co/7gPS5Rec2U Father Chrysostomos - Fix $DB::sub in DB::goto for lexical subs $ PERL5DB='sub DB::DB{}' ./perl -Ilib -XM...
16 Sep 14 14:25:43
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/2d2E5CLkQG
16 Sep 14 14:24:23
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/T1fbAEfJA5
16 Sep 14 14:24:22
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/DucwULulcd
16 Sep 14 12:28:27
@theflynews Virginia wanted to be greedy and not be part of DOJ settlement so now TFB. $BCS $C $CS $DB $GS $RBS $HSBC $MS $UBS $JPM $BAC
16 Sep 14 12:28:11
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/V95Sks6n1E
16 Sep 14 12:25:10
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/D4w94rSjpB
16 Sep 14 12:25:08
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/9EJIVTdXTZ
16 Sep 14 12:22:09
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/9iNL8PKZaW
16 Sep 14 12:22:08
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/kCYyfmyiW3
16 Sep 14 12:22:06
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/c2KQkvmxl8
16 Sep 14 12:22:05
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/DA8ITFiNfX
The Fly
16 Sep 14 11:44:20
$BCS $C $CS $DB $GS $RBS $HSBC $MS $UBS $JPM $BAC Virginia AG files $1.15B lawsuit against banks that sold RMB... http://t.co/yBQZvB2ABr
16 Sep 14 11:13:06
$DB - Prospectus Filed Pursuant to Rule 424(b)(2) (424b2) http://t.co/Q2SU0aX16v
Aaron I. Ying
16 Sep 14 11:02:03
$EURUSD <1.3030short @ $XAUUSD <1292short @ $AAPL >90$long @ $FB >60$long @ $USDCAD >1.09499long @ $AUDJPY >97.12 long @ $DB >25.61€ #forex
Market Newswire
16 Sep 14 10:46:39
Why Best Buy (BBY) Stock Is Higher Today - http://t.co/ct29zff7rD $DB #finance #stocks #invest
By  +Follow December 5, 2013 7:56AM



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