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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. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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Results for DB
Andrew Teasdale
9 Oct 15 14:46:43
RT @retheauditors: ICYMI 16 years later, billions in value gets wiped away from Bankers Trust http://t.co/DSImtsX8rB $DB
Francine McKenna
9 Oct 15 14:43:39
ICYMI 16 years later, billions in value gets wiped away from Bankers Trust http://t.co/DSImtsX8rB $DB
9 Oct 15 14:05:02
Having 10 different news tabs open for $AAPL $DB $BP? We give you 1 http://t.co/iSMMsCwWju http://t.co/GaCXwam24C
Javier Hasse
9 Oct 15 13:14:53
JC Parets: Stay Away From Banking Stocks $CS $DB $UBS http://t.co/J5AEuoFTE2 via @benzinga
Jeff Helfrich
9 Oct 15 12:07:42
What We're Reading this week: http://t.co/wnAlvV1BZm #water #soda #wirelesscharging $AMZN $ORCL $IBM $DB
9 Oct 15 11:56:35
Deutsche Bank AG (DB) - Volume Up 22% http://t.co/TlOZI5jguH $DB #investor #stocks #investing
9 Oct 15 11:37:36
Commented on StockTwits: the new Greece is $DB and then $CS probably be something now one was even looking at ...... http://t.co/TsGlIEgVA9
9 Oct 15 11:07:23
@AH44KS @GerberKawasaki @CNBCFastMoney @MelissaLeeCNBC Bloomberg and $DB will tell you: http://t.co/KAqJ7W3pYU and http://t.co/cPlGUNutb6
9 Oct 15 10:58:14
Yesterday $DB #NextGen volunteers teamed up with @ElevateNY high schoolers and grads for a resume writing workshop http://t.co/BDMRnKkNld
9 Oct 15 10:21:01
$DB $CS: JC Parets: Stay Away From Banking Stocks: http://t.co/NHWPfhNWbq
The Legacy News
9 Oct 15 10:18:38
Deutsche Bank Raised to Buy at Kepler Capital Markets $DB http://t.co/qT8hlSag4P
9 Oct 15 10:18:29
Having 10 different news tabs open for $AAPL $DB $BP? We give you 1 http://t.co/iSMMsCwWju http://t.co/GSbotYjRdU
Dividend Master
9 Oct 15 10:15:06
@dougby1 looking at $DB & even VW bounce , i would guess german gov has done just that
Dividend Master
9 Oct 15 09:11:27
@TheVolawatcher @michaellebowitz They need to announce an $8bln loss like $DB did who is up 3-4% on the GREAT NEWS
9 Oct 15 09:04:27
RT @BOOMFinance: "Deutsche Bank biggest quarterly loss in a decade" The Guardian @ProfessorWerner @ProfSteveKeen @AnnPettifor $DB #DB http:…
Kleyton Cooper
9 Oct 15 09:00:19
RT @BOOMFinance: "Deutsche Bank biggest quarterly loss in a decade" The Guardian @ProfessorWerner @ProfSteveKeen @AnnPettifor $DB #DB http:…
Ticker Report
9 Oct 15 08:58:30
Deutsche Bank Sees Unusually-High Trading Volume $DB http://t.co/ODPa99lrbV
9 Oct 15 08:58:05
RT @BOOMFinance: "Deutsche Bank biggest quarterly loss in a decade" The Guardian @ProfessorWerner @ProfSteveKeen @AnnPettifor $DB #DB http:…
9 Oct 15 08:56:51
I need to go Public Lose Lots of Money Wall Street Will LOVE Me and Run my Stock Price UP UP UP Short SQUEEZEEE $SPY $DIA $QQQ $BAC $DB $C
US Banking News
9 Oct 15 08:56:32
Deutsche Bank Sees Unusually-High Trading Volume $DB http://t.co/QTh2zdADy2
Sleek Money
9 Oct 15 08:48:23
Deutsche Bank’s Buy Rating Reaffirmed at DZ Bank AG $DB http://t.co/rbnqTlHnQ6
9 Oct 15 08:46:54
Deutsche Bank’s Buy Rating Reaffirmed at DZ Bank AG $DB http://t.co/emdkCwaJn4
9 Oct 15 08:35:00
@DougKass This Stock Market goes against ALL Logic $DB Losses 7 Billion Dollars Stock goes UP $PACB Never Ever made any money stock goes UP
9 Oct 15 08:34:37
This Stock Market goes against ALL Logic $DB Losses 7 Billion Dollars Stock goes UP $PACB Never Ever made any money stock goes UP WTF
Dividend Master
9 Oct 15 07:55:15
same reason $DB is soaring to moon despite massive $7bln loss .... Merkel bidding it up to make problems vanish https://t.co/39ggQc85bB
9 Oct 15 07:52:03
$DB oct 30/31 vertical call credit spread for 20cent.
9 Oct 15 07:50:03
YINN Horsehead Holding Corp. Volume http://t.co/anh5IJrqhi $YINN $DB $TWTR $FOLD #YINN #pennystocks #tradeideas
Edward Dowd
9 Oct 15 07:48:37
$SPY 1) All these credit induced sell offs over the years only end when the old maid bag holder capitulates. Glencore? $DB? Food for thought
9 Oct 15 07:47:04
UUP ProShares Ultra VIX Short-Term Futures ETF News http://t.co/FHuwAIsVl6 $UUP $DB $HZNP $VXX #UUP #stock #investing
9 Oct 15 07:43:33
SHOP Shopify, Inc. Company Info http://t.co/7NWoTgZF58 $SHOP $XLU $DB $T #SHOP #share #stockmarket
9 Oct 15 07:37:33
GPS Gap, Inc. Filings http://t.co/gFT9RR2rXi $GPS $IWM $DB $DRT.TO #GPS #stocks #invest
Dividend Master
9 Oct 15 07:34:30
and $DB rallying 4% and well above where it was before massive $7bln hit wiped out profits & bonuses for all 2015 . Merkel bot alot ?
9 Oct 15 07:33:33
DB Deutsche Bank AG EOD Data http://t.co/YeXxu0OqxI $DB $VRX $XGD.TO $FXI #DB #investing #invest
9 Oct 15 07:29:47
Check out what @allstarcharts told us aobut $DB yesterday: http://t.co/GeuQp2iRew
Saibus Research
9 Oct 15 07:22:00
.@business but, but, but I thought $DB's offshore-outsourcing program was supposed to save it millions of dollars! #Pennywise #poundfoolish
9 Oct 15 07:06:18
@DIRT2GOLD @Chrisyahahha @gene70 @dave_meadows i am hurt this morning, $DB is up 1 pt. im short :-( i will hold my short position
9 Oct 15 07:05:03
$DRYS $DB: • Hottest European Stocks Now: DryShips Inc. (NASDAQ:DRYS …: http://t.co/Tjmn1WXSTP
9 Oct 15 07:03:20
DB 29.20 Deutsche Bank Ag $DB added to my watch list. Right now with DB I am watching the last price 29.20 Hig http://t.co/sxJeEt8U7r
Investors Hangout
9 Oct 15 06:57:37
jim50: DB Gapped up +0.78 $DB Last Price 29.24 Day High http://t.co/lfppbEXDqv
Investors Hangout
9 Oct 15 06:57:37
jim50: DB Gapped up +0.78 $DB Last Price 29.24 Day High http://t.co/xEKUOAhaY6
9 Oct 15 06:56:04
DB Gapped up +0.78 $DB Last Price 29.24 Day High 29.27 Day Low 29.24 Change +0.85 Volume 102,577 Today 61 stoc http://t.co/W1LYBin2o9
9 Oct 15 06:55:32
Having 10 different news tabs open for $AAPL $DB $BP? We give you 1 http://t.co/iSMMsCwWju http://t.co/KWZtUkIPRS
9 Oct 15 06:29:31
RT @KeithMcCullough: Going to talk about why you should sell both $DB and $JPM next @FoxBusiness @MariaBartiromo
A Gap Trader
9 Oct 15 06:00:42
#gapup $rio $aem $nvda $wll $enb $db http://t.co/Gtg6OlbJ6B #earnings #stock #market
9 Oct 15 05:56:00
Bezek's Daily Briefing: Bulls In Charge Despite Tech's Struggles http://t.co/ltFnb9pXoN $AAPL $AMBA $ASHR $AVH $COO $DB $EWG $EWZ $GE
9 Oct 15 05:56:00
Bezek's Daily Briefing: Bulls In Charge Despite Tech's Struggles http://t.co/gJ26425Ksf $AAPL $AMBA $ASHR $AVH $COO $DB $EWG $EWZ $GE
9 Oct 15 05:52:57
Breaking News Now
9 Oct 15 05:45:06
$VOD $DB: Best European stocks: Deutsche Bank AG (DB), Vodafone Group Plc …: http://t.co/ZdlynxnNP9
9 Oct 15 05:42:03
$VOD $DB: Best European stocks: Deutsche Bank AG (NYSE:DB), Vodafone …: http://t.co/JfurIljsDO
Keith McCullough
9 Oct 15 05:19:52
Going to talk about why you should sell both $DB and $JPM next @FoxBusiness @MariaBartiromo
By  +Follow December 5, 2013 7:56AM



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