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Nickel And Zinc

Miroslav Jovic, Nikola Volchkov & Manouchka Pierre

Nickel

  • Price of Nickel

One month Nickel price

-We said three weeks ago that the Philippines started a massive investigation on nickel mines due to environmental legislation. As a reminder, the government has found that toxic wastes were spilled in nearby rivers and promised a ban on nickel exports. Around the 10th November, the government has soften the ban and mines could continue exporting the commodity. Unfortunately, it is impossible to ascertain with complete certainty how the Philippines will enforce theses mining suspensions through 2017.

-Since Trumps election, prices have risen due to the president-elect policy to invest 1 trillion on the infrastructure to rebuild bridges and railroads.  Moreover since the election, investors have bought 1.8 million tons of base metals in the form of derivatives which lead to an increase in prices.

  • Inventory levels

One month inventory level

  • Shortage is coming

Production forecast requirements

Since our last bulletin (10th November) even tough the graph seems pretty steep the inventories have not increased that much. In this case its just a little more than 1% on the 23rd November.

The International Nickel Study Group (INSG) has reported production deficit of 52,600 tons during the initial three quarters of the current year. This is in comparison with a surplus of 74,800 tons during the corresponding nine-month period in 2015. Also, INSG forecasts a deficit of nearly 66,000 tons for the whole year 2016. It foresees the nickel market to continue to remain in deficit in 2017 as well.

  • Production balance
  • Production Balance until 2016

A 3 Month price represents the price agreed to settle or deliver material 3 months from the time the price is agreed.

Zinc

One week Zinc Price


One month Zinc Price


As we see in this chart, the price of zinc is continuing to rise since the first bulletin. This trend is due to the recent major mines closures which leads to a shortage. No major mines have been opened or closed during the month that is why the price curve is not volatile.

The surge in the price of this metal during the month of November is beyond expectations. The influences that are driving the market did not face a major change but experts believe that this increase is due to the overall metal market fever.

This graph shows that the price of Zinc rose by 30% (from the lowest year price) since the beginning of November. We see a brutal increase since mid-November. The price went  from 2556 $/t to 2867$/t. What can possibly explain this rise of the price is that when prices were flat (2015), traders were short and made money by selling options. Then they wanted to cover their position so they went long  (buying futures) because of the price exposure and this influences the market.

  • Inventory Level

Zinc Inventory Level

Since our last bulletin, the warehouse level have continued falling. It has dropped for about 1.1%. This is mainly to mine closure and buyers are drawing zinc from the current available supply.

  • Supply and demand dynamic

Nickel: Actually, this is the rainy season in the Philippines and there is low ore supplies. Due to this, the price of nickel continued to rise.

There are expected to be six companies by the end of 2017 that would sell electric vehicle. Electric cars will influence the demand for nickel. Due to that, there is actually a huge demand to produce batteries that contain nickel.

Secondly, China approved a 36 billion $ plan for building new rail links around Pekin.

Zinc: Concerning the supply, it is decreasing  because the demand is hugely increasing. Unfortunately, there is shortage of zinc.

  • Recommendations

The global analysis of this bulletin suggests us that it is better to go long with nickel because the price only goes up.

Concerning the zinc, the situation is not stable. Either the price goes up or down.

http://www.hellenicshippingnews.com/rising-nickel-market-offers-firmness-to-stainless-steel-scrap-prices/

http://economictimes.indiatimes.com/markets/commodities/news/base-metals-copper-futures-slide-nickel-falls-on-profit-booking/articleshow/55680425.cms

http://www.skynews.com.au/business/business/market/2016/11/30/lead-and-zinc-prices-fall-six-per-cent.html

http://www.lesechos.fr/26/01/2016/LesEchos/22115-121-ECH_nickel—les-producteurs-contraints-de-ralentir.htm

http://www.romandie.com/news/Les-metaux-industriels-continuent-de-grimper/756078.rom

Crude oil operating rigs recap

The number oil rig started to increase around January 2010 to reach a number of 1,596 operating rigs on October 2015.Then it started to decrease, impacted by Obama’s energy policies, coupled with high cost of production.471 active rigs were reported in November 18th. Following Donald Trump’s election, and considering his new energy policy, and increase in the number of rig can be expected.

We can notice a sharp increase in the production of shale oil covering the same period as the previous graphic, thus explaining the increase in number of operating rotary rigs.

Supply and Demand

The Crude oil demand for US refinery rose over the month, reaching 16.28 MMbbl/day as of November 25th. An increase in production of 10 Mbbl/day during the same timespan, as well as an increase in exports of 59 Mbbl/day, thus decreasing the ending stock of the week by 1’256 Mbbl. They were estimated at 1’184’115 Mbbl as of November 18th, of 1.7% compared to last month.

OPEC vs WTI

In June 2015, production is less than 31.5 MMBbl/day & prices are 60$/Bbl. Production flew to 33 MMBbl/day in Feb 2016 & prices dropped to its lowest level 27$/Bbl.

WTI Crude Oil prices (NYMEX) in USD/Bbl From Nov 1st 2016 – Dec 1st 2016

Source : Bloomberg

Decrease in prices since October such as global supply rose to 97.8 MMBbl/day with OPEC’s production at its highest level to 33.64 MMBbl/day as well as Russia with 10.5 MMBbl/day. Prices rose on Nov.15th as market hoped that OPEC would reach an agreement to cut output as Iraq to cap its output to 3.9 MMBbl/day instead of 4.5 MMBbl/day as well as because of drop in US inventories by 1.3 MMBbl. Nov 20th Putin said that Russia will freeze its output so prices flew to 48$. Prices fell down on Nov 23rd to 46$ because of a stronger dollar based on the expectations that Federal reserve will raise interest rates. On November 28th Saudi Arabia threatened that if Iran-iraq do not find a compromise they won’t even attend meeting so prices fell down again. Finally biggest peak of this month to 50$/bbl as a production cut of 1.2 MMBbl/day agreed in Opec meeting on Nov 30th 2016.

Forward Curves’ comparison from 21.11 – 01.12.2016:

Forward curve is Contango. A purchase of Future would have been in lost if bought in the week of 19.11 & sold in the week of 26.11 but if waited until the decision of Opec’s meeting would make 4$/bbl buying at 46$ & selling at 50$/bbl.

Forecasts

Worldwide consumption in 2017 would be increasing from 95.33 MMBbl/day to 96.67 MMBbl/day.

OPEC agreed to a deal to cut oil production, a freeze of 1.2 MMBbl/day to capping production at 32.5 MMBbl/day. Also Russia will cut by as much as 300’000 MB/day. The Cartel expects that others Non-OPEC members would also contribute to reach a cut over 600’000 MB/day from them. A balance supply & demand is expected for 1st semester of 2017 and prices flying up to 50-55$/Bbl.

Regarding Trump’s policies which are to ease federal restrictions on oil drilling will have an impact but they will not be immediate. The impact will be reflected in the oil market and may become evident in the second half of 2017.

Sources :

https://www.ft.com/content/a0b73c1c-b750-11e6-961e-a1acd97f622d

http://www.aogr.com/web-exclusives/us-rig-count/2016

http://www.investing.com/news/commodities-news/crude-oil-futures—weekly-outlook:-november-14—18-440235

http://www.investing.com/news/commodities-news/oil-up-2-on-renewed-hopes-for-opec-cut-442698

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCRFPUS2&f=W

http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-reportsother

https://ycharts.com/indicators/us_crude_oil_field_production

http://marketrealist.com/2016/11/us-crude-oil-inventories-fell-market-expectations/

http://marketrealist.com/2016/11/us-crude-oil-rig-count-turning-point-crude-oil-market/

https://www.bloomberg.com/news/articles/2016-11-29/three-possible-scenarios-for-opec-meeting-on-oil-production-cuts

https://www.barchart.com/futures/quotes/CLF17/all-futures

  1. Aluminum price :

On this graph, we can see the aluminum price in US dollars per metric tons. We can see that there have been two significant price increase.

http://www.lme.com/metals/non-ferrous/aluminium/

The 8th November we can see that the price raise a lot. This increase is mainly due to the election of Donald Trump. Indeed, in his speech, the 45th US President said that he will spend approximately $500 billion on the infrastructure sector (highways and bridges) despite the higher budget deficit. Moreover, he also mentioned that the US economic growth will double. This two factors will have a positive impact over the US demand of aluminum.

However, we also have to take into account the negative impact that it will have over the Chinese economy.

2. Inventories level :

In this graph we see a raising in the aluminum’s warehouse stocks.

But looking long term, we see that such a rise is absolutely non-relevant, and represent a little pick in the 5 years aluminum Warehouse Stocks level. We can see that since beginning 2014, the stocks starts to fall. We think it is mainly a cause of the Chinese growth rate that decreased in 2012.

http://www.kitcometals.com/charts/lmewarehouse.html#aluminum

3. Forward curve :

Between January and March 2017 the curve is backwardation, then it changes to contango. We don’t have a real explanation about the backwardation but it’s a negative sign for aluminum producers because in general, this deals are profitable when the curve is in contango because the aluminum is a commodity which is bought near the delivery.

4. Recommandation :


With the election of Trump we could expect a raise in the demand of aluminum in USA, because Trump promise to spend more than 500 billion on the infrastructure sector in order for the country to be more competitive. Basically he wants to increase the demand and the supply in the US. Aluminum is also very important commodity for the Chinese economy. In 2015 China announced a 50% cut in its sales tax on cars with engines smaller than 1.6 liters. This tax cut is effective until end 2016 but some analysts expect China to extend it until end 2017. With the investment promised by trump in the US linked to a tax cut in 2017 for the china’s cars, we recommend to be long. But, the Chinese government did not officially communicated that the tax cut will be extended, and the investments of Trump will take time to have a real impact in aluminum demand. The Recommendation is to be taken as long term.

Besmale, Adrian and David.

Sources :

http://www.lme.com/metals/non-ferrous/aluminium/

http://marketrealist.com/2016/11/trump-china-and-commodity-prices-its-all-happening-for-alcoa/

http://marketrealist.com/2015/04/april-aluminum-prices-backwardation-negative-alcoa/

https://www.jmbullion.com/investing-guide/pricing-payments/backwardation-contango/

https://www.lme.com/~/media/Files/Notices/2015/2015_03/15%20068%20A068%20W021%20UPDATE%20ON%20LME%20PHYSICAL%20NETWORK%20REFORM.pdf

https://www.barchart.com/futures/quotes/AL*0/all-futures#/

https://www.fastmarkets.com/base-metals-news/aluminium/timeline-whats-happened-to-lme-warehouses-since-bazooka-was-loaded-112210/

1) Price movement

Trump effect:

The iron ore price today sit around 75$

Donald Trump win made the future markets price to explode, on the Dalian Commodity Exchange, iron ore futures traded for as high as $90 per ton. Investors were hopeful about the fact that Trump said that the US were spending $500 Billion on infrastructure projects, which is supporting the commodity price. Speculator are on a Bullish position.

(To control the speculative boom the Chinese regulators raise the transaction charges and margin requirement.)

Goldman Sachs Upgrade:

Another cause of the rising price of the commodity is that Goldman Sachs are suggesting the investor to overweight the commodity they believe that manufacturing will support the commodity next year.

The forward curve is in Backwardation it means that the spot price is higher than the futures.

(Spot price from 29th November)

2) Supply and demand dynamic

China’s five year plan is to cut capacity in steel mills sector because they want to reduce the pollution. Steel mills are increasing their demand of ores of higher quality in order to reduce their emission (high quality ores need less processing) and also decreasing the cost because they will buy less coking coal (last time we said that the price of this commodity was skyrocketing).

China is actually reducing their own productions of iron ores also in order to reduce pollution and because they cost more to produce, so it will lead to more importation of the commodity.

Concerning the balance between the supply and demand even with the increasing demand there is still more supply for the two commodity so the market stay unbalanced.

Steel:

China is going to reduce their steel production, by doing that they try to reduce the overcapacity of the sector. This overproduction made the price to decrease, for example the production in 2008 were 132 million and in 2014 327 million.  In the future the price of the steel is going to increase.

As you can see on the graph, the world steel production on 2016 rise more than 3% but the world steel demand at the same time growth to 0, 2%. It means steel’s stocks growth for the year 2016.

The total of steel production in October were at 136.5 metric tons, every supplier saw their production increase but that doesn’t mean that the demand were rising. That oversupply makes the price decrease mostly because of China, which is why they want to limit the production.

Recommendation

We recommend to be on a long position for the three next month in order to see how Donald trump plan will impact the market and also to see how the capacity cut in Chinese will be handle. The price right now is unstable and makes it a good opportunity to buy iron ore at low price and then profit from the events that will occur upcoming months.

Sources

http://marketrealist.com/2016/11/speculation-iron-ore-futures-lead-spike-spot-prices/

http://www.afr.com/business/mining/iron-ore/iron-ore-futures-soar-again-on-chinese-steel-mill-closures-20161124-gswx7p

http://www.abc.net.au/news/2016-11-15/iron-ore-price-hike-explained/8028298

http://www.mining.com/web/the-true-benefactor-of-president-trumps-americas-infrastructure-first-initiative/

http://www.reuters.com/article/us-china-ironore-futures-idUSKBN13K0AU

http://fr.cctv.com/2016/11/24/VIDEKBWkEvbSoexZNJQyADCU161124.shtml

http://www.fool.com.au/2016/11/28/the-iron-ore-price-could-go-to-us90-a-tonne/

http://www.reuters.com/article/china-steel-zinc-idUSL4N1DT22T

https://agmetalminer.com/2016/11/15/3-reasons-why-steel-prices-will-rise-well-into-2017/

http://marketrealist.com/2016/11/whats-driving-steel-prices-china/

http://www.businessinsider.com.au/heres-the-goldman-sachs-note-thats-got-iron-ore-traders-excited-2016-11

http://www.reuters.com/article/us-column-russell-ironore-rio-tinto-idUSKBN13N0AL

http://blogs.platts.com/2016/11/22/china-steel-output-capacity-cuts/

http://french.xinhuanet.com/2016-11/22/c_135850097.htm

http://www.scmp.com/news/china/economy/article/2049767/chinas-bid-slash-size-its-polluting-steel-and-coal-industries

http://marketrealist.com/2016/11/whats-driving-steel-prices-china/

https://www.worldsteel.org/media-centre/press-releases/2016/worldsteel-Short-Range-Outlook-2016—2017.html

General Trends

According to usda.gov:

“World production for 2016/17 is forecast to rise 2.4 million bags from the previous year to 155.7 million bags (60 kilograms) as record Arabica output in Brazil more than offsets lower Robusta production in Brazil, Vietnam, and Indonesia. As a result, world Arabica output is expected to rebound to 60 percent of total production after being below this level the previous 5 years. Global consumption is forecast at a record 150.8 million bags, drawing ending inventories to a 4-year low. World exports are expected to slip from last year’s record primarily due to lower shipments from Indonesia, Vietnam, and Brazil.”

So lower supply in Robusta and higher supply in Arabica is expected. The general stock is 4 years low.

On the demand side, the overall coffee consumption is increasing, especially in Asia:

Coffee consumption does not require much setting as tea, that’s why it’s preferable for most people in our western active-stressful culture.The consumption of coffee vs tea: Denmark (92.2%), Sweden (90.6%), Norway (88.9%) Finland (88.8%), Spain (85.9%) Portugal (88.1%), Italy (78.4%), Belgium (90.4%), Romania (89.9%), Austria (80.7%) and Greece (96.8%), Netherlands (73.8%), France (70.5%), Switzerland (69.7%), Germany (60.2%), Czech Republic (65.5%) and Poland (51.3 %).

While in western countries the domination of coffee is undeniable, in asia the champ was and is still tea. Most Asian countries consumes more tea than coffee: China (1.1% of coffee consumption against 98.9% of tea) <huge potential?, Iran (10.1%), India (11%), Russia (22.5%), Saudi Arabia (31.3%) and Japan (37.4%), Africa (12% coffee versus 88% tea) Australia (49.7% coffee versus 50.3% tea).

But the trend is changing as younger asians generations adopt more and more the western lifestyle. This translated by a higher and steady demand for more coffee in the future from asian regions.

Forward Curves

Forward curves Oct.2016 vs Nov.2016

Price Forward curves Oct.2016 vs Nov.2016

Forward curves carry and do not show seasonality, everything seems stable.

Volume forward curve Oct.16 vs Nov.16

Volume forward curve Oct.16 vs Nov.16

Price Charts

NYC KC

Arabica NYC KC US$cents/pound

Robusta London RC

Robusta London RC US$/metric ton

We both have a striking phenomena of price dropping after the election. But since the Trump effect does not affect the Supply Demand neither the Inventory, we wonder what else could influence the curves. Let us take a look at the Forex rates.

Forex influences:

BRL to USD

Brazilian Real to US Dollar

VND to USD

Vietnamese Dong to US Dollar

IDR to USD

Indonesian Rupiah to US Dollar

Here we have the price of currencies of 3 main exporters decrease much compared to the US$ we could somewhat have an explanation for the price drop.But there are differences between Arabica and Robusta.

Recommendation

The Arabica price curve is quite logic as the supply is increasing and the Brazilian Real drops. We could short it for now but not really confident neither how long this trend will last.

For the Robusta, we are more confident in our recommendation to long it. The demand is high and increasing, the stock is low and the supply is low too. For the price rally from the 17th of Nov, we suspect some speculative moves from China as we could read from news, but we could not conclude for certain, lack of evidence.

By: Nghia Bui, Nicolas Sliwowski, Fabien Tassy

Sources

Charts:

https://markets.ft.com/data/commodities/tearsheet/charts?c=Coffee+(Arabica)

https://markets.ft.com/data/commodities/tearsheet/charts?c=Coffee+(Robusta)

https://www.theice.com/products/15/Coffee-C-Futures/data

http://www.marketqview.com/forwardcurvechart.php?ID=15&TYPE=Volume

http://www.xe.com/currencycharts/?from=BRL&to=USD&view=1M

TAYLOR TRADING BUY DAY IN COFFEE FUTURES, 2016 (accessed 22.11.2016). Available at:

https://www.danielstrading.com/swing-traders-insight/2016/11/09/november-9-taylor-trading-buy-day-coffee-futures

INTERNATIONAL COFFEE ORGANIZATION (ICO), 2015. Coffee Prices Fall to 18-Month Low as Supply Concerns Fade – Coffee Market Report July 2015. International Coffee Organization Blog. 10.08.2015. (accessed 01.11.2016). Available at:

https://icocoffeeorg.tumblr.com/post/126328115415/coffee-prices-fall-to-18-month-low-as-supply

PM markets: ag futures fall as Trump-bump reverses, 2016 (accessed 22.11.2016). Available at:

http://www.agrimoney.com/marketreport/pm-markets-ag-futures-fall-as-trump-bump-reverses–3844.html

Colombia coffee export hopes rise – as Brazil’s fade, 2016 (accessed 22.11.2016). Available at:

http://www.agrimoney.com/news/colombia-coffee-export-hopes-rise—as-brazils-fade–10185.html

http://www.cafedecolombia.com/bb-fnc-en/index.php/comments/coffee_or_tea_a_picture_of_world_consumption/

Today, the current spot price is at 2’060 £/metric ton and 2’438 $/metric ton (on 24 November 2016). This cocoa price decrease since our bulletin n°1 is due to the abundant supply of the “Main-Crop”, which started in October as the harvest began in most of the producing countries, especially in West Africa. Forecasts have been revised upwards for 2016/17. The Main-Crop changed the ICCO’s forecasts from a deficit of 212’000 M/T to a surplus. Cargill is now expecting a surplus of 200’000 M/T.

Therefore, non-commercial funds are reducing their Long positions leading to an additional source of decrease in the price of cocoa. Moreover, the latest events occurring in USA have led to a strengthening of the dollar, which has enabled producers to gain more money when exchanging in their local currency. As a matter of fact, buyers of cocoa are asking producers to reduce the price.

Forward Curve

Currently, the forward curve is now in a Carry shape because:

  • Well supplied market due to “Main-Crop”
  • Grinders waiting for the “Main-crop” of better quality

We recommend to go long on Cocoa as today, customers are not worried about fresh supplies, thus there is less demand for Cocoa delivery now. In opposition with our last forward curve, the market is now well supplied.

Since our last Bulletin, the future price for delivery in December dropped from 2756 $ on October 28 to 2438 $ on November 21 (- 11.5%).

This is due to the fact that farmers usually hold part of their previous crop in order to benefit from the increasing price of the “Main crop”. Therefore, grinders are waiting to be sure to get the new crop which is of better quality because of ideal meteorological conditions.

“Why would you want to take old cocoa when you don’t even know what you’re taking,” – NY based Trader

Gold (precious metal)

Bulletin 25.11.2016

Week 4th to 25th November 2016

As we mentioned in our previous bulletin (4th November 2016) Gold is a “safe haven”. The election of Donald Trump had to be a bullish factor for the Gold price as investors hate uncertainty.

The fact that the US changed the political party at the White House in electing a Republican president had to increase uncertainty and therefore increase the long positions of this precious metal that would result of a Gold price rise.

However, in our last bulletin we recommended being short as the fundamentals were not favorable for a Gold bullish price. As you can see in the below chart Gold’s slide continued as the dollar extended its move to new 14-year highs. 95.4% of investors think that the interest rate will increase at the December FOMC meeting (an increase of 25% compared to the last bulletin).  Fundamentals won against the “safe haven” factor certainly due to the comments from Federal Reserve Chair Janet Yellen. She stated that the central bank could raise interest rates “relatively soon”.

The above chart is the price of physical gold in American dollar ($) for a troy ounce (oz: 31,1034768 grams) that takes place in London (LMBA) twice a day.

You can see on the above chart that Gold price quickly increased after Donald Trump was elected (8th October 2016) but it lasts only two days due to the comments of Federal Reserve Chair Janet Yellen about the eventual increase of interest rates.

The 14th November 2016 Gold prices consolidate. It means that prices stabilize around 1220-1235 USD/oz. Then, the 18th November 2016, Gold declined below the May bottom at 1207 USD/oz and is still vulnerable to a higher decline due to continued dollar strength and could continue to fall as low as the 2015 low at 1052.6 USD/oz.

Here is the U.S Dollar Index (USDX). This index is the value of the U.S dollar compared to a basket of currencies.

You can see that at the beginning of October 2016 the dollar moved sharply higher which pushed Gold prices down.

Edit 23.11.2016 :

The bearish trend confirms itself as Gold price hit a nine-month low, below its support of 1’200 USD/oz. The increasing U.S. dollar index and better than expected U.S. economics numbers pushed Gold under this support.

Price in USD for a troy ounce of gold

As we can see here, once the support broke, gold price fall until 1’185 USD/oz and is actually traded around 1’190 USD/oz at the time of writing of this bulletin.

The above chart is the price of physical gold in American dollar ($) for a troy ounce (oz: 31,1034768 grams) that takes place in London twice a day.

Gold Futures (USD/oz)

As we can see the forward curve remains a contango. However, prices are following the trend and dropped by approximately 100 USD/oz regarding today’s (23th November) price for a future delivery. An oversupply resulting from an important sale. Thus the price dropped.

Recommendation

We recommend being short until the FOMC meeting in December 13-14th 2016. If the interest rates are still unchanged we still recommend you being short as increase of interest rates will certainly be delayed to January 2017 meeting.

As Gold price broked below the 1’200 USD/oz support level, the prices are expected to be under pressure in the following weeks.

References

CMEGROUP. Warehouse & Depository Stocks [online]. 2016 [Consulted on 02.11.2016]. Available at: http://www.cmegroup.com/clearing/operations-and-deliveries/nymex-delivery-notices.html

FEDERALRESERVE. Federal Open Market Committee [online]. 2016 [Consulted on 20.11.2016]. Available at: https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

INVESTING. US Dollar Index Streaming Chart [online]. 2016 [Consulted on 20.11.2016]. Available at: http://www.investing.com/quotes/us-dollar-index-streaming-chart

LBMA. London is home to the international prices for Gold, Silver, Platinum and Palladium Chart [online]. 2016 [Consulted on 20.11.2016]. Available at: http://www.lbma.org.uk/pricing-and-statistics

FORBES. Gold Drops Below $1,200.00, Hits 9-Mo. Low, On Charts, Upbeat U.S. Data [online]. 2016 [Consulted 23.11.2016]. Available at: http://www.forbes.com/sites/kitconews/2016/11/23/gold-drops-below-1200-00-hits-9-mo-low-on-charts-upbeat-u-s-data/#55311e723431

DailyFX. Gold prices Stage Significant Support Break: Buyers Beware[online]. 2016 [Consulted 23.11.2016]. Available at : https://www.dailyfx.com/forex/technical/home/analysis/xau-usd/2016/11/23/daily-classics-gold-11-23-2016-srepstans.html

GoldPrice. Live gold price [online]. 2016 [Consulted 24.11.2016]. Available at : http://goldprice.org/live-gold-price.html

CME Group. Gold Futures Quotes [Online]. 2016 [Consulted 24.11.2016]. Available at : http://www.cmegroup.com/trading/metals/precious/gold.html

Ending Stocks

As you can see in the graph above, the USDA forecast, published the 9 of November, didn’t show critical change in the wheat market structure. The wheat ending stocks are in range with the expectation given by the USDA. The November 16/17 Ending stocks are above the analysts’ average expectation at this stage (+0.83 millions tons). Regarding the level of the stock to use, it is in the same level than October (33.8%).

High stock level, strong dollars, low price

USA and Russia have huge harvest due to good weather. We can say that this trend is applicable more or less around the world, except in France and German due to poor weather (heavy rain which devastated the wheat crop).

As you can see in the graph below, the price of wheat is only decreasing.

There are many reason of this. First, the wheat market looks well supplied for 2016-17 and that impression has tended to keep prices under pressure. The pressure stemmed from record stocks as well as upgraded production expectations in some areas. This increase in stocks leads to a low price of wheat. Then, the inventory levels which reached a new high record due to the technical improvement which allows to harvest more. Finally, the good weather which allows to increase the harvest.

Forward curve


As you can see in this graph above, the wheat forward curve is in carry. The spot price is lower than the expected futur spot price. Despite the low price in the market these days. Our recommendation is to be  long because we are expecting that the price will increase in the next 6 months.

Black sea threats for Australia exports.

These days the grain demand in South Asia increase a lot. Australia are in a strategic position to supply them. It is mainly due to the proximity and the quality advantage. Black sea exporter leads by Russia put pressure on the stability of the Australian exports. Indeed, the low cost of production, the low ocean freight rate and several investment of the public and private sector in the grain infrastructure are an advantage for the black sea exporter. That help the black sea exporter to boost productivity and volumes available for export. They have planned to built a grain terminal in Vladivostok in order to have a better access to the Asian market.

https://www.google.ch/maps/place/Australie/@17.159132,71.9200002,3z/data=!4m5!3m4!1s0x2b2bfd076787c5df:0x538267a1955b1352!8m2!3d-25.274398!4d133.775136

Sources:

http://www.investing.com/commodities/us-wheat

https://www.ft.com/content/75fdb856-6b0c-11e6-ae5b-a7cc5dd5a28c

http://www.indexmundi.com/commodities/?commodity=wheat&months=60

http://www.igc.int/en/Default.aspx

http://seekingalpha.com/article/4022948-sell-wheat-now

http://www.manitobacooperator.ca/daily/u-s-grains-wheat-climbs-on-acreage-view-short-covering

http://www.investing.com/analysis/wheat-market-and-the-us-dollar-200164292

http://www.voanews.com/a/russia-record-wheat-harvest-raises-quality-issue/3605539.html

http://www.ers.usda.gov/topics/crops/wheat.aspx

https://www.ers.usda.gov/data-products/wheat-data/

http://www.usda.gov/oce/weather/pubs/Monthly/current.pdf

http://www.agweb.com/article/usda-surprises-analysts-in-november-wasde-report-naa-debra-beachy/

http://marketrealist.com/2016/11/crop-prices-move-lower-november-trouble-monsanto/comments

http://www.cmegroup.com/trading/agricultural/files/ht_charts/snd_cbt.pdf

https://www.agmanager.info/grain-marketing/grain-supply-and-demand-wasde

http://www.agweb.com/article/6-things-you-need-to-know-about-the-wheat-market-right-now-naa-debra-beachy/

http://www.brecorder.com/markets/commodities/america/329219-cbot-trends-wheat-down-2-3-cents-corn-and-soybeans-down-1-2.html

http://www.blackseagrain.net/novosti/cbot-wheat-futures-decreased-under-influence-of-currency-factor

https://apps.fas.usda.gov/psdonline/circulars/grain.pdf

https://www.thebalance.com/wheat-planting-and-harvest-seasons-809321

Overview of World’s Cotton supply, production and stocks as of November 23rd, 2016

  • China’s production – which has fallen from 35’000’000 bales in 2014/15 to 21’000’000 bales in 2016/17 (drop of 40% of their production which is roughly 15% of 2015/16 World’s total production) due to a decreasing interest to produce this commodity because of its high producing costs and the high stocks of the Government – is forecasted to be stable, so as the World’s production this coming year comparing to 2016/2017
  • Consumption is stable with a rising tendency. As we can see above the consumption is higher than the production outcome and will therefore lead to a price increase of the commodity
  • Current stocks are still high on a historic basis at 80% of world’s annual consumption requirement. More than half (48’000’000 cotton bales = volume of 9972 Olympic swimming pools) of the World’s stock (total 88’000’000 bales) are stocked in China. Every year China’s production-use balance is negative and can have a relative high impact on the cotton prices.
  • The latest report of the USDA estimates an increase in the acreage surface of 58’000 Ha globally and the yield of 2 kg/Ha comparing to October’s last estimate.

Let’s now have a closer look at the cotton price key drivers and understand its latest evolution.

US Dollars

The main & leading cotton future commodity is quoted at the NYSE exchange market and is traded in US dollars. We have analyzed the appreciation of the US Dollar lately on Bloomberg which is mainly due to the multiple announcements of the US Federal Bank Reserve stating that it will increase the bond and T-bills rates in December 2016.

US Dollar Index: “This index is calculated by factoring in the exchange rates of six major world currencies the Euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc”- www.Investopedia.com

An appreciation in the US Dollars currency should logically decrease the cotton prices as you theoretically need less US Dollars to get the same quantity if it were to appreciate.

So how did it the cotton forward prices move as we can see that the US Dollars have appreciated +4% since our first bulletin (04.11.2016-18-11)?


Cotton price movements

Well not as planned… A major supply problem in India led to an increase in price in the Cotton future’s prices in global markets that characterized the latest price movements in this commodity.

The problems in India are due to a cash crunch and late harvesting in some regions. Some contracts may not be deliverable on time; traders could turn themselves on other suppliers which explains the increase in price of the U.S. cotton forward commodity.

Forward curves – The Indian cash crunch

1st bulletin – 04.11.2016

18.11.2016 – (on 23.11.2016 11.02 p.m. Dec 16 contract prices : 73.190)

This “crisis” give us important data about market reaction and how we reflect short term negative events on a commodity.

Reasons:

-        Exports of 1 million bales delayed due to limited cotton supply*

-        Farmers not ready to accept cheque, traders short of cash*

-        Importers could switch to the U.S., Brazil and Africa*

Expecting a bumper crop of 35 million bales, Indian traders had contracted 2 million bales for exports to China, Vietnam, Bangladesh and Pakistan for shipments in November to January. But traders have managed to ship only around 300,000 bales and nearly 1 million bales that were due to ship in November and December are getting delayed, three exporters told Reuters.

*source Reuters


The Indian Industry officials however say that the crunch is temporary and since there is still much production to be harvested, there shouldn’t be any shortage of raw cotton for the mill’s.

Prices should therefore stabilize when this crisis will be over.

Upcoming important dates for cotton:

-        30/11/16          OPEC Meeting in Vienna, Austria

-        14/12/16          US Federal Reserve Bank interest announcement

-        Dec – Jan         Chinese market survey – Will previsions become true?

-        Jan                   USDA’s 2016/2017 cotton crop prevision and current situation


Key points

Weaknesses

-        Inversion in GDP growth of China (low)

-        Less global demand as the stock-use-ratio are on a record high (moderate)

-        Production: good forecasts, stable consumption (high)

-        US dollar currency appreciation (moderate)

-        Currently low Brent crude oil prices (moderate)

Strengths

-        India problems may still take some time before being resolved (high)

-        Consumption is still outweighing production capacity; past events have proven that a sudden price increase is possible (low)

- Miscellaneous events may still occur, weather, climate, war, etc. (low-moderate)



To conclude, we think that cotton forward prices inverse in the next couple of weeks, with the hope that the Indian cash crunch will be resolved and no other problem will occur.


Agron Etemi, Justin Nangmo, Stefan Zgraggen

Sources

Marketqview.com (2016) Futures Forward Curve

[Online] Available from: http://marketqview.com/forwardcurvechart.php?ID=20&TYPE=Price

[Accessed: November 2016]

Bloomberg.com (2016) Cotton CT#2 @NYSE Quotation

[Online] Available from: https://www.bloomberg.com/quote/CT1:COM

[Accessed: November 2016]

Cotton Inc. (2016) Cotton monthly Economical Letter

[Online] Available from: http://www.cottoninc.com/corporate/Market-Data/MonthlyEconomicLetter/

[Accessed: 04/11/18 November 2016]

AGEFI, Edition du 28.10.2016 – Si l’économie chinoise implosait…

[Online] Available from: http://www.agefi.com/quotidien-agefi/forum-blogs/detail/edition/2016-10-28/article/les-repercussions-dans-le-monde-si-les-sombres-previsions-sur-les-perspectives-chinoises-se-revelaient-exactes-439090.html

[Accessed: 10 November 2016]

Bloomberg.com (2016) Bond Vigilantes to Trump: Be Careful, It Could Get Painful [Online] Available from: http://www.bloomberg.com/news/articles/2016-11-14/bond-vigilantes-to-trump-be-careful-it-could-get-very-painful

[Accessed: 15 November 2016]

Bloomberg.com (2016) India Cotton Supplies Slump as Banknote Switch Roils Farmers

[Online] Available from: http://www.bloomberg.com/news/articles/2016-11-16/india-cotton-supplies-slump-as-banknote-switch-roils-farmers

[Accessed: 17 November 2016]

Commodity Online (2016) MCX Cotton market under short covering

[Online] Available from: http://www.commodityonline.com/news/mcx-cotton-market-under-short-covering/12097

[Accessed: 17 November 2016]

USDA/FAS (2016) Cotton: World Markets and Trade – USDA Foreign Agricultural Service

[Online] Available from: https://apps.fas.usda.gov/psdonline/circulars/cotton.pdf

[Accessed: 18 November 2016]

Saxo Bank (2016) Le point économique du jour (18.11.2016)

[Online] Available from:http://fr.saxobank.com/insights/newsletter-quotidienne

[Accessed: 20 November 2016]

Cotlook Index (2016) Displaying Cotlook A Indices for the past month

[Online] Available from: https://www.cotlook.com/information/cotlook-indices/

[Accessed: 20 November 2016]

Reuters (2016) Cash crunch puts brake on India’s cotton exports; rivals to gain

[Online] Available from: http://www.reuters.com/article/india-cotton-exports-idUSL4N1DM2VA )

[Accessed: 20 November 2016]

Picking up where we left off last month, palm oil prices have experienced a volatile month through October-November. There have been two significant price movements: The first at the end of october and the second after the US elections.

The first price movement in late October is a drop of 20 USD for CPO, as Soy oil prices decreased in Chicago and China. The effect is a basic economic one, as Soy oil is a substitute commodity for Palm oil. Despite the recent announcement of increased percentage of palm oil in the production of Bio-Diesel that made the market optimistic mid-october, prices were dragged down none the less. More on this in the Soy commodity bulletin next week.

The second price movement occurred after President-elect Donald Trump was announced victorious. On that day, the value of the USD to the MYR rose by 3.5%. This position creates an advantage for exporting businesses, as CPO becomes more competitive abroad. As Palm oil is sold spot in USD and repatriated in local currencies, companies are seeing profits through this exchange. A clear winner of the US Election results, Palm oil has see prices rise as traders become more optimistic for the future of palm oil businesses. It is important to note that this effect is not exclusive to Malaysia, as most emerging markets are seeing a weaker currency following Donald Trump’s announced presidency.

DONALD TRUMP’S EFFECT ON SOFT COMMODITIES VIDEO: http://video.cnbc.com/gallery/?video=3000568000

Uncoincidentally, rising palm oil prices has also caused the Malaysian authorities to delay the plan to increase the percentage of palm oil in Biofuel production. The main reason for this is the effect of CPO price on the competitiveness of Biofuel with regards to other fuels, as well as an affordability issues for local consumers in Malaysia.

The inverse in palm oil futures reflect the low inventories caused by the El Niño drought that has been affecting Malaysia and Indonesia, as production this month have not met predictions from October. Recovery in production is slow and does not meet the volume of exports, aggravating the situation. Recently, Palm oil reserves in Malaysia have hit their lowest point since 2011. As we have stated previously, both these countries produce approximately 80% of world production.

Forcast:

As we are soon going to be back where we were last month we retain our positions. We believe a sound trading strategy would be to go short for the next three months, then Long after that.

Sources: [Last visted 16.11.16]

http://www.investing.com/commodities/crude-palm-oil

http://www.mpoc.org.my/Daily_Palm_Oil_Prices.aspx

http://www.thesundaily.my/news/2044662

http://asia.nikkei.com/Markets/Commodities/Malaysia-defers-raising-palm-oil-share-in-bio-diesel-mix

www.bursamalaysia.com/

http://www.bloomberg.com/news/articles/2016-08-10/palm-oil-reserves-in-malaysia-drop-as-exports-outpace-production

http://dailytimes.com.pk/business/16-Nov-16/soy-weighing-down-palm-in-vegetable-oil-market

http://www.mpoc.org.my/monthly_sub_page.aspx?id=a1f1c5c4-eca4-4f15-baa0-03ded627104d