Low stocks and Chinese demand in the second quarter boost the prices of copper to a 7-month high. Indeed, last week, the LME copper price ended at $6,405 its highest since July 2018. This is due to the low inventories, the LME warehouses reached 139,500 tonnes, close to the 10-year low of 122,500 tonnes in December 2018. The reason the depleting inventory is the seasonally strong demand of China as well as the resolution of the trade dispute. Demand is typically high in the second quarter as the third quarter is the period in where construction activity rises in China. The global demand is estimated at 24 million tonnes and nearly half of it will be consumed in China. The country is also expected to stimulate its economy using new monetary and fiscal policies. An indicator of the future economic activity in China is the new loans. Loans hit a record of 3.23 trillion yuan ($481 billion) in January as policymakers tried to boost the decreasing investment in the country and prevent the economic slowdown. Concerning the trade dispute, President Trump said on Tuesday last week that talks with China were doing well and even suggested to extend the deadline of March 1 to complete the negotiation. Citi is expecting the price to rise to $6,700 a ton over the next 3 to 6 months. The premium for cash over three-month contracts hit $58 a tonne on Monday which is the highest since October as the market worried about the short-term availability of the commodity, however it now stands around $23.15 a tonne.
Copper’s inventory level at the LME’s warehouses almost reached the historical low end of December. As demand is increasing, the price do so and therefore it is a usual phenomenon that these inventory decrease. Nevertheless, the very low level brings insecurity regarding the supply side, as constructions in China are going to start again in the 3 quarter and big lots are to be order soon. Indian rise in demand: The rise of price of copper is also supported (in a smaller extent than China) by the rise of demand in india. Indeed, the Indian’s consumption has been rising significantly over the past decade. In 2018, the annual indian copper consumption was 650’000 tonnes. According to the asian copper conference in Shanghai, the copper demand in india will double by 2026. The Indian’s consumption is expected to rise to 1.433 million tonnes by 2026. India has forecasted its nation refined consumption to hit 843’000 for 2019. This is 200’000 tonnes more than in 2018. Even more interesting, this assumption is not taking into account the fact that electrical vehicles will become more copper intensive into the future. To conclude, it seems that nothing suggest that the price of copper will decrease anytime soon. The Chinese continues to increase its demand for copper, especially for this third quarter. Inventories are historically low and no change are forecasted into a near future. India’s copper demand is rising at a rapid paste.
Forward curve Backwardation: In February, the trend in the 3-month future price shows that there is shortage on the supply side as the spot price is higher than the future price. It is quite a logical fact as the market is bullish (hot). As we can see on the table below (data the 28.02.19), the current cash price was increasing until 6545$ (01.01.19 – 25.02.19) before decreasing a bit to 6470$, and then increase again until 6532$.
Million Btu stand for million British Thermal Units.
We can observe above the Henry Hub Natural Gas Spot Price from 16 Jan to 11 Feb. A small reminder for ones coming back from holidays, Henry Hub is the US benchmark for natural gas and considered as the biggest natural gas hub.
On 4 Feb, the price went down to 2.54 (2540) USD per Million Btu which is quite impressing as the price didn’t fall at that stage since almost 1 year ago on 16Feb 2018. Since 3 years, the lowest price of LNG ca be found in the month of February. Therefore we can explain this fall to a seasonality trend.
What represent British Thermal Units.
First of all, below some acronyms to understand better their meaning. (US Energy Information Administration)
Btu—British thermal unit(s) Ccf—the volume of 100 cubic feet (cf) M—one thousand (1,000) MM—one million (1,000,000) Mcf—the volume of 1,000 cubic feet MMBtu—1,000,000 British thermal units Therm—One therm equals 100,000 Btu, or 0.10 MMBtu
Used as a unit of measurement for natural gas prices, Btu is the Amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit in practical terms, the amount of heat generated by one lighted stick of match. So we understand that it’s a representation of energy.
The heat content of natural gas may vary by location and by type of natural gas consumer, and it may vary over time. We can see the similarity with oil where the quality will change in function of the location. Therefore it’s important for Consumers/buyers to inform themselves about the natural gas distribution companies or natural gas suppliers for information on the heat content of the natural gas they are supplying. Some natural gas distribution companies or utilities may provide this information on customers’ bills.
As seen in the prior bulletins, the worldwide demand for natural gas and liquefied natural gas raises during the winter season. Being close to the end of the winter period, we could assume that the worldwide demand for natural gas and liquefied natural gas will decrease, mainly for the production of heat. A progressive decrease of the demand could be demonstrated by looking at the historical closing prices from 25thJanuary 2019 that amounted to USD 3.18per mmbtu to the closing price of USD 2.63per mmbtu dated on 15thFebruary 2019.
By referring to the below natural gas’ forward curve which shows the 25 natural gas back-month contracts, we could determine that the natural gas market is currently in contango since the forward curve is upward sloping. Having the natural gas’ forward price higher than the spot price, this means that currently the natural gas and liquefied natural gas’ market is a bearish market.
Some significant definitions to know in futures trading are “the front month contract” and the “back-month contract”.
A front month contract is a future month contract with an expiration date closest to the current date. Most of the time, this is in the same month as the current date and is the most actively traded month (Chen, Front Month, 2018). The front month is also called the spot month.
The back-month contract is a type of future contract that expires in any month past the front month futures contract(Chen, Back Month Contract, 2009). You will find below the forward contract expiration dates of natural gas. These expiration dates are necessary to notice the convergence point of each forward contract. The convergence point is when a future/forward contract becomes a physical contract.
As seen in the bulletin no. 3 “LNG and NG, the best performing commodities in November 2018”, the factor that appreciates the future price is the change of season that will pass from the winter to the spring. As a conclusion, we recommend natural gas and liquefied natural gas’ producers to store their commodity and to sell with future/forward contracts.
LNG news
The Commonwealth project is one of more than 10 LNG export terminals under development and construction in the United States along the coast of the Gulf of Mexico (in Louisiana, where the Henry Hub is) to take advantage of demand for the gas production in the US, thanks to the shale gas.
Commonwealth LNG has received commitments from European buyers to take almost half of the liquefied natural gas (LNG) from the planned 8.4-million-tonnes-per-year export terminal in Louisiana. First shipments are planned for the beginning of 2024.
The project was also aiming Japan, the largest LNG importer in the world for many years. Surprisingly, Japanese companies were not so keen on signing long term deals with the American project: reasons mentioned were that the country is reopening slowly tis nuclear power plants, 8 years after the tsunami in 2011 and are focusing on renewable energies such as the offshore Wind Turbines, expected to bring more and more electricity in the future years. Will it be enough and how is the Japanese population going to react towards the reopening of these nuclear plants? Some reports are saying that Japanese are investing in Russian LNG projects near the Asian sea coasts.
Some suppositions:
We have seen that China and Russia are working together to put in place pipelines going through China. This is creating a second major gas buyer for Russia who has been ‘’stuck’’ with Europe as its only main buyer until now. Russia will be able to have better price bargaining power. On the other hand, US has begun to be a shale exporter thanks to its shale gas production. Europe is starting to buy from them expecting Russia to bargain more about its gas?
Could the Japanese also be thinking about negotiating with Russia now that they are expending their pipelines towards the sea?
References
Chen, J. (2009, February 15th). Back Month Contract. Retrieved February 19th, 2009, from Investopedia: https://www.investopedia.com/terms/b/backmonthcontract.asp
Chen, J. (2018, March 8th). Front Month. Retrieved February 19th, 2019, from Investopedia: https://www.investopedia.com/terms/f/front-month-contract.asp
Above we can see the composite price for coffee done by the International
Coffee Organization. What’s visible here is that the price of coffee is on a
downward curve.
If we look at the last graph we did in our bulletin, back in November, we had a decrease in price going from 114 to 106 US cents/lb. During December it continued its bearish run until it stabilized at around 100. Then, in January, it stayed stable during the whole month around 99 and 103. Now, as we saw earlier, it’s continuing its bearish run after a brief halt in January.
Brazilian Real:
Price movement in general:
Generally, if anyone wants to know why the coffee price is either bearish
or bullish, they should just look at the Brazilian currency and see which way
it is going. They will often find both going in opposite directions. Both are
extremely correlated. If one is up, the other is down and vice versa.
Following the last bulletin, we can see the same behaviour of the price
which keeps in decline. For example: Arabica – drop to 1.10 USD per pound which
is well below 1.2 USD from the required level to make a profit for Latin
American farmers.
This decrease is continuing mainly because of the weakening of the Brazilian
Real against the US Dollar and the over supply of coffee beans especially from
Brazil.
As we mentioned in the last bulletin, the main
reason for the weakening of the Brazilian Real is the new Brazilian President
Bolsonaro’s policies that have not been implemented yet which create
uncertainty, and this creates economical and political unstability (for example
for investors).
The over production of Brazil is due to the historical trend of coffee production following a cycle.
Forward curves: US coffee C futures (Arabica):
Price in cents and hundredths of a cent up to two decimal places USD
Robusta Coffee Futures
Price per metric tonne in USD
In terms of the forward
curves, we now already know that it is generally always in carry. There is constant
supply from all around the southern part of the globe thus keeping the curve in
this position.
What we can notice however is that the Arabica price has stayed the same to the graph in our last bulletin, but the Robusta has decreased slightly
Potential usage of Blockchain technology in the future in the Coffee Commodity in order to boost business:
According to an article in Forbes, The Moyee Coffee brand (Ethiopia) is using blockchain to differentiate between 350 farmers in order to provide buyers with full transparency in the supply chain and full price discovery. This transparency allows the buyer (the roasting companies) to keep the price balanced and not go too low in order to keep the farmers motivation to produce the coffee beans. In the Moyee case it allowed the increase the price by 20% above market rate. The article also states that the UN food and agriculture organization believe that the blockchain has huge potential to solve challenges of small coffee holders regarding uncertainty (for example: fluctuation in supply) and trust among market players.
