PRICE MOVEMENT RECAP

Price in USD per bushel (60 pounds)
From May 28 2020 to November 6 2020
source: Macro trends

China is the biggest importer of Soybeans and since the number of Chinese pigs is increasing in China, more soybeans are purchased in order to feed them. China is concerned about the COVID-19; thus, they have decided to increase its stock of soybean in order to not experience a shortage. The price increases since the demand has increased rapidly and the supply is decreasing. China imports principally soybeans from Brazil but when the supply is running low in this region, China buys them from the US.

FORWARD CURVE

source: CME Group

As we can see, the forward curve is generally inverted. This trend can be explained by the weather concerns in South America. Irregular rainfalls caused by the La-Nina phenomenon could cause a shortage due to a decrease in productivity, which would explain why buyers are willing to pay a premium for delivery now. Furthermore, the demand for soybean is high due to Chinese mass pig farming. It is forecasted to go up to 2,7 million of bushels for the marketing year 20-21, while it was 2,4 million of bushels for marketing year 19-20.

SUPPLY & DEMAND CHART

source: CME Group

As we can see the supply and demand are in constant increase since the 90s. As populations, income levels, and urbanisation expand worldwide, the demand for soybeans is boosted. Another major soybean trade driver is the different governments policies. The 3 main drivers of soybean’s supply are weather, protein demand and Chinese demand.

What is interesting is the 2018-2019 decrease. It coincides with the start of the US-China Trade War which led to a decrease in production. Nowadays the situation got better and China started to import from the US again.

On the demand side, China is the biggest importer. The recovery of China’s pork industry from the African swine fever has stimulated imports in 2020. Mainly because soybean is used as a source of feedstock in animal production.

INVENTORY LEVEL (STOCK) CHART

source: CME Group

Brazil and the U.S. are the main soybean exporters and there have been supply issues in both countries. Due to COVID-19 Brazilian supplies have been limited.

Due to drier conditions in Brazil and Argentina, the future supplies might be lower. Dry conditions have negatively affected U.S. yields as well.

RECOMMENDATIONS

The Chinese economy is back to normal and there is a forecasted increase in demand. Therefore, importers are ready to pay a premium for delivery now as the supply is uncertain given the weather conditions coupled with COVID-19. Moreover, China imports first from Brazil and then from the US, since the harvest season happens at the beginning of the year in Brazil and at the end, in the US. From an importer’s point of view, we would recommend it to be long over the next few months as the supply will remain low.

REFERENCES

• A Supply Drop and Demand Pickup Pushed Soybeans to a Three-Year High, [no date]. [online]. [Viewed 10 November 2020]. Available from: https://www.spglobal.com/en/research-insights/articles/a-supply-drop-and-demand-pickup-pushed-soybeans-to-a-three-year-high
• Blog: World Soybean Production Projected to Rebound, 2020. IHS Markit [online]. [Viewed 10 November 2020]. Available from: https://ihsmarkit.com/research-analysis/blog-world-soybean-production-projected-rebound.html
• SAEFONG, Myra P., [no date]. Why soybeans may be headed for their highest price in 6 years. MarketWatch[online]. [Viewed 10 November 2020]. Available from: https://www.marketwatch.com/story/why-soybeans-may-be-headed-for-their-highest-price-in-6-years-11600450312
• Soybean Reports – CME Group, [no date]. [online]. [Viewed 10 November 2020]. Available from: https://www.cmegroup.com/content/cmegroup/en/trading/agricultural/soybean-reports.htm
• USDA ERS – Major Factors Affecting Global Soybean and Products Trade Projections, [no date]. [online]. [Viewed 10 November 2020]. Available from: https://www.ers.usda.gov/amber-waves/2016/may/major-factors-affecting-global-soybean-and-products-trade-projections/
• China’s Oct soybean imports jump 41% on year on swine fever recovery | S&P Global Platts, 2020. [online]. [Viewed 10 November 2020]. Available from: https://www.spglobal.com/platts/en/market-insights/latest-news/agriculture/110720-chinas-oct-soybean-imports-jump-41-on-year-on-swine-fever-recovery
• Chinese 2019-20 soybean imports to total 88 mil mt, up 6% on year: USDA | S&P Global Platts, 2020. [online]. [Viewed 10 November 2020]. Available from: https://www.spglobal.com/platts/en/market-insights/latest-news/agriculture/021220-chinese-2019-20-soybean-imports-to-total-88-mil-mt-up-6-on-year-usda
• Soybean Futures Quotes – CME Group, [no date]. [online]. [Viewed 10 November 2020]. Available from: https://www.cmegroup.com/content/cmegroup/en/trading/agricultural/grain-and-oilseed/soybean_quotes_globex.html
• Soybean Futures Quotes – CME Group, [no date]. [online]. [Viewed 10 November 2020]. Available from: https://www.cmegroup.com/trading/agricultural/grain-and-oilseed/soybean_quotes_globex.html
• Soybean Prices – 45 Year Historical Chart, [no date]. [online]. [Viewed 10 November 2020]. Available from: https://www.macrotrends.net/2531/soybean-prices-historical-chart-data
• TAN, Huileng, 2020. Soybean futures have been surging on Chinese demand, trade group CEO says buying could continue. CNBC [online]. 10 September 2020. [Viewed 10 November 2020]. Available from: https://www.cnbc.com/2020/09/10/soybeans-have-been-surging-on-chinese-demand-and-purchases-could-continue.html

Group 3 – K
Maxime DOLLA, Mahona PENNA, Romane POUCHON

Overview of corn market on the last 15 years

Source : https://www.agriculture.gov.au/abares/research-topics/agricultural-outlook/coarse-grains

-#1 In 2008, the financial crisis caused the prices to fall.

-#2 In 2006-2011, the ethanol production doubled (strong demand for ethanol).

Source : https://www.uwlax.edu/globalassets/offices-services/urc/jur-online/pdf/2012/rattray.jennifer.pdf

-#3 In 2012, there was severe dryness in the USA,  (USA, largest producers and exporters, had to import  5 times more than the 2 previous years. The importation was 160 million bushel against 28-29 million in 2010-2011.

Source : statista, from USDA, economic research service.

-#4 Between 2012 and 2017, the production was higher than demand and at the same time stocks were increasing resulting in low prices. Since 2017, demand has become higher than supply. To satisfy this demand, it was necessary to use the stocks. Therefore, the stocks decreased and it explains that the impact on price was quite low.

Source : https://teseo.clal.it/en/index.php?section=maisesoia&utm_source=teseo&utm_medium=website&utm_campaign=menuEN#

How has evolved the price through the current year

Corn prices in USD/Bushel (last update 4/11/2020)

Source :https://markets.businessinsider.com/commodities/corn-price

On this chart we can see that the price collapsed in the first months of the year, mainly caused by the covid-19. The lockdown in many countries led to a collapse of diesel and gasoline demand and ethanol is no exception. The production has fallen and decreased by almost 50%. And we know that more than 1/3 of corn production is used to make ethanol. After that, we can see that the price started to increase linked to the end of the first wave of covid-19. And when we approach August the price tends to increase. The explanation is climate in the US; a storm in Iowa (the main state to produce corn in the US) has damaged the crop. We can also add the low rainfall in the corn belt during the month of August. All these events have affected the quality and the quantity of corn.

Source : https://teseo.clal.it/en/index.php?section=maisesoia&utm_source=teseo&utm_medium=website&utm_campaign=menuEN

World corn prices

The world price of corn is forecast to drop by 8% to US$150 per tonne in 2020-21, representing the lowest price since 2006-07. The fall in the price is due to a record global planting and expectations of record average yields. The mixed outlook for demand due to the COVID-19 pandemic worsened the impact of record production on prices.

Global production

Global corn production is expected to reach 1.2 billion tonnes in 2020-2021, an increase of 6.5% over the previous year. Corn production is forecast to reach record peaks in the United States and Brazil. An almost record production is also forecast in China, backed by favourable seasonal conditions.

Global demand

Because of the ongoing COVID-19 impact, the global demand outlook for corn remains unclear. As a consequence of COVID-19 measures, industrial and food use of corn is expected to decline in 2020.

Also due to COVID-19 impacts on travel, the use of corn for bioethanol in the United States decreased by 8 % compared to the previous year.It is also expected that the use of corn as food will have decreased over the COVID-19 period, due to ongoing disruptions to the food service industry.

On the other hand, despite the ongoing impact of COVID-19, the use of corn as animal feed is expected to increase.

As we are still in this COVID-19 period and potential future waves of it still represent a big risk for the industrial and food use of corn.

Forward curve

Source : https://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_quotes_settlements_futures.html

From December ‘20  to July ‘21, it is a normal curve. Then, it goes into an inverse curve until September ‘21. From September ‘21 to july ‘22 it goes into a normal curve again and then falls into an inverse curve and goes back to a normal curve again. We can see a pattern here. Indeed, it is a normal curve (the market is well supplied) but always drops into an inverse curve between July and September which is due to the harvest period for the two main producers, USA and China. Prices reflect the seasonal breakdown of supply.At this time, the supply/demand is in favor of demand.

From December to July, the message is to store because the demand doesn’t need as much.  From July to September, the message is to deliver (don’t store) because the demand is willing to pay for it.

Recommendation

We prefer to give a recommendation for 3 months because of the uncertainty due to COVID-19. Indeed, the situation is constantly changing. The recommendation is to go short for the 3 upcoming months based on the price’s forecast.

Patrice Correia Cardoso, Maike Da Silva, Léo Millet & Cassandra Kirchhoff

SOURCES

CLAL, [sans date]. TESEO – Corn and Soybean: world market trends. [en ligne]. [Consulté le 5 novembre 2020]. Disponible à l’adresse : https://teseo.clal.it/en/index.php?section=maisesoia&utm_source=teseo&utm_medium=website&utm_campaign=menuEN

Coarse grains: September quarter 2020 – Department of Agriculture, [sans date]. [en ligne]. [Consulté le 5 novembre 2020]. Disponible à l’adresse : https://www.agriculture.gov.au/abares/research-topics/agricultural-outlook/coarse-grains

Corn Futures Settlements – CME Group, [sans date]. [en ligne]. [Consulté le 5 novembre 2020]. Disponible à l’adresse : https://www.cmegroup.com/content/cmegroup/en/trading/agricultural/grain-and-oilseed/corn_quotes_settlements_futures.html

Find information for Corn Futures Settlements provided by CME Group. View Settlements GILBERTIE, Sal, [sans date]. Corn And Soybean Prices Are Often Lowest During The October Harvest. Forbes [en ligne]. [Consulté le 5 novembre 2020]. Disponible à l’adresse : https://www.forbes.com/sites/salgilbertie/2020/10/06/corn-and-soybean-prices-are-often-lowest-during-the-october-harvest/

NYSTROM, Phyllis, [sans date]. Grain Outlook: USDA misses 2019-20 corn stocks by 205 million bushels. TheLandOnline [en ligne]. [Consulté le 5 novembre 2020]. Disponible à l’adresse : https://www.thelandonline.com/news/grain-outlook-usda-misses-2019-20-corn-stocks-by-205-million-bushels/article_a44435d6-0a5a-11eb-ae12-bfc2f3f76440.html

USDA, [sans date]. [en ligne]. [Consulté le 5 novembre 2020]. Disponible à l’adresse : https://www.usda.gov/

Rattray – 2012 – The Implications of the Increasing Global Demand f.pdf, [sans date]. [en ligne]. [Consulté le 5 novembre 2020]. Disponible à l’adresse : https://www.uwlax.edu/globalassets/offices-services/urc/jur-online/pdf/2012/rattray.jennifer.pdf

Price movement recap

Chinese, transportation and construction industry demand are factors influencing the price. Worldwide lockdowns in March led to the closure of plants and construction sites. Transportation and automotive industries demand decreased as well, due to the decrease in travelling, an increase of telecommuting, the interruption of Chinese parts exports and manufacturing and assembly plants. This explains the price fall at the beginning of the year, which has slowly increased since mid-May.

Forward curve

As it can be observed, the market is in contango. It makes sense as demand is expected to grow in the few months and the market is oversupplied. Companies can therefore easily stock.

Supply and demand dynamic

As said above, China has a huge impact on supply and demand. Its monthly output is expected to rise for the end of the year as smelters are reopening and increasing their capacities. The global demand is expected to grow again as Asian countries and are recovering from the first wave of Covid-19 and are less impacted by the second wave. The fact that Asian countries are not facing right now such a high contamination rate as in Europe has given a new wind of optimism and exports have surged in the region. China has become even more than before the driving force of production and demand in the aluminium market.

In addition, a switch to can consumptions has been fastened by the COVID-19. While cans were already starting to be preferred thanks to their ease of recycling, the shutdown of restaurants has shifted the consumption from glass bottles to cans. Consequently, there is not enough capacity to meet demand. Ball corp., the largest producer of cans, is unable to make up to 8 billion cans for the year. It is important to note that this shift is unlikely to go away with the pandemic.

Inventory levels

As an effect of the COVID-19, the largest producer, China, has put in place a lockdown, which stops the production from at the beginning of the year. The lowest level was reached in March with the lockdown of the other countries. Then China recovered first from the epidemic, though recovery of production starting at the end of March increasing stocks. Stocks are now reaching the same level as before lockdown.

Recommendations

Due to the actual oversupplied and the growing demand, prices are expected to rise. However, in the long-run, when supply will be more balanced with demand, the surplus will be none, and prices will probably rise even more.

Beatriz Ferreira Caetano, Virginie Gruaz and Mingxin Ma

---

Price Recap

CFDs future Arabica coffee in USD/100 pounds	CFDs future Robusta coffee in USD/metric ton
Source: IFCmarkets	Source: IFCmarkets

CFDs future cocoa in USD/metric ton

Source: Avatrade

Both commodities, cocoa, and coffee beans experienced sudden drops in price at the end of the last summer. From USD 2703/MT in mid-September, the cocoa fell to USD 2381/MT on the 29th of October (-11.91%). The tendency is even more dramatic for Arabica coffee beans. The price drop reached -21.11% between early-September and end-October. However, Robusta coffee saw its price increase slightly between October 5th and October 29th (+4.95%).

These variations can be explained by the arrival of the second wave COVID-19. For the two last months, the spread among the population gained in intensity and with it the number of restrictions around the world. Naturally, the market is suffering from a demand contraction due to the closure of restaurants, businesses, and the recent lockdowns in several countries.

Futures and Cost Curves

For these two commodity futures, we can notice dramatic changes in December compared to the following months. Regarding the coffee, after the initial December drop, the curve is a contango. About the cocoa, the curve is harder to analyze due to several consecutive months of heavy curve variations.

future coffee in USD/100 pounds	future cocoa in USD/metric ton
Source: Barchart	Source: Barchart

Supply and Demand Dynamic

Coffee

On the supply side, the USDA has revised its forecast for 19/20. The world production is forecasted 2.4 Mio. bags below last December estimate to 166.9 Mio.bags. This is following revised yield due to weather conditions and some damages. Exports are down by 3.4 Mio. Vietnam revised yield accounts for most of the reduction in both production and exportable supplies. 

For 20/21 season is set to break records driven by Brazil with an increase of 9.1 Mio bags amounting 176.1 Mio. bags. This surge is based on good weather conditions prevailing in most coffee regions possibly resulting in a higher yield of the harvest.

The yearly demand for 2020, both the US and Europe markets have been revised lower due to low consumption and stocks build-up. The US by 1.2 Mio. to 25 Mio. and Europe by 0.5 Mio. to 47.5 Mio. 

For 2021, both markets are set to each be up 2.0 Mio. bags from this year latest forecast. The EU would consumption reaches 49.5 Mio. bags. The ending stocks are expected to increase to 14.5 Mio. bags. On the US side, the total import would arise to 27.0 Mio. with ending stocks increasing 0.5 Mio. bags to 7.0 Mio bags. According to the USDA, the coffee market will be in surplus for season 20/21.

Cocoa

At the end of the 19/20 cocoa season, Côte d’Ivoire production reached 2.0 Mio Ton, down 4.8% YoY. The exports are down 2%. The start of 20/21 season, Ghana and Côte d’Ivoire announced a surge in farm gate prices. Up 28% and 21% YoY respectively. There are potential risks in exports linked to end of November election in Côte d’Ivoire. 

Demand, based on grinding data, is down 4.7 YoY in EU for 3rd quarter, might indicate that demand is not recovering. This decline is not as important as during the 2nd quarter of 2020 (16.3%). This is attributed to COVID-19 crisis.

Recommendation

Coffee

For coffee, based on falling consumption and production in 2020, the rising stocks in consuming countries as well as low-cost oil, the coffee price is expected to remain stable. For the longer term, the oversupply capacities of producing countries with uncertainties in consumption for the largest market might decrease prices further crossing the 1 USD/lb threshold. 

Cocoa

Like coffee, cocoa demand and the pace of re-opening of economies is the critical question. Therefore short term price, as well as long term, is expected to remain stable at 2300-2500 USD/Ton due to exports falling. The backwardation situation might be corrected by COVID-19 with continuous low demand.

Quentin Pilloud, William Béguin & Vincent Stalder

DiscLAIMER

This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient.  It is based on numerous assumptions

reference

Aboa, Ange. “Ivory Coast Struggling To Sell 2020/21 Cocoa Mid-Crop”. Reuters, 2020, https://www.reuters.com/article/instant-article/idUSL8N2HK4BE. Accessed 29 Oct 2020.

Carey N, Naidu R, Cavale S. Coffee, ketchup and Nike Air Max: it’s the COVID consumer economy. Reuters. https://www.reuters.com/article/us-health-coronavirus-consumer-pricing-i-idUSKBN25S4SB. Published 2020. Accessed October 28, 2020.

COFFEE Price Live | Arabica Coffee Price | Arabica Coffee Chart | IFCM. Ifcmarkets.com. https://www.ifcmarkets.com/en/market-data/commodities-prices/coffee. Published 2020. Accessed October 28, 2020.

Coffee Price Live | Robusta Coffee Price | Robusta Coffee Chart | IFCM. Ifcmarkets.com. https://www.ifcmarkets.com/en/market-data/commodities-prices/robusta. Published 2020. Accessed October 28, 2020.

Cocoa CFD – Cocoa Trading Conditions | AvaTrade. AvaTrade. https://www.avatrade.com/trading-info/financial-instruments-index/commodities/cocoa. Published 2020. Accessed October 28, 2020.

Coffee Prices and Coffee Futures Prices – Barchart.com. Barchart.com. https://www.barchart.com/futures/quotes/KCZ20/futures-prices?timeFrame=daily. Published 2020. Accessed October 28, 2020.

Cocoa Prices and Cocoa Futures Prices – Barchart.com. Barchart.com. https://www.barchart.com/futures/quotes/CC*0/futures-prices?timeFrame=daily. Published 2020. Accessed October 28, 2020.

ICCO. COCOA MARKET REVIEW SEPTEMBER 2020. 2020, https://www.icco.org/statistics/monthly-review-of-the-market.html. Accessed 29 Oct 2020.

ICO. Monthly Coffee Market Report – September 2020. London, 2020, http://www.ico.org/documents/cy2019-20/cmr-0920-e.pdf. Accessed 29 Oct 2020.

ICO. Monthly Export Statistics (Members & Non-Members) – August 2020. London, 2020, http://www.ico.org/prices/m1-exports.pdf. Accessed 29 Oct 2020.

ICO. Imports Of Coffee By Selected Importing Countries – June 2020. London, 2020, http://www.ico.org/prices/m4-imports.pdf. Accessed 29 Oct 2020.

ICO. Coffee Production By Exporting Countries. London, 2020, http://www.ico.org/prices/po-production.pdf. Accessed 29 Oct 2020.

ICO. World Coffee Consumption. London, 2020, http://www.ico.org/prices/new-consumption-table.pdf. Accessed 29 Oct 2020.

Ny Cocoa Closes At A 2 Week Lows On Concern Pandemic Lockdowns Will Curb Cocoa Consumption – Barchart.com. Barchart.com. https://www.barchart.com/story/futures/quotes/CC*0/futures-prices/533051/ny-cocoa-closes-at-a-2-week-lows-on-concern-pandemic-lockdowns-will-curb-cocoa-consumption. Published 2020. Accessed October 28, 2020.

Terazono E, Munshi N. Choc waves: how coronavirus shook the cocoa market. Financial Times. https://www.ft.com/content/37aa0ac8-e879-4dc2-b751-3eb862b12276. Published 2020. Accessed October 28, 2020.

USDA. Coffee: World Markets And Trade. Washington, 2020, https://apps.fas.usda.gov/psdonline/circulars/coffee.pdf. Accessed 29 Oct 2020.UBS. Agriculture: Food Price Risks Emerge. Züirch, 2020. Accessed 29 Oct 2020.

Price movement recap

For this first bulletin, and in view of the current situation in the world, we will focus on the consequences of Covid-19 on the sugar market. The first graph shows the evolution of the sugar price for the year 2020. 

Like many other commodities, sugar is highly volatile. At the beginning of the year, prices have been rising steadily. Sugar prices reached a peak in February. However, in the months that followed (until almost the end of May), prices fell steadily. We can notice that this drop happened because of the worldwide lockdown period. Then, from the end of May until now, we can see that prices have a tendency to increase, although they have not yet reached the initial price before Covid-19 – more than 0.15 before the virus compared to 0.14 nowadays. 

Sugar prices in USD/pound

Available on: https://www.fxempire.com/commodities/sugar

Supply and demand dynamic  

As we can see in the graph below, consumption and production are almost equal, while the indicator price tends to decrease. 

Demand and supply are impacted by the COVID-19 pandemic but in very different ways. The importance of the virus today is slowing the growth in demand for sugar (quarantine, closing of restaurants/bars,…). On the other hand, the supply for sugar is increasing. This increase has two main causes: 

– due to the fall in the price of oil. Indeed, the price of ethanol is set according to the price of oil. If the price of oil falls, then the price of ethanol also falls (and vice versa). Since the beginning of the pandemic, the price of oil has been falling, which has lowered the price of ethanol. As a result, sugar producers are now focusing mainly on sugar production because ethanol production is uncompetitive 

– due to the reduced demand for ethanol. Indeed, during the quarantine period put in place because of the significant spread of COVID-19 , fuel consumption has decreased sharply.

Furthermore, the falling prices can be explained by the forecast of export which is going to be mainly from India. Indeed, India has accumulated lots of sugar stocks during the pandemic because of the lockdown. 

Available on: https://www.londoncg.com/covid19/industries/agricultural-business-aquaculture-fishing/sugar-mills/global-sugar-production-continues-despite-covid-19/

Available on:https://www.agriculture.gov.au/abares/research-topics/agricultural-outlook/sugar

Recommendations

Since we are in a backwardation position it is preferable to adopt a short position. Indeed, prices are falling down. As we are entering the second COVID-19 wave, the sugar market is facing lots of uncertainty, but we can predict that sugar consumption is probably going to continue to fall down and prices even. 

References

2020 – Agricultural Commodities vol.10 no.2, June quarter.pdf, [no date]. [online]. [Viewed 28 October 2020]. Available from: https://daff.ent.sirsidynix.net.au/client/en_AU/search/asset/1030381/10

Agricultural Commodities vol.10 no.2, June quarter 2020, 2020. . Vol. 10, p. 4.

Global sugar production continues despite COVID-19 – London Consulting Group, [no date]. [online]. [Viewed 29 October 2020]. Available from: https://www.londoncg.com/covid19/industries/agricultural-business-aquaculture-fishing/sugar-mills/global-sugar-production-continues-despite-covid-19/

SPYROSOFT, 2020. The Energy Series: The Brazilian Ethanol Market -. [online]. 7 September 2020. [Viewed 29 October 2020]. Available from: https://www.czarnikow.com/service/market_analysis/the-energy-series-the-brazilian-ethanol-market

Sugar | OECD-FAO Agricultural Outlook 2020-2029 | OECD iLibrary, [no date]. [online]. [Viewed 28 October 2020]. Available from: https://www.oecd-ilibrary.org/sites/3736a600-en/index.html?itemId=/content/component/3736a600-en#back-endnotea5z2

Sugar Price | FX Empire, [no date]. [online]. [Viewed 28 October 2020]. Available from: https://www.fxempire.com/commodities/sugar

Price movement recap – Historical and Forward curve

HISTORICAL (over last year)

The price of copper on the London Metal exchange from 10/29/2019 to 10/27/2020

Available from: https://www.lme.com/en-GB/Metals/Non-ferrous/Copper#tabIndex=2

The price on the Y-axis is in US dollar per tonne.

The big fall downs of January and March are provoked by the economic consequences of the COVID-19 crisis. China being the main importer of Copper, its initial lockdown hugely decreased its production- and investment- activities (so demand) while the production, especially the top ten copper producers, increased by 1% compared to the first quarter of 2019[i]. As the impact of the COVID did not occur at the same time between the supply (non-Chinese, mainly South America) and the demand (mainly China through its role as the main importer), the prices decreased drastically. The price of oil has also decreased during that period (Q1 2020)[ii], it has decreased the production cost of copper, and subsequently played a role in the decreasing price of that commodity.

FORWARD CURVE

Forward curve as of 10/28/2020 as per data of Chicago Mercantile Exchange

Available from: https://www.cmegroup.com/trading/metals/base/copper_quotes_globex.html?optionProductId=797&optionExpiration=797-X0

Price for one pound of copper in US dollars

The above graph represents the price of copper today based on future delivery. We can notice for the period from November to December 2020 a backwardation, (estimated low supply). The period from January to March 2021 represents a contango (estimated good/high supply) and the following periods until December 2021 represent that supply and demand are estimated to be stable.

Considering the increase of cases in Europe resulting in a market index falling by 2%, the demand for copper decreases with the declining economy[iii]. Nevertheless, China shared a possible availability of the COVID-19 vaccine as early as December resulting in a lift of the price of copper[iv].

The speculations regarding the outcome of the US elections, impacting the strength of the dollar, do impact the demand for copper since this commodity is traded in the US dollar currency.[v]

Illustration of the supply and demand dynamic of the commodity

LME Copper Warehouse Stocks level from 10/1/2019 to 10/28/2020

Available from: http://www.copperenews.com/copper-warehouse-stocks.asp

1year Copper Warehouse stock level.

The effect of Covid-19 started to be felt after 31 March 2020. Since the production companies had to lower the number of workers which led to smaller production. But since the economic activity was too slow, the slow over the production didn’t impact the stocks up until the economy started picking up again in June 2020, and we can notice a drop in the Copper stock from jun2020 to October 2020 due to these reasons and also the price rise of copper during that period. In October 2020 we can notice that the stock of copper is getting higher while the price is getting lower.

Recommendations: short (sell) or long (buy) for next 3 to 6 months

For November and December 2020 we have a backwardation we advise selling. Since the buyer is ready to pay a premium today for the product. For December our advice is to buy to make a profit in January by selling. The uncertainty planning with the COVID-19 pushes us to plan only for the 3 upcoming months.

Article by Ismail MODAFFAR IDRISSI, Tashi JARRON & Amélia REUSSER

---

[i] BASOV Vladimir, Largest Copper Producers Worldwide : Q1 2020 Overview [online],  MINING NEWS & INTELLIGENCE, July 3^rd 2020, consulted October 29^th 2020, available from: https://www.minesandmetals.com/2020/07/largest-copper-producers-worldwide-q1-2020-overview/

[ii] TRADING ECONOMICS, Brent Crude Oil, consulted October 29^th 2020, available from: https://tradingeconomics.com/commodity/brent-crude-oil

[iii] JONES Huw (Reuters), Europe trumbles 2% on COVID curbs and Brexit impasse [online], INVESTING.COM, October 15^th 2020, consulted October 29^th 2020, available from: https://www.investing.com/news/economy/asian-stocks-mixed-on-fading-us-stimulus-hopes-virus-concerns-2324823

[iv] P.SAEFONG Myra, Copper futures post highest finish in over 2 years [online], MARKETWATCH, October 20^th 2020, consulted October 29^th 2020, available from: https://www.marketwatch.com/story/copper-futures-head-for-highest-finish-in-over-2-years-11603213007

[v] Bloomberg, JPMorgan says Trump win could spur US Stocks, Dent Asia Assets [online], INVESTING.COM, October 28^th 2020, consulted October 29^th 2020, available from: https://www.investing.com/news/stock-market-news/jpmorgan-says-trump-win-could-spur-us-stocks-dent-asia-assets-2334707