Commodity Trading Major

As we can see in this graph that spans over the last week, the price of the soybean has risen quite a bit. Going from $9.10 and reach $9.20, all while experiencing a sharp dip early in the week. It was resolved almost immediately after.

Additionally, the last two days represented the highest the price has reached with this week’s peeking happening on the 12th and surpassing $9.20.

The fact that the price has gone past the 9 dollar mark displays that the market is slowly recovering from the slump it has been stuck in. If it continues to follow this trend, the effects of the Trade War will be considerably lessen.

However, we had the news that China has made his first major purchase of U.S soybean this last Wednesday 1.5 to 2.0 millions metric tons, providing some relief to U.S farmer who have struggled to sell their record-large harvest. The fact that a trade between the Chinese and the Americans happened not only brought hope for this market after months of trade war, but also has made the value of the soybean rise. Since it means that there is future with these nations trading in soybean, the price naturally went up to reflect the fact that these actors will finally make a decent margin.

Almost two weeks before the end of the year we can see always the same pattern regarding the forward curve of the soybean. However, we can see that there is a slight inverse position beginning at the end of July 2020. This inverse refers to the phenomena that we already describe a few weeks ago (seasonal pattern). Same pattern forecasting for July 2019.

In this graph we can clearly see the impact of the trade war on the Brazilian soybean exports, where, the previous years we can see that the curve is following the same pattern (again due to the seasonal pattern), so it is decreasing in November but with the trade war and China who was asking always for more soybean, Brazilian keep supplying ,for a longer period, China in order to respond to this huge demand.

Spot price

We can see on the graph below that the US NG Henry Hub spot price was traded at USD 4.423($ per Million Btu) the 2018-12-06 at 09:01:11. As we can observe here, the price has risen since the beginning of November. As seen last time, we know that NG is a very seasonal commodity. Since winter has hit the US, it is normal to see these higher prices: demand is high. We can also compare with the weather temperature from September to see the correlation (see weather 2^ndgraph below).

Beginning of October, spot price was at closing time 3,110$/BTu.

Beginning of November, spot price was at closing time 3,293, meaning a +5,88% increase. If we compare to now (4,423), it is an increase of +34,3% from 1^stof November + 42,22% since 1^stof October!

We can observe a sudden ‘’Wile.E coyote’’ moment the 15^thof November, the actual highest November pick in the US, where it was reported to be at 65F (18C) a sudden hot day. It shows how volatile this commodity can be looking at the weather.

Fahrenheit to celsius calculation : (32 °F − 32) × 5/9 = 0 °C

Or here directly: https://www.rapidtables.com/convert/temperature/fahrenheit-to-celsius.html

AVG US :

October : Orange : 11c/ blue : -5c/ braun : 26c /  gray : – 25c

November :Orange : 3c / blue : -10c / braun : 18c / gray : -37c

Left to right: September and October heat map US 2018.

For today’s weather, available here: https://www.weathercentral.com/weather/us/maps/current_temperatures.html

What about other NG markets?

We can observe than the US gas is lower than European and Asia gas: not surprising since we know that US benefits from its large Shell gas supply since 2009. Asian gas LNG is the highest since most of its cost is due to the LNG transformation and freight costs. If we take Henry Hub as the benchmark, both EU and Asian gas are traded at a premium: 4.13$/BTu and 7.52$/BTu respectively. We can observe an abnormal rise in September in Europe: this was due to Outages in the North Sea that lasted 4 weeks, decreasing supply, now it has come back to normal. Something that we can also observe is both Asian and European gas seem to be in a constant positive slope compare to US, which seems to react more to seasonality (high in Oct-nov-dec-jan, lower the rest of the year).

Forward curve

The natural gas forward curve below shows the latest closing prices for the 24 future natural gas contracts. For the month of December 2018, the spot price equals to USD 4.46 per mmbtu (closing price on December 4^th, 2018, available at: https://markets.businessinsider.com/commodities/historical-prices/natural-gas-price/usd) and is lower than the current forward price which is equal to USD 4.602 per mmbtu (forward contract January 2019. Contract expiration date: December 27^th, 2018. Available at: https://bluegoldresearch.com/forward-curve).

Currently, natural gas market is in contango and the forward curve is upward sloping. This means that the forward price might increase over the cold months.

From the beginning of the spring months (March 2019), the natural gas and liquefied natural gas market will be in backwardation because of the decrease of the forward price. The factor that makes the depreciation of the forward curve is the weather data which shows some future warm temperatures above the normal level in the US for example.

If we compare the current forward price (January 2019) with the one presented in the previous bulletin (USD 4.53, bulletin no. 2 – “The rally of LNG and NG”), we notice that the current forward price is higher, and still higher than the spot price.

We might conclude and recommend selling natural gas and liquefied natural gas during the backwardation period which should arrive very soon.

https://bluegoldresearch.com/forward-curve

The winner of November 2018

Natural gas was considered as the best performing commodity in terms of forward price. Indeed, the future price of this commodity climbed at 41.1% for November 2018. The highest future price recorded in November had amounted to USD 4.837 per mmbtu. This commodity has not recorded a high future price such this one since February 26^th, 2014.

The factors that pushed up the future price were the low storage of NG and LNG, the cold weather forecasts and the record exports of NG and LNG.

(Available at: https://www.marketwatch.com/story/natural-gas-leads-commodity-gainers-in-november-but-oil-prices-suffer-the-biggest-losses-2018-11-30?siteid=rss&rss=1)

Inventory levels

As we can see on the inventory level’s graph, on November 21^st, the actual inventory level was lower than the forecasted level. The effect on the price was a bullish effect because of the high demand. Most of the time, this deficit of the inventory level might occur because of a non-linear demand, which increases during the cold weather periods.

The difference between the last two reported inventory levels (Nov 21^st, 2018 and Nov 29^th, 2018) was that the actual deficit is lower than forecasted, which pushed up the spot price of NG.

The unit used in this graph is in “the number of cubic feet of natural gas”.

https://www.investing.com/economic-calendar/natural-gas-storage-386

Creation of a new hub in Asia

Since more than one year, there is a rumour about the future creation of a hub in Asia. Actually, it is kind of a non-sense that in Europe work two gas hubs, the TTF and NBP and in United States the Henry hub so why not establish one or more in Asia?
The most advanced hub initiatives are in Singapore, Japan, and China. A number of institutional and structural requirements needed to create a competitive wholesale natural gas market. Six requirements put forward by the IEA “International Energy Agency” were settle.

The institutional requirements were as follows:

1. A hands‐off government approach to natural gas markets. An independent antitrust agency who will regulate the hub.
2. Separation of transport and commercial activities.
3. Wholesale price deregulation. Letting the market fix by itself the price and not the government.

The structural requirements were as follows:

1. Sufficient network capacity and non-discriminatory access to networks.
2. Competitive number of market participants Gas market requires a number of gas suppliers and traders with competitive market shares along with multiple producers and buyers of gas.
3. Involvement of financial institutions.

Hence, by referring to the requirements above, which of the three following countries would be the best to host the Asian hub, Singapore, Japan or China?

Sources

Natural Gas Forward Curve, 2018. “Henry Hub Natural Gas Futures Price”. Bluegold Research (online). Consulted on December 5th, 2018. Available to the following URL: https://bluegoldresearch.com/forward-curve

SAEFOND, Myra P, 2018. “Natural gas leads commodity gainers in November, but oil prices suffer the biggest losses”. Market Watch (online). December 1^st, 2018. Consulted on December 5^th, 2018. Available to the following URL: https://www.marketwatch.com/story/natural-gas-leads-commodity-gainers-in-november-but-oil-prices-suffer-the-biggest-losses-2018-11-30?siteid=rss&rss=1

GONZALES, Leticia, 2018. “January Natural gas Plunges as Warming Trends Traders’ Attention”. NGI’s daily gas price index (online). December 3^rd, 2018. Consulted on December 5^th, 2018. Available to the following URL: https://www.naturalgasintel.com/articles/116659-january-natural-gas-plunges-as-warming-trends-finally-catch-traders-attention

U.S. Natural Gas Storage. Investing.com (online). Consulted on December 5th, 2018. Available to the following URL: https://www.investing.com/economic-calendar/natural-gas-storage-386

UK GAS-Prices rise on Norwegian supply disruptions https://af.reuters.com/article/energyOilNews/idAFL1N1V7057, consulted December 2018

averagetemp-monthly-cmb for 2018-10-00 | NOAA Climate.gov https://www.climate.gov/maps-data/data-snapshots/averagetemp-monthly-cmb-2018-10-00?theme=Temperature, consulted December 2018

Pubdocs.worldbank.org

http://pubdocs.worldbank.org/en/451911543968504757/CMO-Pink-Sheet-December-2018.pdf, consulted December 2018

Calendar Monthly Weather Forecast – weather.com

https://weather.com/weather/monthly/l/Calendar+USID0448:27:US, consulted December 2018

Plus500 WebTrader

https://app.plus500.com/trade/usa–g, consulted December 2018

During last weekend’s G20 summit, the US President, Mr Trump and the Chinese President Xi Jinping agreed on a 90-day ceasefire in their damaging trade dispute. Trump decided not to increase its tariffs to 25% starting on January 1st and but to keep them at 10% till March 1st.
On Monday and thanks to to this agreement, the copper cash price first rose from 6,237$ to 6,306$ but decreased significantly the next to days to reach 6,161$, its lowest in a week, following Mr Trump’s comments that he will revert to tariffs if the two side cannot resolve their problems before the 90-days truce ends as well as its comment on twitter that he is a “Tariff Man”.

If you want to know more about tariff man, please press play :

Therefore, what was supposed to be a good news was received by a significant amount of worries by the market which still doubts about a the possibility to see a trade resolution soon. Moreover, in order to secure the 90-day ceasefire between the two countries China agreed to a number of additional commitments.

China agreed to purchase a “very substantial” amount of agricultural, energy, industrial and other products to reduce the bilateral trade imbalance. However, the exact amount has not yet been agreed.
Nevertheless, the cease-fire helped to reestablish the usual relation between the cash and the 3-month prices. Historically, a higher 3-month price compared to cash price has always been observed as copper is generally traded using 3-month contracts and also for carriage reasons. However, these last weeks, the trend switched and the cash price was traded with a premium relative to the 3-month prices. This situation was due to the unpredictable decisions President Trump could have made, consequently, people were rushing and settled price for direct delivery. With the 3 months truce, we believe that the market will experience a “temporary stability”.

To secure the 90-day ceasefire between the 2 countries and the of Mister Trump, China agreed to a number of additional commitments.
China agreed to purchase a “very substantial” amount of agricultural, energy, industrial and other products to reduce the bilateral trade imbalance. However, the exact amount has not yet been agreed.

Regarding the inventory, the LME warehouse level remain low (As shown in the graph). No big change since beginning of November. The offer and the demand are therefore meeting quite well. The price did not experience any big variation due to the inventory.

http://www.china-briefing.com/news/us-china-trade-truce-90-days-g20-summit/
https://finance.nine.com.au/2018/11/30/07/46/copper-gains-but-trade-thin-ahead-of-g20
https://www.cnbc.com/2018/12/02/dow-futures-surge-after-trump-and-xi-agree-to-pause-the-trade-war.html
https://www.cnbc.com/2018/11/30/reuters-america-metals-copper-steady-as-all-eyes-turn-to-g20-meeting.html
https://uk.reuters.com/article/global-metals/corrected-metals-copper-eases-on-soft-china-data-ahead-of-g20-meeting-idUKL4N1Y53KI
http://www.infomine.com/investment/warehouse-levels/copper/1-month/

According to the composite and the future prices for both types of coffee beans, we can notice a significant decrease which continues the downward trend in the price that was seen in previous bulletins.

One reason for the price decrease in the composite graph, is the same as for the first two bulletins, it is that the Brazilian currency has been rising as we can see in the graph, we know that both are negatively correlated so when one goes up, the other generally goes down.

In terms of the futures prices, this decrease is due to a high supply of coffee beans on the  market. We will explain more on what happened below.

Following an article on CNBC, we understood that the November Robusta Future Contracts were traded at a discount of 11-33 dollars. Therefore, Louis Dreyfus, one of the leading agriculture trading company, bought the majority of stock of Robusta beans because of the attractive price which is also used to reduce significantly the carrying costs it has because Dreyfus owns a number of certified warehouses across Europe including Belgium(4stox and Molenbergnatie). This allowed them to stock the beans in their warehouses without it costing them as much as it normally would’ve thanks to the low price of the Robusta.

We believe that this was a strategic move by Dreyfus, as this purchase along with the purchase of 33,360 tonnes of Brazilian Robusta beans was done to have the majority of stocks. Having this important part of inventory allowed the trading company to have the control as well as the power, compared to its competitors, on the physical supplies of Robusta beans.

We have discovered that the high production and supply of Brazilian Robusta beans bought by the European Market made the Vietnamese Robusta beans drop in price as they have also a big supply but no many buyers because most have bought from Brazil which had cheaper prices.

Overall, the price of coffee has been dipping because of the fact that there is too much supply in the market.

We can highlight that this over supply and sharp decrease in price is like in the oil market at the moment.

https://www.nasdaq.com/markets/coffee.aspx?timeframe=1m

https://www.cnbc.com/2018/11/20/reuters-america-louis-dreyfus-poised-to-take-back-strategic-robusta-stocks–sources.html

https://fp.brecorder.com/2018/12/20181204428466/

https://www.theice.com/products/15/Coffee-C-Futures/data?marketId=5352189

https://www.theice.com/products/37089079/Robusta-Coffee-Futures/data?marketId=5545668

http://www.ico.org/prices/p1-November2018.pdf

https://www.xe.com/currencycharts/?from=BRL&to=USD

Iron ore spot price

According to Metal Bulletin, the spot price for benchmark 62% fines tumbled 8.4% to $64.25 a tonne, its largest one-day percentage drop since April 12 last year.

It is the largest recorded declines in the era of spot pricing for lower and higher grades ore too.

The prices are declining for several reasons, the first one is the steel entering a bear market, and in consequence, the steel prices decrease, it means that the margin for steel mills are decreasing almost to nothing. To counter that, steel mills in China produce steel with low-grade iron ore, which is cheaper. Unfortunately, it is the first time since three year that Chinese mills report losses.

Moreover, today, china has less incentive to produces steel and the producers are offloading existing inventory in the market.

Future of iron ore

Based on a report from iron ore and steel data Analytics Company, they found out that steel mills are putting pressure on iron ore producer to decrease there price in order maintain their margin.

The steel mills are hedging their forward production profit margin because they expect higher production due to less sintering cuts from the government.

It means that with demand of steel decreasing because of the cold season, however in the first quarter 2019, the mills will increase production can maintain their profit margin by buying input at lower price.

The future contract of iron ore are down warding slopping because it reflect the steel industry future contract such as steel rebar and steel scrap

Like iron ore, that’s also been reelected in coking coal and coke futures on Monday with the most actively-traded contracts sitting at 1,289 and 2,137 yuan respectively, down from 1,321.5 and 2,170 yuan on Friday evening.

Steel futures are also under pressure with rebar and hot-rolled coil prices sitting at 3,575 and 3,397 yuan respectively, off Friday’s night session close of 3,627 and 3,465 yuan.

($1 = 6.9499 Chinese yuan)

Recommendation

We should go long, we are expecting to see the price decline due to the rise of iron ore production. Indeed, according to the Fitch Solutions Global Iron Ore Supply and Demand Outlook Report, the iron ore’s output will increase from Brazil and India from 2018 to 2027. Thanks to their new mining infrastructure.

References

Els, F. (2018). Iron ore price craters 8% | MINING.com. [online] MINING.com. Available at: http://www.mining.com/iron-ore-price-craters-8/ [Accessed 28 Nov. 2018].

Investing.com. (2018). Iron ore fines 62% Fe CFR Futures Contracts – Investing.com. [online] Available at: https://www.investing.com/commodities/iron-ore-62-cfr-contracts [Accessed 28 Nov. 2018].

Investing.com. (2018). Iron ore fines 62% Fe CFR Futures Contracts – Investing.com. [online] Available at: https://www.investing.com/commodities/iron-ore-62-cfr-contracts [Accessed 28 Nov. 2018].

Lme.com. (2018). London Metal Exchange: LME Steel Scrap. [online] Available at: https://www.lme.com/Metals/Ferrous/Steel-Scrap#tabIndex=2 [Accessed 28 Nov. 2018].

MINING.com. (2018). China iron ore hits 4-1/2-month low, steel market under pressure | MINING.com. [online] Available at: http://www.mining.com/web/china-iron-ore-hits-4-1-2-month-low-steel-market-pressure/ [Accessed 28 Nov. 2018].

Scutt, D. (2018). Iron ore is in free-fall. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/iron-ore-price-collapse-china-steel-production-profits-2018-11 [Accessed 28 Nov. 2018].