Commodities hold their breath on China growth concerns

By Ole Hansen, Head of Commodity Strategy at Saxo Bank

The commodity sector continues to consolidate following the September to early October price surge, and this week the Bloomberg Commodity Index traded lower for a third straight week. Investors have become more risk adverse given the amount of incoming data pointing to pausing growth expectations, most notably in China, where a manufacturing slowdown, mounting debt risks in the country’s property sector and nationwide power shortage all point to lower activity. In addition, a recent government-driven collapse in Chinese coal prices have helped support lower prices across some of the most energy-intensive metals led by aluminum.

Industrial metals suffered the biggest weekly drop for the reasons mentioned above, and since hitting record territory three weeks ago, the London Metals Index has reversed lower by 10%.

Precious metals showed signs of life after the market concluded a long-awaited taper announcement from the US Federal Reserve was dovish, in the sense that the FOMC showed little appetite for rate hikes and once again repeating their transitory view on inflation. Adding to the dovish skew was the Bank of England's decision to keep rates unchanged despite seeing inflationary pressures at a near 25-year high. Gold returned to $1800 following another sharp and short-lived sell-off, but overall the market is sorely lacking the momentum to propel it out of the range that has prevailed for many months now. ​

Crude oil is increasingly showing signs of having entered a period of consolidation and, following a two-month rally which up until recently had lifted the price of Brent and WTI crude oil by close to one-third, it could be argued it was overdue. However, we only expect this phase to be temporary with the strong fundamental reasons which supported the surge not gone away. With this in mind, we still see the risk of even higher prices towards yearend and into 2022.

World food prices hit a fresh 10-year high last month according to the UN FAO which saw their Global Food Price Index rise by 3%. The index, which tracks 95 different price quotes, has risen by more than 30% during the past year with gains seen across all five food sectors. Vegetable oil prices hit a record high last month after rising almost 10%, thereby bringing the annual rise to +74%. Other sectors seeing strong annual gains are sugar (+41%) and cereals such as wheat, corn and rice at 22%. Apart from weather woes and strong demand, the UN FAO also mentioned labour shortages in parts of the world as a driver pushing up the cost of production and transportation of food.

Global wheat prices surged higher at the beginning of the week, with Paris Milling wheat reaching a record high close to €300 per tons while Chicago wheat temporarily broke above $8 per bushel for the first time in nine years. A poor harvest in North America together with a decline in exports from Russia, the world’s largest shipper, has triggered increased demand for European sourced wheat, and with the prospect for another potentially challenging crop year in 2022 caused by a returning La Ninã weather phenomenon and high fertilizer costs, some of the major importers have recently been stepping up their pace of purchase.

After hitting the mentioned record high, an end of week retracement in Paris Milling wheat could potentially signal a short-term top.

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