The energy complex continued to unwind this week as risk came off with the bank chaos and margin risk was taken off. Volatility again soared in all markets, the VIX up 6.7 % after 22% the week prior, though off it’s highs. Silver futures caught a bid after not running with gold the week prior. Copper, with the same vulnerability as oil fell 3.36%, it had been a leader in the risk on movement for commodities and is a key for the bigger picture here. The Bloomberg commodity index dropped 1.9% and is down 9.1% YTD. declined 1.9%.
Week Ending March 24, 2023
“High interest rates, volatile prices and the war in Ukraine have made it significantly more expensive to finance commodity trade, forcing the industry to hunt for an extra $300bn to $500bn in working capital to keep raw materials moving around the world. Changing trade patterns have made the global flow of raw materials less efficient and more costly to finance and are also likely to push up the price of commodities for consumers, according to… McKinsey. ‘Since the end of 2020, we have seen a doubling of the working capital requirements in the commodity trading sector,’ said Roland Rechtsteiner, McKinsey partner and lead author of the report. ‘We could see a similar increase by the end of next year, if [further] changes in trade flows materialize.’”January 29 – Financial Times (Leslie Hook)
Weekly Commodity Highlights
- Bloomberg Commodities Index declined 1.9% (down 9.1% y-t-d).
- Spot Gold jumped 6.5% to $1,989 (up 9.1%).
- Silver surged 10.0% to $22.60 (down 5.6%).
- WTI crude sank $9.94 to $66.74 (down 17%).
- Gasoline dropped 5.5% (up 2%),
- Natural Gas fell 3.8% to $2.34 (down 48%).
- Copper lost 3.4% (up 2%).
- Wheat rallied 4.6% (down 10%),
- Corn recovered 2.8% (down 7%).
- Bitcoin surged $6,940, or 34%, this week to $27,354 (up 65%).
COT on Commodities
COT on commodities in wk to March 21 saw continued aggressive selling of Brent & WTI (13-yr low) and agriculture led by soy, cattle & cotton, while buyers focused on gold, corn & wheat. via Ole S Hansen @Ole_S_Hansen
COT on metals in wk to March 21: Gold +21.6k to 107k, a seven week high driven by short covering (-16.1k) with fresh buying (+5.5k) slowing ahead of $2,000. Silver flipped to a small 0.9k net long. Copper (+3k to -7k) bought for the first time in four weeks. via Ole S Hansen @Ole_S_Hansen
- Copper futures saw very aggressive higher high and higher low action this week.
- Strong copper price gains on a jump in trading volume and higher open interest which can signal breadth in the bull camp.
- Declining LME and Shanghai copper warehouse stocks readings released this week. While LME copper stocks fell by a minimal 800 tons, Shanghai copper warehouse stocks declined by a very material 21,189 tons which is a decline of 11.6% on a week over week basis.
- Copper did manage a 16-day high while the net spec and fund short position has been brought down by this week’s rally.
- The sharp decline in Shanghai exchange stocks, the copper market saw another significant drop in private company inventories of roughly 18,700 tons from Monday. While not always the case, declining visible copper supplies inside China is usually seen as a sign of strengthening demand.
- Copper is entering the strongest Chinese demand season of the year. Outside that pressure from fear of a financial crisis which could trip up the global economy.
- The copper trade is concerned the US will implement fresh sanctions against China and tensions between the US and China could drift toward trade war status.
- Demand favors the bull camp and supply factors favor the bear camp.
- “A copper deficit is set to inundate global markets throughout 2023 — and one analyst predicts the shortfall could potentially extend throughout the rest of the decade. The world is currently facing a global copper shortage, fueled by increasingly challenging supply streams in South America and higher demand pressures. Copper is a leading pulse check for economic health due to its incorporation in various uses such as electrical equipment and industrial machinery. A copper squeeze could be an indicator that global inflationary pressures will worsen…” February 6 – CNBC (Lee Ying Shan)
- “Widespread anti-government protests are disrupting copper output in Peru, the world’s second-biggest producer, triggering predictions of a further surge in prices for the metal which has already rocketed in recent months as China’s resource-hungry economy reopens. Demonstrators demanding early elections and the resignation of President Dina Boluarte have thrown up roadblocks across the country and attacked mines, causing production slowdowns and closures in the Latin American nation’s copper operations, which account for about 10% of global supply.” February 7 – Financial Times (Joe Parkin Daniels and Harry Dempsey)
- Chile, the world’s top copper producer, saw production fall 6.9% in November to 449,000 tonnes.
- Fitch Solutions revised up its copper price forecast to $8,500 a tonne in 2023 from $8,400, as demand edges higher alongside a comparatively weaker supply outlook.
- Commodity trader Trafigura and Goldman Sachs last year both warned that global copper stocks have fallen to record lows with current inventories enough to supply world consumption for just 4.9 days
- Glencore estimates a supply shortfall of 50 million tonnes in 2023.
- Analysts at Goldman Sachs Group Inc. predict copper will hit a record high of $11,000 a ton within 12 months, while BNP Paribas says prices will drop to $6,465 a ton by the middle of next year as the market swings into a huge surplus.
Copper followed through with its break to the upside out of the pennant through the 50wma after it rebounded sharply off the tenkan and failed three times there in the past month. The flattening Weekly Kijun acted as a magnet with the cloud twist. We closed right at the bottom of the previous bull flag from 2021. Copper had been a leader in the risk on movement for commodities.
- Spot Gold dipped 0.6% to $1,978 (up 8.7% YTD).
- Silver jumped 2.8% to $23.23 (down 3.0%).
- Gold futures settled Friday $12.10 lower (-0.6%) to $1,983.80/oz, up about +0.5% this week, but pinned down by a jump in the dollar during the session.
- Gold caught the bid with safe haven flows as banks were dropping out the back door.
- The bull case in gold fundamental headwinds of rising rates, periodic fears of global slowing.
- Smallish inflow to gold ETF holdings yesterday of 5,987 ounces as that suggests the sharp gain in gold futures prices this week has not prompted a noted influx of investment in gold derivative instruments. ETF holdings are partly a lagging indicator with smaller investors usually late to the party.
- Goldman earlier in the week labeling gold as “the” investment hedge of preference and predicting gold to trade to $2050.
- Global inflation data released earlier this week confirmed inflation remains problematic around the world and if the US Fed is forced to hold back its inflation fight to save the US banking system, inflation will likely regain momentum.
- Gold and silver will continue to see money flows from residual global bank contagion fears but a significant slide in implied US treasury yields this week adds a secondary supportive force for the bull camp.
- Gold is highly sensitive to the rates outlook as higher interest rates raise the opportunity cost of holding non-yielding bullion and vice versa.
- Indian gold jewelry retailers are projected to see revenues jump by as much as 25% this fiscal year reportedly because of rising disposable incomes and pent-up demand from the Covid period.
“Traders quip that one of the few things to rally during bear periods is volatility. Add gold to the list. Its price has leapt about 7% so far in March to one-year highs of just under $2,000 per ounce. With investors dumping stocks and corporate bonds, money has flowed into both government bonds and gold. Interest in the yellow metal seems odd, given that price inflation in the US and elsewhere may well have peaked. And gold offers no income to investors… So what explains the renewal of interest? Well, gold does offer a safe haven, particularly for retail investors worried that their money may not be safe in a bank.””March 24 – Financial Times
Gold futures successfully back tested the median after another rejection at the Tenkan (orange) moved towards the flat cloud and twist. Needs to get impulse off this ABC so double bottom gains more weight and it follows silver break higher. The yellow metal is consolidating after it accelerated after breaking the weekly triangle higher. Gold has bounced after support at its uptrend line since the August 2021 bottom and Kijun. To be bullish we need to stay above the triangle. Murrey Math resistance, watch Fibs & Chikou.
PBOC Buying Gold
- PBOC in November added 32 tonnes of gold worth around $1.8 billion to its reserves, the first time it has disclosed an increase since September 2019.
- PBOC in December added to its gold reserves for a second straight month, adding 30 tonnes of gold worth. Brings China’s holdings to a total of 2,010 tons.
- China has the world’s sixth-largest official national gold reserves after countries including Russia, Germany and the United States, which is the biggest with 8,133.5 tonnes
- The World Gold Council (WGC) said in October that central banks globally bought 399 tonnes of gold in the third quarter of 2022, by far the most ever in a single three-month period.
- Silver upside action over the past two weeks has been very orderly and potentially indicative of continued stepwise gains ahead.
- Silver is mostly missing out on flight to quality buying interest.
- Signs of low supply had supported prices, as New York’s COMEX inventories fell 70% in the last 18 months to just over 1 million tonnes. London Bullion Market Association stockpiles fell for the 10th straight month to a record-low 27.1 thousand tonnes in November.
Silver bounced off the bottom trend line and was energizes in the sphere of influence. Back over 50wma after spitting tenkan, now providing support after reversed. Closing under outer channel which is now resistance. Major support is 50wma and tenkan.
The London Metal Exchange at the end of 2022 showed the smallest available warehouse stockpiles in at least 25 years. Available inventories of aluminum fell 72% decline, zinc shrank by 90%.
“After a substantial stretch when battery makers were desperate for mineral supplies, the shoe is suddenly on the other foot. In the past few months, previously red hot cobalt and lithium prices have cooled dramatically. The chill is coming from both sides: supply and demand. Supply bottlenecks are easing while China’s demand for electric vehicles, and global demand for many consumer electronics, have ebbed as well. Cobalt has fallen out of favor the most: prices in February were down 61% from January last year… Lithium carbonate prices rose rapidly for most of last year, but the metal has seen a sharp correction of 21% since November. China’s EV subsidy cut in December is a big factor…”February 28 – Wall Street Journal (Megha Mandavia)
- Aluminum futures were trading under 2,400 USD/T, easing from a seven-month peak of 2,660 USD/T touched on January 25th, as fears of a global economic slowdown and rising output from China prompted investors to unwind some long positions.
- China’s annual aluminum production in 2022 increased by 4.5% from a year earlier to a record high of 40.21 million tonnes thanks to newly launched capacity and softened power supply constraints.
- China has been taking significant steps to boost its economy and end the strict coronavirus-induced regime, lifting the outlook for metal demand and overshadowing global recession concerns.
- On the supply side, last year’s output cuts at key European smelters, including Alcoa’s San Ciprian smelter and Hydro’s plant in Slovakia, lent further optimism to bulls.
- Global inventories now stand at just 1.4 million tons, down 900,000 tons from a year ago and the lowest since 2002.
- Aluminum hit an all-time high of around 4,100 USD/T in March 2022 in the aftermath of Russia’s invasion of Ukraine. Aluminum is down roughly 40% from that record high in March amid persistent fears of a demand-sapping global recession triggered by an aggressive tightening campaign from major central banks.
- Alcoa reported Q4 earnings of a second consecutive quarterly loss as expected and missed on revenue. The company has been squeezed by higher energy and raw material costs and restructuring charges putting pressure on margins.
- $AA projects 2023 total alumina shipments of 12.7-12.9 million metric tons and aluminum shipments between 2.5-2.6 million metric tons. $AA traded down 5.5% after the release.
- In 2022 Aluminum and zinc on the LME had their worst year since 2018, with prices down 15% and 16%, respectively.
- Tin was the worst performer, falling by more than a third and registered the biggest annual decline since at least 1990.
- The world’s top aluminium producer, China’s primary aluminium production in November climbed 9.4% from a year earlier with 3.41 million tonnes as looser power restrictions allowed some regions to ramp up output and as new smelters started operation.
- China is the biggest producer, accounting for 60% of production, followed by Russia and then Europe and the U.S.
- On the supply side, LME has decided against banning Russian metal from trading and storing in its warehouses because many traders are still planning to buy the metal in 2023.
- The car industry is the world’s largest aluminum consumer, with nearly 67 million vehicles per year, according to SkyQuest.
We analyze Alcoa as a surrogate to Aluminum given its high beta relationship and more liquid aspect as an investment vehicle. $AA retested the 50Wma and 50% confluence after earnings. From there the Chikou rebalanced it closed under the tenkan. We have support below at 2/8 sphere of influence under the tenkan confluence.
Lumber prices were a leading indicator of the supply-chain problems and inflation that followed pandemic lockdowns. They are a leading indicator for the strength of the home building industry.
The CME is attempting the replace the random length with the physical futures, but they have yet to achieve the critical mass necessary for success.
The existing legacy contract is freight on board (FOB) originating in Prince George, BC. It’s a reflection of the mill price of western spruce pine fir lumber, which legacy 110,000 board feet futures contract is derived from. The new mini lumber is FOB Chicago, so the premium of $105 represents the additional from delivering to the mill in Chicago. That’s the reason the premium in the mini. Secondly, the new contract has the ability for producers to deliver western SPF, eastern SPF, domestic and Canadian Doug Fir, and U.S. Hem Fir. Depending on the species and delivering mill, the FOB is anywhere from $80 to $105 premium to the legacy contract delivered to Chicago. Lastly, the new contract is sunset out of existence with the official and permanent expiration on May 15, 2023.Greg Kuta, the President of Westline Capital Strategies,
- Chicago lumber futures moved sharply lower after spitting the weekly Kijun. For now, they are trying to bottom above the $400 per thousand feet mark as persistent fears of a demand-sapping global recession prompted some profit-taking after a massive rally drove prices to an over three-month high in early February.
- Prospects of interest rate hikes continued to depress real estate activity. Stubbornly high inflation and a tight labor market have raised worries that the Federal Reserve will keep rates elevated even after the recent turmoil in the banking sector.
- Fundamentals in the lumber complex had supported tight supplies and prospects of a rebound in-home construction and demand recovery.
- The benchmark remains down roughly 70% since its May 2021 peak of around $1,700, when supply chain issues compounded strong demand.
- Worth noting that before 2018, the price never eclipsed $493.50.
- In January 2023, nearby March random-length lumber futures were sitting at the $417.70 level, with the new physical futures at $525.00.
- In March 2020, random-length lumber futures fell to $251.50 per 1,000 board feet as the global pandemic gripped markets across all asset classes. When commodities exploded higher over the following months lumber rose to $1,711.20 as supply chain and other issues created a shortage. In an almost perfect bullish storm for the lumber market, historically low interest rates caused a housing boom, increasing the demand for lumber when supplies were low.
- The Federal Reserve’s aggressive tightening cycle has briefly pushed 30-year mortgage rates to levels not seen since 2001, leading to slower home construction and souring sentiment among homebuilders.
- The war in Ukraine and the tightening sanctions against Russia and its ally Belarus, which account for more than 10% of the global export of lumber, had squeezed global supplies.
- CBOT wheat futures prices were higher across the board as Russia’s threat to temporarily halt or limit exports caused the short covering surge.
- May-23 KC surged thru resistance at the 50 day MA, while making a new high for the month. Friday’s high at $8.61 ¼ stopped just shy of its 100 day MA resistance at $8.63 ¼.
- If Russia follows thru with the $275 mt limit for wheat exports they seemingly have established a global floor at recent lows. Time will tell.
- Russia’s Ag Ministry states the 93% of their winter crops are in good to satisfactory condition, down 2% from the previous month. They also raised their wheat export tax for the period ending April 4th to 5,410 roubles/mt from 5,328.
- KC May-23 inverse to Chicago May-23 reached a new high at $1.71 bu. before pulling back to close at $1.59 ½.
- USDA-FAS is now estimating that Australia will post a record-breaking wheat production of 1.360 billion bushels during the 2022/23 season. Estimates were based on ideal conditions in western and southern Australia partially offset by excessive rains in New South Wales.
Wheat resistance is now the tenkan and the 50 and 61.8% Fibs. It had been drawn higher by the flat weekly cloud which unraveled the shorts which when done we sailed back through 0/8 like butter. The contract keeps failing to stabilize after it continued its sharp impulsive collapse. This came about after a failure at retesting the 8/8 move and high after it spat 8/8, and the minimum target. It had completed a measured 4/8 correction off highs then broke key support at 38% then 50% and 50wma confluence in the freefall.
- Corn prices closed $.07 – $.12 higher Friday day of very choppy 2 sided trade.
- May-23 made a new high for the month at $6.45 as China continues to be a steady buyer of US corn.
- The USDA announced another sale of 204k tons (8 mil. bu.) to China. Announced sales this week reached 25 mil. bu.
- The Farm Futures survey suggests corn acres in 2023 at only 87.7 mil. down from 88.6 mil. YA and well below the Feb-23 Outlook forecast of 91.0 mil. acres.
- The Russian Ag Ministry raised their export tax on corn to 2,885 roubles/mt, up from 2,647.
- The BAGE lowered their Argentine corn production another 1.5 mmt to 36 mmt vs. the USDA at 40 mmt. While much of the 2nd corn crop is planted in Mato Grosso Brazil, the forecast for heavy rains and potential flooding does raised concern over crop development and fertilizer leaching.
Corn failed to hold last week’s price action failing under the Kijun after the 7/8 fail to close under the weekly cloud and under the 50wma. Earlier in the year Corn had topped out at the highest since 2012 in Chicago at +1/8 and corrected with impulse back to break the Tenkan which it swiftly did a spit of a spit after bouncing off 720, which also the price successfully retested the high from April 2021. From here we saw Tenkan fail again. Which is back where we are.
- Soybeans made new lows for the week in soybeans and meal, prices and were able to rebound and close higher across the board heading into the weekend.
- BAGE kept their Argentine soybean forecast unchanged at 25 mmt, the Rosario Grain Exchange is forecasting production at 27 mmt. RGE went on to state that record imports of 7.9 mmt would be necessary to support their domestic crush industry.
- The USDA already is forecasting Argentine soybean imports of 7.25 mmt based on production of 33 mmt, which is likely way to high.
- A Farm Futures survey from Mch 4th – 14th suggests 2023 soybean acres at 89.6 mil. acres well above the 87.5 mil. from the USDA Outlook conference in Feb.
- Spot board crush margins also rebounded nicely today, up $.19 to $1.37. Too soon to say whether US soybean prices have bottomed as Brazilian prices remain a $60 – $65 mt discount to the US with the threat of imports likely to keep rallies in check.
Soybeans after it rejected new lows at the bottom of trendline finally got the legs to break above the 50wma. The 50 wma and the tenkan are above the Kijun providing heavy support in the cloud. We sit above the January breakup. The weekly cloud and Murray mingle around the $14.9/bushel benchmark.
Recall beans broke down from the bull pennant framed by +4/8 and +1/8 with the Kijun unable to sustain support right at the breakout. Support at the 50wma gave way to under the futures pivot at $15/bushel benchmarks and at the close of the week was a magnet to the recovery bounce. Pressure came from futures spitting the Weekly +4/8 over $17.50/bushel three times. The market needs to rebalance that energy.
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Investing in commodities is something that needs to be done within a constructive strategy to understands risks and opportunity. There are many factors to consider individually depending on one’s access, location and financial position. Five factors to consider are monitoring the market, monitoring supply and demand dynamics, diversification, long-term focus and dollar cost averaging.
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