Commodities

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A key guage of Commodities prices which tracks 23 energy, metals and crop futures contracts continued to surge higher over record highs set in 2011. Incredibly since hitting a four-year low in March 2020 the index has surged more than 90%.

Bloomberg Commodity Index 10 4 2021

The critical supply crunch, shortage of energy from ESG political moves and the trade war between China and Australia has fed a resurgence in demand for raw materials running smack into supply constraints.

With that has been surges in inflation around the world. While the major central banks in the US, ECB and BOE have all called the price moves transitory emerging nations have been reacting to curb inflation. Central banks in Brazil and Mexico raised rates in the past few weeks.

The biggest gainers are energy commodities such as coal, natural gas and oil surging from shortages in both Europe and China. Oil jumped to the highest in almost seven years on Monday after OPEC+ maintained a gradual 400kBpd supply increase despite the gas crisis is set to boost demand for crude to generate power.

Thermal coal, which is used mainly by utilities to produce electricity has seen prices triple to about $200 a metric tonne in Australia. Glencore has sizable operations in Australia and produces thermal coal and metallurgical coal, which is used to make steel.

ICE NewCastle Coal Oct '21 (LQV21) 210.50s +2.80 (+1.35%) 09/29/21 [ICE/EU]

ICE Newcastle Coal 9 29 2021

Coal Kicker

Jefferies analyst Chris LaFemina in a client note titled the “Coal Kicker,” estimated Glencore's annualized Ebitda run rate on spot coal prices for the company's coal business has increased to $9.1 billion today from $1.3 billion in August 2020 wih the prices having tripled during the period. On a mark-to-market basis, the company's annualized Ebitda has increased to $24.3 billion from $21.8 billion since early August 2021, the bank estimates.Conversely, Ebitda projections for other major miners fell materially over this period due to the rapid declines in iron ore prices.

LaFemina has a Buy rating and a price target of 425 pence for Glencore’s U.K.-listed shares, almost 30% above the recent price of 330 pence. Glencore’s U.S.-listed shares (GLNCY) are up 25 cents at $9.24.

Chinas Power Rationing 21 9

In china 12 provinces have identified coal supply shortage as the key reason behind for power rationing or rolling blackouts. In the three provinces in northeast China. Liaoning, Jilin and Heilongjiang, in particular, even residential power usage is affected, a rare occurrence for a country putting household energy supply in a prioritized category. For most provinces, industrial power rationing remains the key measure a report by IHS Markit said.

Thermal Coal Futures China 9 29 21

The reopening of major economies unleashed pent-up demand for transportation fuel and commodities used in manufacturing. At the same time a combination of the COVID lockdowns and ESG policies has seen new commodity mining and production developments stalled or abandoned. At the same time China is replenishing crop stockpiles and bad weather is hurting top exporters of agricultural goods, drought in Brazil has pushed up coffee and sugar.

Cotton futures last week rose to the highest in a decade on weather and shipping bottlenecks. The knockon is costs for clothing around the world are surging.

Aluminum and copper have surged because of short global supplies, and another factor is the weaker stockmarkets over the past month and poor performance of gold and silver has seen investors looking elsewhere for returns and an inflation hedge. This has caused prices to rises and attracted more investors, a self fulfilling prophecy.

Its not all one way however, when commodity prices reverse it is hard and fast.

Corn W 10 1 2021

Lumber W 10 1 2021

Soy W 10 1 2021

Soybean meal, Corn, lumber, and Palladium are just some commodities that reversed in brutal fashion.

China trade and information war

China has begun a trade and information war with Australia over the Covid crisis with a campaign to rein in prices by ordering state-owned enterprises to limit their exposure to Australia commodities markets and selling metals including ironore, copper, aluminum and zinc from state stockpiles. The problem is China needs those commodities such as coal and LNG from Australia who is the largest exporter of both. The evidence from Australia's massive trade surplusses underscores this.

With the power crisis and restrictions on pollution, Chinese production of steel has plunged, reducing demand for iron ore and talked the prices down. While it is down from over $200 to $100 it is still up from $40 or so last year. THis is also part of the orchestrated campaign against Australia.

Goldman Sachs Group issued a note saying China’s efforts will likely be in vain because China is no longer dictating commodities pricing, given the strength of demand coming from the U.S. and Europe. Something it is learning the hard way.

Source: Bloomberg, TC

From The Traders Community Research Desk

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