Good times seen for commodities, but not yet a boom

This article first appeared in The Edge Financial Daily, on January 14, 2019.
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KUALA LUMPUR: US Federal Reserve (Fed) chairman Jerome Powell’s statement last week that the Fed will be “patient” on raising interest rates has led to a weaker US dollar, with the US dollar index falling 0.52% year-to-date (YTD) to 95.67 last Friday.

The decline has proven a boon to US dollar-denominated commodities, which generally have an inverse relationship with the greenback. The Bloomberg Commodity Index (BCOM), which tracks commodities such as crude oil, natural gas, gold, copper, corn and soybean, has risen 3.8% YTD to 79.66.

Thus, the weak US dollar would make it a good time to keep an eye on commodities. This was seen during the 2008 sub-prime crisis when the US dollar index plunged as much as 11.5% to 72.03 on July 2 that year from 81.39 a year earlier, with the BCOM moving in the opposite direction, surging 39.6% to 237.95 within the same period.

Commodities last had a good run in the early 2000s — its so-called “super cycle” — with the BCOM seeing a more than two-fold increase from 89.03 points on Dec 31, 2001 to 233.03 points on June 30, 2008, before dropping 53% to 109.78 points on March 31, 2009.

Still, another commodity boom is not likely to come anytime soon, said US commodities guru Jim Rogers.

“There will be many commodity booms to come over the next decades, but not so soon. Commodity prices are [still] making complicated bottoms. So a boom is unlikely [to happen] for a while since world economic problems are coming within a year or so,” he told The Edge Financial Daily via email.

On what these problems are, Rogers warned that a recession is looming.

“We will soon have the worst recession in my lifetime. We had problems in 2008 because of too much of debt. Since then, debt has skyrocketed everywhere in the world ... even China has debt now while they had little then.

“How can the next recession not be worse [as] the numbers are clear and there for anyone in the world to read,” he said.

In a Jan 10 note, Goldman Sachs head of commodities research Jeffrey Currie said given last year’s headwinds of rising interest rates and a strong US dollar being removed in 2019, this spells good news for the current rally in oil and other commodity prices.

“[Currently] the US dollar is depreciating, wages are still rising and positioning is light. On the supply side, the Organization of the Petroleum Exporting Countries (Opec) has shown a commitment to reversing the second half of 2018 build in inventory that it has created.

“With the expected help of Chinese policy, which usually responds to external weakness, we remain confident in our bullish trade recommendations and a 10% return forecast for [commodities in] 2019,” he said.

China is the world’s largest buyer of commodities, and was instrumental in the commodities boom of 2008, a time when the world’s second-largest economy was growing at a rate of close to 10%.

Today, China may not be able to provide the same kind of support for commodities as its growth has slowed, according to Sunway University Business School economics professor Dr Yeah Kim Leng.

“The commodity boom in the 1990s and in recent years has been largely attributed to China’s growth performance, which at that time was expanding at double digits. The Chinese economy has slowed to [a growth of] about 6% to 6.5% at present, which is reflected in lower imports of commodities as a result of slowing demand. [Not helping is the US-China] trade war, which has also [dampened] demand,” he said.

UOB Malaysia senior economist Julia Goh concurred. “While there are hopeful signs that the US-China tensions are de-escalating, there are still a number of hard-hitting issues to resolve and concessions that the US is seeking.

“As such, we think there are still risks to watch on the trade front against a backdrop of decelerating global growth,” she said.

Socio-Economic Research Centre (SERC) executive director Lee Heng Guie said while a weakening US dollar would help boost commodity prices, they are still dependent on the demand and supply equilibrium.

“It’s not just the US dollar factor, as ultimately commodity prices fall back on the concept of demand and supply. For example, when oil prices started to weaken in the last two months of 2018, there were concerns over [a] slower global economy and a weaker growth in China which would impact demand for commodities,” he said.

Brent crude oil prices have appreciated by 14% YTD to US$61 (RM249.80) per barrel.

Besides crude oil, other commodity prices which have strengthened include gold (up 0.6% to US$1,290.25 per ounce) and wheat (up 3.2% YTD to US$5.195 per bushel).

Crude palm oil (CPO) prices, on the other hand, have also shown signs of improvement. Last Friday, the benchmark palm oil third-month contract for April delivery was traded at RM2,213 per tonne, a 12.6% recovery from its low of RM1,966 per tonne last November.

However, Sathia Varqa, the owner and co-founder of Singapore-based independent online publisher Palm Oil Analytics, is of the view that a weaker US dollar would lead to investors shifting their risk appetite to emerging market currencies such as the ringgit and this would make the ringgit-denominated CPO expensive to international buyers.

“A stronger ringgit will push CPO prices lower due to lower demand. The ringgit has been appreciating from the start of this year mainly due to remarks from the Fed chief on a pause in [the] interest rate hike,” he told The Edge Financial Daily.

Varqa said variables for CPO to watch out for in 2019 include the El Nino weather phenomenon, which is positive for prices as the dry spell will curb production and restrain supply, the implementation of the B10 biodiesel mandate for the transport sector in Malaysia from Feb 1, and a soybean crop size in Brazil that appears lower than expected.

“This will slash around four to five million tonnes from the annual global production, supportive of soybean prices, which may spill over to lift CPO prices.

“Stocks are forecast to linger above three million tonnes in January but [are expected to] begin to decline in the first quarter due to [a] seasonal slowdown in production. This could offer support to CPO futures to trade between RM2,300 and RM2,500 per tonne for the April, May and June contracts,” he added.