- Money Morning Australia

Is This Proof That Commodity Prices are Set to Fall?


Written on 21 November 2012 by Murray Dawes

Is This Proof That Commodity Prices are Set to Fall?

Since I took over writing Money Morning every Wednesday I have focused on giving you an insight into my technical approach to trading markets.

But today I’d like to start by having a squiz at some interesting developments in the commodity markets.


I’ve noticed a distinct rise in articles referring to speculative commodity stockpiling in China and elsewhere.

An ANZ commodity research report from this week focused on something called ‘contango financing’ in the aluminium market. In a moment I’ll explain why you should take notice of this obscure term, and what it means for commodity markets…

According to the report:


‘The aluminium market is facing a supply shock in 2014 when prices could drop by 20% or more in a very short period. We expect around 70% of on-warrant and off-warrant stocks, or about 8 million tonnes of metal tied up in financing deals, to come to the market around the middle of 2014. The trigger will be rising interest rates, which will make contango financing unprofitable.

‘Contango financing – buying cash metal at a discount, selling forward at a premium, then using the difference to cover the cost of storage, interest and make a profit – has increased significantly since the global financial crisis. Low interest rates have caused investors to seek yields in alternative investment structures and financing metal remains a relatively low risk opportunity. However, margins can rapidly shrink as costs, primarily interest and warehouse rents, go up.

‘The metal locked away in these deals could amount to around 8 million tonnes or 15%-20% of global supply.’

This is scary stuff.

Then I read a Bloomberg article on Mike Shedlock’s economic blog, Mish’s Global Economic Trend Analysis. The article notes:


‘cotton stockpiles in China, the world’s biggest importer, are set to climb to about 9 million metric tons this season, enough to cover the country’s deficit for the next six years, according to Allenderg Cotton Co.

‘Inventories are rising as the government boosts purchases to support domestic prices and lift farmer incomes, Joe Nicosia, chief executive officer of the worlds largest cotton trader, said at a conference in Hong Kong today.’

A China Daily article from the same website focuses on the problems ahead for the Steel industry:


‘China’s steel industry is a big cause for concern in the fourth quarter due to shrinking demand and heavy losses, according to an industry official. The fears were outlined by Huang Libin, an official from the Ministry of Industry and Information Technology, in an interview with China National Radio.

‘The steel sector’s performance has been bad since the beginning of the year,” Huang said. “Their revenues are falling and demand remains weak.” The entire steel sector is now operating at a loss and struggling with problems of oversupply and a broader economic slowdown, he said. MIIT data show that 45 percent of the country’s steel companies suffered losses in the first nine months of 2012.’

It seems quite clear to me that we’re seeing distortions in many hard and soft commodity markets. Some are due to central bank meddling in interest rates, which is forcing investors to look for ingenious ways to make a buck (contango financing) and some are due to government interference (Chinese subsidies for cotton).

But the end result is the same: inventories going through the roof while growth comes off the boil.

A Leg Down Coming in Commodities

I find it hard to believe that we’re not close to another serious leg down in commodities.

I think the catalyst for such a fall will be any signs that Chinese macroeconomic data is shifting back to the downside.

So economic data such as this Thursday’s release of the HSBC flash PMI will be worth keeping a close eye on.

Murray Dawes
Slipstream Trader

From the Port Phillip Publishing Library

Special Report:
Retire Rich, Happy and Free From Money Worries

Daily Reckoning:
Facing Fiscal Reality: You Can’t Tax Your Way Out of a Spending Problem

Money Morning:
Buy Quality Gold Stocks That Have the ‘Right Stuff’

Pursuit of Happiness:
The Biggest Threat to Peace: A State of Warfare or Welfare?

Diggers and Drillers:
The High-Tech Commodity Driving an Investing Revolution



Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...
Share

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au


Comments are closed.



FREE INVESTMENT REPORT: The Top 5 Oversold Blue-Chip Stocks in Australia


These five Aussie stocks all have something very powerful in common…and it could see them bounce up in the coming weeks and months. For all the details download this report right now.

PLUS you'll get Money Morning every weekday...absolutely free.

Enter your email address below and hit the 'Claim My Free Report' button now.

Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

New Frontier Investor

The last investment megatrend birthed stock gains of 11,095%, 20,621% and 50,760% over 20 to 40 years.

If Kris Sayce is right, gains from this next megatrend won’t just reach those heights...

They’ll SURPASS them...

To see why, click here.

Iron ore leadgen

Stock Market Updates

  • ^NDX3986.192+24.569 - +0.62%
  • ^FTSE6798.15+2.81 - +0.04%
  • ^AORD5578.800+11.800 - +0.21%
  • ^AXJO5588.800+12.100 - +0.22%
  • AUDUSD=X0.9444
  • USDJPY=X101.5405

PAN [predict literally ban]

interest rates leadgen

Australian Small-Cap Investigator

Why Holden’s future lies
beneath the soil in
Tasmania…

 
And not just the future of Holden…but Toyota,
Hyundai and Mazda too


CLICK HERE FOR THE FULL STORY

investing success leadgen

TDR [war in the pacific ban]

Resource Sector leadgen

Gowdie Family Wealth

Which type of family are you?


  1. The kind that ends up in court
    battling over inheritance money…

  2. Or the kind that knows how to
    protect, pass on and grow wealth forever.

Click here if you want the kind of family
that grows its wealth for generations.

The Money For Life Letter

A giant wrecking ball is about to smash Australia’s retirement system to smithereens...
 
And unless you take the evasive action outlined in this Special Issue, everything you’ve saved and invested over your whole working life could soon be GROUND to DUST.
 
Click here to read.

Gold Stock leadgen

Revolutionary Tech Investor [BANNER moonshot]

Graphic Ad 1 – Blue Chip Stocks Report


More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

Russia and its supporters have nothing to gain from attacking civilians. Russia and Putin were winni [Read More...]

You owe it to yourself take this advice. But even if I’m right and you act now, you may not be able [Read More...]

New Zealand may not be an emerging market, but it’s highly leveraged to growth in emerging markets. [Read More...]

Clearly, illegal immigrants are a headache for the government. But rather than store them on Christm [Read More...]

Don’t fear the swan. But don’t be complacent either. Acknowledge and respect that black swan events [Read More...]

The world is a safe, stable place. Must be. Janet Yellen says so. The bond market says so. The stock [Read More...]

Into this swirling maelstrom of confusion, you’ll be invited to board a new investment vehicle next [Read More...]

Russia and its supporters have nothing to gain from attacking civilians. Russia and Putin were winni [Read More...]

This morning the Australian dollar is trading for 93.9 US cents. It hasn't managed to regain pa [Read More...]

While Australian investors continue to hold most of their share investments in local stocks, they ar [Read More...]

TESTIMONIALS

"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery