Commodities: Holding on to gains in September - HSBC

Research Team at HSBC, suggests that their proxy for the IMF commodity price index suggests that overall commodity prices were flat in September, leaving them 26% above the January trough.

Key Quotes

“Half of the 32 commodities included in our indicator had lower average prices during the month. OPEC's recent decision to cut production has seen the oil price rally in the last few days of the month. Production cuts in China have driven further sharp increases in coal prices. We believe that commodity prices are past the trough, as a supply correction is gradually reducing oversupply that exists in some markets.

Oil prices traded in a fairly tight range in September, with Brent crude prices tracking between USD45-50 a barrel. Oil markets were focused on the OPEC discussions on 26-28 September. In a surprising outcome, there was a unanimous agreement to cap production in a 32.5-33.0 million barrels a day range, which is a cut from the current record output of 33.5 million barrels a day. If the agreed production limit is adhered to, we expect the global oil market to return to balance sooner – possibly by Q1 2017. However, there remains uncertainty about how the agreement will be implemented and enforced – perhaps a reason why the oil price has only lifted by about USD3 a barrel so far. These details are expected to be hammered out at the late-November OPEC meeting.

The other big story was continued strength in coal prices. Thermal coal prices were up 5% compared to August, taking the three-month price gain to around 40%. Coking coal prices have risen by an even more impressive 130% in three months. Higher prices have been driven by Chinese policy measures aimed at curbing production and improving profitability of the sector. China has cut working days on coal mines to 276 days from a typical 330 days, reducing domestic production and driving rising import demand. Coal is just one example of the supply side driving the prices higher.

Metals prices were mostly slightly lower in September, with nickel down 2%, aluminium down 3% and iron ore prices down 6% on average. However, most remain well above the recent troughs; for instance, the iron ore price is 41% above the December 2015 month average. Zinc prices held onto recent gains in September, while tin prices lifted by 6%. Tin prices have lifted by over 40% since January due to tightening supply, especially from the Philippines where the new government has imposed tougher environmental standards on the country's mining sector. In September LME tin inventories were reported to have fallen to the lowest level since 1998.

Amongst the agricultural commodities, grain prices were fairly flat in September but there were some large moves, both up and down, across other 'soft' commodities. The rally in sugar prices continued, up a further 6% for the month and by 88% y-o-y. Coffee prices rose by 7% m-o-m due to adverse weather conditions in Brazil, the world's largest producer. But pork (-13%) and beef prices (-6%) both fell due to strong supply data in the US. The USDA reported that the country's hog herd at the beginning of September was the biggest ever at that time of year.

Australia's commodity price index rose by 1.9% in USD terms in September, and by 2.3% in AUD terms. Higher coal prices more than offset a decline in iron ore prices.”