The World Bank’s Compounded Commodity Commiserations

The World Bank’s quarterly commodities outlook predicted “broad-based weakness” into 2015 as energy, metals and agricultural prices are all down 35 percent from 2011 peaks. It expects “rare” uniform drops in the nine classes tracked, assuming no further global economic slide or an OPEC shift toward oil supply management.  Natural gas and coal will also fall and for food and grain only beef should increase. Biofuels will collapse with governments unable to justify subsidies with oil at $45/barrel and fertilizers’ value decline should moderate to single digits. Precious metals face dual risks from lower demand in China and India as well as from institutional investor “safe haven” withdrawal, according to the report. It points out that International Energy Agency forecasting revisions are common and that the US shale oil boom and reduced world appetite by themselves do not explain the sudden 50 percent reversal as much as OPEC’s new strategy to maintain capacity, static geopolitical confrontation in Eastern Europe and the Middle East, and dollar appreciation. In the past three decades similar volatility was noted on several occasions, most recently during the 2008 financial crisis when all asset classes were correlated unlike the case today. Then global growth and liquidity concerns were main drivers in contrast with current sector-specific influence. The traditional oil price divergence between West Texas Intermediate and Brent has disappeared and non-OPEC producers continue to supply 750,000 barrels/day. International demand will be flat at 95 million barrels and 2015’s average will be $53 and rise only modestly in 2016, the Bank believes. In metals, iron ore, nickel, tin, lead, copper, aluminum and zinc have all suffered from the arrival of cut-rate producers like Australia and Brazil and negative Chinese imports. Warehouse and exchange inventories have shrunk but prices will retreat another 5 percent this year. In precious metals ETF outflows slashed holdings 10 percent in 2014 on incremental Federal Reserve tightening as gold miners in South Africa and elsewhere otherwise merge and consolidate operations. Fertilizer will show mixed direction and India and China may add pressure with subsidy cuts. Wheat and maize are “well-supplied” and rice output will taper to 475 million tons in part due to Thailand’s huge stockpile accumulated under the Yingluck Administration’s support program, with the former premier now charged with negligence by the military-controlled parliament. Soybean crops are at a record, and in beverages coffee recently spiked on Brazilian drought but cocoa and tea lagged in good African and Asian harvests. Cotton and rubber are in a multi-year correction and timber will be off 3 percent this year, according to the early estimate.

Reflecting the commodity crash the IIF’s last quarter 2014 emerging market lending conditions survey still registered below 50 with all regions reporting domestic and international line cutbacks especially in trade finance. The 125 banks polled cited Russian and oil crisis contagion as the main drags, with a slight NPL improvement in Europe among the scarce future recovery seeds.