WMP under performing; GDT 186

Commodity prices:

Some could be bored with some of my commodity commentary and the repeated references to supply-demand balance. The chart below, I think, is an interesting example of these factors.

For clarity (and to provide reference points) I have included WMP and oil prices (as the commodities that you are probably most familiar with). The blue line is coking coal prices. Coking coal is used in steel making in China and much of the high quality coking coal comes from east coast Australia. The rapid rise in coking coal prices last year was due to unanticipated mine closures in China (supply) and rising steel output (demand) in China. As supply responded to higher prices, the price fell back but the latest spike is due to east coast mines being flooded and supply disrupted as a result of Cyclone Debbie.

The red line is iron ore prices. Iron ore started the year at $65 and I was forecasting a prices range of $95/t to $55/t. It seemed generously wide at the time but just weeks ago iron ore prices were in the mid 90’s and threatening $100/t before perceived excess supply has seen a rapid fall in iron ore prices to $68/t late last week.

I would make the obvious point that the coking coal supply issue is a short run factor so these prices are unlikely to be sustained. The iron ore supply is structural and more likely to dominate longer term. Nevertheless an interesting illustration of supply and demand factors in real time!

 

The chart below is the same commodities over a 6+ year period (to March month end and hence absent the spikes in the chart above). It provides an interesting perspective on dairy prices and also suggests some correlation between all commodities notwithstanding the unique supply and demand characteristics of each commodity that can dominate short term moves.

Year to date (until recent weeks) iron ore was the outperformer relative to expectations. Both oil and WMP have under-performed expectations coming into this year but have regained their footing in the later part of the quarter.

The major reason for me suggesting that WMP and oil under-performed expectations is illustrated below. Coming into 2017, I noted that I expected the first half of the year to have more momemtum and to perhaps be easier than the second half of the year. The reason for this view is illustrated (with hindsight now that we have the data) by this ANZ Bank chart on leading indicators. What it shows is that coming into 2017 the US, Europe, Japan and China all had positive momentum (and positive) leading indicators suggesting rising growth momentum. As we enter the second half of the year, while growth will remain positive it is likely that “momentum” will fade and therefore likely that commodity demand will flatten out. Far from precise but worth reflecting upon!

 

Auction #186:

The outlook for the auction tomorrow night is robust at this stage.

After WMP reached lows of between $2,600/t and $2,700/t across the curve, the market clawed its way back to above $2,800/t into the last auction and then delivered circa $2,950/t across the forward curve. Bearing in mind that last Thursday was the last trading day, the April contract closed at $3,000/t but the May – October contracts closed at circa $3,140/t, up roughly $200/t on the prior auction result and suggesting a 5%-8% rise this week. This outcome is supported by a bounce in SMP prices from the lows of circa $1,900/t to $1925/t- $2,000/t over the balance of this season and stronger prices(+10 - 12%) into the new season.

This renewed optimisim is also reflected in the FGMP futures (MKP). A month ago 2017/18 traded at $5.55/kgMS (at the time 35c lower than the 2016/17 price) but it is now bid at a 10c premium ($6.13/kgMS) to the last traded 2016/17 price of $6.03/kgMS.

Importantly this rise has happened on relatively robust volumes and reportedly good levels of interest in the physical market with Algeria in the market. In fact, last Tuesday was a record volume day for dairy futures on the NZX and last week (despite the shortened week) saw FCNZ report commodity volumes of 8172 contracts (almost 75% in WMP) compared with circa 7,000 contracts for the whole of April last year.

One unknown is how much the market was responding to advance reports of Cyclone Cook. Wet though it has been over Easter, the “forecasts” of last week look to have been overly dire.  (MyFarm notes that the legacy of Cook and the wet weather than proceeded her is now resulting in a lot of lame cows; constantly wet hooves on damaged races can cause significant problems quickly.  Perhaps the season will close with a whimper).