GLOBAL HEADWINDS FAIL TO DAMPEN COMMODITIES RALLY

Despite a tepid March, commodity prices enjoyed a strong first quarter as tensions around the US-China trade dispute and uncertainty around Chinese growth subsided.

The US dollar initially rose last month on the back of dovish comments from the European Central Bank (ECB), but it subsequently eased back as risk appetite improved, which lifted some commodities prices.

The return of risk appetite is also evident in global equity markets, which have moved in lockstep with commodities in recent months. On a more fundamental level, China’s oil imports grew strongly in year-on-year terms in January and February, but there were signs of weakness in imports of some industrial commodities.

The S&P GCSI, a global commodity index, rose 1.6% in March to take its overall gains for the year to 15%. Meanwhile, the Dow Jones Commodity Index, which has a lower energy weighting, was only up 0.1% for the month, and 7.5% year to date.

Energy, base and precious metals products all rallied during the first three months of the year, despite talk of a slowdown in the global economy, which was largely offset by accommodative monetary policies by the world’s largest central banks including the US Federal Reserve, ECB, Bank of Japan and the Bank of England, injecting optimism among investors.

Among major commodities, Brent crude was up by a staggering 25% during the quarter to reach USD 68 per barrel, as OPEC and allies worked through production limits to stabilise the market.

S&P Global estimates benchmark crude indices could rise further amid summer demand in emerging markets.

“Traders attributed the strength in part to a general rally in global crude oil prices, owing to OPEC's high compliance with its promised production cuts,” S&P said. Post-maintenance, spot price differentials of sour crude grades are expected to rebound for June-loading cargoes being traded this month, the financial services company added.

However, precious metals prices fell in March. While recent data showed that China and India’s combined gold imports dropped sharply in February, the main driver of the dip in gold and silver prices at the end of the month was a renewed rise in risk appetite, after signs of progress in US-China trade talks.

Meanwhile, most industrial metals prices started and ended the month roughly at the same level owing in part to a postponed conclusion to US-China trade talks. The only industrial metal to fall significantly in March was lead, perhaps because the Chinese car sector remains painfully weak.

“Performance across the industrial metals complex was more disparate, leaving the Industrial Metals Index flat for the month. The rise in commodities this year has been partly fuelled by hopes for an agreement to end a trade war between the US and China,” according to S&P Global.

Zinc and nickel were the standout beneficiaries of such growing expectations, and, combined with critically low inventory levels, this pushed the Zinc Index and Nickel Index approximately 21% year to date (YTD).

Aluminium is the laggard industrial metal YTD, and the S&P GSCI Aluminum was down 0.2% in March and up by a relatively meek 3.4% YTD. Investor concerns regarding rising aluminium supplies have been heightened since the Russian aluminium giant Rusal resumed sales to the US market, following its removal from the US sanctions list.

Copper prices are up 9% YTD driven by optimism around a US/China trade deal and Chinese stimulus efforts. However, recent soft economic numbers from China, the US and Europe have kept the slowing global economy in focus.

Positive March PMI readings in China and an uptick in credit to start the year show stimulus efforts are helping, but credit growth remains well below 2016 and 2017 levels. Grid investment in China remains a stable backbone of copper demand, although slowing auto sales and weaker property starts are headwinds.

S&P Global Ratings said it raised its assumptions for copper and iron ore, reflecting steady demand, combined with tight supplies and limited prospects for output growth.

“The increase in our copper price assumption reflects an expected minor deficit for 2019 that could increase through 2021,” S&P said.

“All in all, we believe copper prices have some room for further upside if deficits widen. We expect near-term iron ore prices to remain well supported, with an estimated 3% to 4% of the global seaborne market directly affected by lower output from Vale's tailings dam failure. Prices in 2019 have remained elevated since the event, but the current spot price may cool as sentiment wanes and seasonal restocking in China draws to a close.”