What to Expect from the Commodities Market this Year – Introduction
In 2017, the commodities market was disappointing. As shown below, the Bloomberg Commodities Index (BCOM) showed no major movements in the year.
The drag was attributed to major price decreases from soft commodities like agricultural products like corn and coffee.
The biggest gainer last year was palladium followed by copper. Crude oil also saw some major gain especially as the year came to an end with Brent and WTI ending the year at three-year highs.
Palladium climb came as demand in the automotive industry rose. Palladium is a metal in a category known as platinoids. Other metals in this class are platinum, ruthenium, rhodium, osmium and iridium. Their main qualities are their density which makes them very hard and thus useful in vehicle manufacturing. They are also found deep within the earth’s crust which makes mining them very difficult and expensive. They are mostly found in South Africa and Russia.
Palladium and Platinum have similar uses which means manufacturers can use either of the metal. Last year, manufacturers switched to palladium which was cheaper than platinum pushing its price to more than $1000. On the other hand, platinum remained static at about and below $900.
Therefore, this year could belong to platinum as more manufacturers use it compared to palladium.
The second main commodity to watch out will be crude oil. In the past two years, crude oil has been in a slow rally since it fell to $26 a barrel in February 2016. The price has since more than doubled to more than $60 a barrel. This surge is likely to continue as the Middle East is rocked with crisis after new crisis. As you recall, the Saudi prince has went on a corruption purge and in Iran, anti-government protests have intensified. United States has recognized Jerusalem as the capital of Israel. All these crisis could mean a higher price of crude with the main challenge comes from the United States which has ramped up the production of Shale.
Copper is another metal to watch. In 2017, copper price rose by more than 30% as investors expected more demand from the electric vehicles market. This year, two things could play out. First, the price could continue to soar as investors digest the demand of EVs or the price could see a correction as the demand slows down.
A key focus this year will be in the agricultural commodities like corn, soybeans, coffee, and cocoa. Last year, soft commodities continued the losing streak. This is despite strong fundamentals. For example, cocoa comes from Ivory Coast and other countries in the West African region. Automation has led to more acreage of cocoa and the surging population and appreciation of cocoa has led to more demand. This year, the focus will be the anticipated la’nina, which could lead to significant warm weather in major producers. The last time a la’nina happened agricultural products surged led by coffee that gained by more than 20%.
Gold could see a strong year. Last year, stocks continued their surge as investors anticipated a tax reform. This anticipation will not be there this year since the bill has been signed. Therefore, this could lead to a more sluggish return in the stock market, which could lead to more demand for gold. Another factor is that yields in treasuries are so low.