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Industry Commentary, December 2011: By Christine Marie Nielsen
The Dow Jones-UBS Commodity Index ended 2011 down 13.37% following a drop of 3.75% in December – a month in which prices were pressured by sovereign debt concerns, signs of a cooling economy in major commodity consumer China, plus unseasonable weather in some regions.
Despite a somewhat quiet ending to 2011, the potential for surprises in the commodities markets in early 2012 could be high. According to a December 20 Barclays Bank report, commodity market sentiment is likely to be heavily influenced by macro factors rather than individual market dynamics. Key issues include the extent of progress toward a European sovereign debt solution, trends in China’s business confidence and property prices, whether or not recent positive signs from the U.S. economy can be sustained, and how freely trade and inventory finance continues to flow in the commodity markets.
The three most significant downside performing single commodity indexes in December were zinc, silver and natural gas, which were down 11.37%, 14.90%, and 16.32% respectively.
Economic indicators emerging from China – a major consumer of zinc – indicate an economy losing some momentum as Gross Domestic Product for the country slowed, exports fell and property prices cooled. Further, the International Lead and Zinc Study Group reported in December that zinc markets had a 308000 metric ton surplus in the first eight months of 2011, due mainly to increased mine production.
Impact from the outlook for China was also felt in the silver market, with trade data showing China’s silver imports were down nearly 30% through November 2011.
Despite the arrival of winter, natural-gas prices fell on increasing supply and low demand. In December, the U.S. Energy Information Administration reported natural-gas storage was 13.7% above its five-year average and 9.1% above the storage level during the same week in 2010.
The Dow Jones-UBS Single Commodity Indexes for nickel, corn and wheat had the strongest gains with month-end returns of 6.87%, 6.33%, and 6.31%, respectively.
Nickel saw gains in December thanks largely to increased demand across the world – particularly from emerging economies. Nickel is also needed at an increased pace in the rapidly growing aerospace industry for the production of aircraft engines.
Weather issues abroad boosted grain prices in December. Continued hot and dry weather in Argentina was noted for buying interest in corn, and market participants pondered word that India's wheat production may be impacted by dry spells.
The Dow Jones-UBS Single Commodity Indexes for gas oil, orange juice and brent crude had the strongest 2011 gains with year-end returns of 19.41%, 18.75%, and 16.77%, respectively. Last year’s three most significant downside performing single commodity indexes were cocoa, wheat and natural gas, down 32.41%, 34.02% and 47.13%, respectively.
