Commodities: Q2 Roundup

As the second quarter of 2012 draws to a close, let's reflect on recent developments in commodity-futures prices. The past three months has been characterised by economic slowdown in key global markets coupled with renewed political and economic turmoil in the euro zone. Meanwhile, signs that further quantitative easing from the Federal Reserve is not forthcoming have reduced speculative demand for commodities from hedge funds while also boosting demand for the U.S. dollar (the dollar index gained 5% during the quarter).

Upside MIA
Although media attention has centred on declines in oil futures prices (Brent and WTI down 20-25%), it wasn’t the worst performer during 2012. Orange juice futures suffered a tumultuous second quarter with a decline of 30%. In contrast, upside amongst commodity futures has been difficult to find. Aside from small gains in a selection of agricultural commodities, the standout performer has been natural-gas prices, up 30%.

Orange Juice: Worst Q2 Performer
Orange-juice prices fell by 30% during the second quarter. Futures prices fell sharply as concerns of supply disruption from Brazil, the top global producer eased. This followed the discovery of a banned fungicide in Brazilian imports earlier in the year. Futures prices also fell on signs that U.S. consumer demand was dwindling due to the economic slowdown -- demand has been declining as part of a longer-term trend and competition from other fruit juices. Orange juice futures prices recently rebounded by around 15% off their lows due to fears that hurricane activity could disrupt the key U.S. growing region of Florida.

Oil: Iran Concern Put On Back Burner...For Now
Oil futures prices fell sharply as concerns about the global economic slowdown trumped supposed supply tightness and concerns over conflict with Iran. Both Brent and WTI have dropped by similar amount over the quarter (20-24% and the worst quarter since 2008) resulting in the spread between the two remaining close to $13 per barrel.

After Brent oil futures hit a three-and-a-half year high of $128.40 per barrel on March 1, OPEC members increased production while the U.S., U.K. and France moved to release emergency reserves. Meanwhile, concern over the economic slowdown in the U.S. also led to lower prices. However, with EU sanctions set to come into force on July 1, attention may focus on the risks that Iran poses to supply, potentially lifting oil futures.

Copper Down On Weak Chinese Demand
Copper futures declined by around 13% during the second quarter as industrial-metal demand weakened (including others such as aluminium and tin) on lacklustre Chinese demand. Copper stocks on the Shanghai Futures Exchange (ShFE) rose to their highest level in more than a decade early in Q2 as demand slowed. Since then, stocks have declined as manufacturers sought to draw down stocks at lower prices. Further drawdowns and improved Chinese demand prospects in the second half of 2012 may start to support copper futures.

Cotton Slumps, Food Commodities Volatile
Food based agricultural commodity futures -- excluding orange juice -- had a mixed performance for the quarter. Sugar was the worst performer, down 4% while cocoa prices rose by 8%. Sugar futures slumped to a 21-month low in early June on concern that the global economic slowdown would curb demand as supply forecasts rose. Since then, however, sugar futures have rebounded by 8% in June due to fear over drought in India affecting new-crop prospects. Meanwhile, cocoa futures rose during the second quarter on fears that too much rain would hurt crops in West Africa, the world's top-growing region.

In contrast, cotton futures fell by 27%, the second worst performing commodity future during the second quarter. Cotton futures fell to their lowest level since late 2009, sapped by concern over demand from China, Europe and the U.S., coupled with ample global stocks. Global cotton stocks are forecast to represent 61% of global consumption by the end of July 2013, the highest stocks-to-use ratio since 1998-99.

Natural Gas Soar
Natural-gas prices rose by 30% making it the top performing commodity in the second quarter. Prices have rebounded to a five-month high on forecasts for hotter-than-normal temperatures, driving fuel demand from plants to power air-conditioning units.