Karachi, December 13, 2017 (PPI-OT): Nov’17: Commodities Update
Continuing to climb, bullish sentiment prevailed during Nov’17 with commodity index firming up around 189.1 points. This uptrend was led by higher oil prices that treaded upwards (Brent/WTI gaining 9.4%/10.3%MoM) following OPEC’s agreement to extend supply cuts amid escalating Middle East crisis. Similar trend was seen in Coal (+2.4%MoM) with the increase being driven by higher demand in China (ongoing heating season, lower hydro power output). Steel prices also treaded upwards (+2.1%MoM) as the Chinese government implements a policy of curtailing supply in the backdrop of improved demand. That said, prices for international milk (FAO dairy index down 4.9%MoM) and Urea (down 1.8%MoM) cooled on the back of rising output. Going into Jan’17, the commodity cycle can sustain its current uptrend with weather disruptions, policies of the Chinese govt. and manageable inventory levels making room for higher prices.
Nov’17 OPEC deal – the talk of the town: World’s major oil benchmarks, WTI/Brent/Arab Lite, all registered hefty gains in Nov’17 climbing 10.3/9.4/10.0%MoM. Concerns regarding OPEC’s deal to modify or extend the production cuts remained the focal point (although eventually resulting in an extension of cuts till Dec’18 – review scheduled in Jun’18). Citing US exports into the region, Russia initially remained hesitant towards the extension creating downward pressure on the commodity, but escalating Middle East crisis (including the arrest of Ministers and key people in Saudi Arabia) drove intl. oil prices higher.
During the month, Arab Lite peaked at US$62.7/bbl, its highest level since Jun’15, widening the WTI-Arab Lite spread to US$5.87/bbl, which averaged US$4.25/bbl in Oct’17. Second half of the month also saw US production at its highest point of 9.68mbpd since the EIA starting recording data in 1983. Active oil rigs in the US also increased by 10 to 747, while inventory levels in the US remained at the same level as excess production was dumped into China. On the domestic front, overall energy spreads narrowed (with an exception of Naphtha) during the month while news regarding closure and under-utilization of refineries also remained in circulation.
Coal prices at 13m high: Global thermal coal prices are experiencing their third spike in the last year and a half (up around 33% from this year’s low set in May’17) due to supply constraints from Chinese and Australian mines coupled with the arrival of heating season. Currently standing at its 13 month high of US$96/mt (vs. previous high of US$99/mt in Nov’16), thermal coal went further up by +2%MoM/+0.6%YoY in Nov’17, to stand at an average of US$93/mt. The uptrend is being driven by market dynamics in China where crackdown on illegal mining in China has curbed domestic coal supplies while ongoing heating season and lower hydro power output lifted demand for coal in household sector and power generation, taking prices higher. Going forward, thermal coal prices can continue to increase as Chinese (world’s largest energy user) revert to burning coal in the backdrop of natural gas shortage.
Cotton prices rebound in Nov’17: Reversing last month downward trend, int’l cotton prices managed to rebound in Nov’17, moving up 2%MoM to an average of USc80.34/lbs. The month end rally was driven by upward revision in world cotton consumption (+1.2mn bales) by the USDA, pulling down world ending stocks by 1.5m bales. Looking forward, we expect the int. cotton prices to take direction from the policy initiatives adopted by the Chinese gov’t, where Chinese officials recently hinted towards another round of cotton auction, feeding domestic demand. This along with bumper cotton crop in countries like India, Australia and United States could keep cotton prices in check. Despite GoP’s decision to allow the import of Indian cotton, domestic cotton prices during Nov’17 gained 5%MoM, where steady local demand in the backdrop of limited supply of quality crop continued to drive cotton prices higher.
Steel prices sustain upward trajectory: Sustaining their upward momentum, CRC/HRC prices in Nov’17 moved up 2.06%MoM/0.37%MoM to an average of US$731/US$635/ton. Factors driving rally in steel prices included: 1) recovery in Chinese steel demand, 2) rising import demand from Turkey and 3) high compliance with steel production cuts by Chinese manufacturers. Going forward, recovering Chinese construction sector along with ongoing production cuts could further push steel prices higher. However, downward pressures emerging from protectionist policies adopted by steel importing countries may restrain ongoing rally in flat steel prices.
Urea prices maintaining high levels: Urea prices remained almost flat in Nov’17 (-1.8%MoM) to stand at an average of US$273/ton, while still remaining 15%YoY higher. After breaking its 14yr low (US$190/ton in Jul’17), urea prices bounced back strongly (+24% CYTD), led by outages, seasonal maintenance and higher demand from India. We can see urea prices sustaining at current price levels through 1QCY18 on account of decreased chemical production in China (gas shortage). On the domestic front, rising trend in the int’l urea prices helped local manufactures to export the remaining allocated quota of urea at higher prices while easing down inventory levels at the same time (urea inventory came down significantly in Oct’17 by 53%YoY to 690k tons).
Food price index is down 4.9%MoM: Representing the second consecutive monthly decline this year, the FAO Dairy price index went down 4.9%MoM. Rising milk output in major milk producing countries improved supply, lowering prices. Skimmed Milk Powder prices however, slid on continued uncertainty over the invention stocks held by EU. We believe the continuous uptrend in food prices can potentially raise concerns on margins of local dairy players making use of the cheaper import alternatives.