Commodities Performance in 2011
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Contents Introduction Precious Metals Gold Silver Energy Crude oil Natural Gas LME Metals Copper Aluminum Lead Zinc Nickel
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Introduction Year 2011 has been the most volatile year for the Commodities and Financial markets across the world as this year was started by hope of a economic recovery and ends with fears of slipping into Economic recession. In last few decades political environment has never affected commodities or financial market as 2011 did. European debt crisis and its contagion to EU and slowdown in global economy and China’s manufacturing PMI slumping down created concerns for the global investors as they spent 2011 in fears rather than relief. Commodities was one of the sector that performed with a lot of volatility as Gold, the safe haven� was giving returns of 35% in 1st half of 2011 suddenly underperformed US treasuries which gave a return of 16.7% in 2011 as Gold posted its first quarterly loss since 2008. Silver which made an all time high of $49.76 and was giving returns to investors which was never imagined, 63.52%, dropped like a knife and underperformed and gave a negative return of 10.1%. And as we enter in 2012 the precious metals have been into more negative territory as there 20 DMA dipped below 200 DMA in last week of 2011. Industrial metals were one of the best performing commodities in 2010 and as 2011 started it was copper that was supposed to lead the rally but as soon as Tsunami hit the Japan, European debt crisis bubbled and its contagion to other economies coupled with fears of economic recession. Industrial, ferrous and non-ferrous metals were the worst performers in 2011 with Tin and Nickel leading the downtrend with 28.72% and 25% respectively. Oil space did well in 2011 as there was better demand but supply side risks, geo-political tensions from Iran, Libya and Sudan coupled with a drop in Dollar led investors to liquidate their portfolio from precious metals and pump into energies space. Crude oil gave investors a return of 8.2% while Brent crude edged up 14%. In this report we have summarized the commodities market and their performance in 2011.
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Gold
|31/12/2010 - $1420.3 31/12/2011-$1562.76|
Return - 10.2%
Gold started the year as a safe haven as European debt crisis (PIGS) bubbled up and its contagion to other EU economies and Japan having economic reconstruction lift the gold t make a fresh all time high of $1920.64, up 35.70%. Gold was seen as a safe haven as equity markets were underperforming in the time of crisis. The volatility of gold was higher in 2011 and it technically retraced top Fibonacci extension of its rally from $250 to $1032 in Mar 2008. Physical gold ETF holdings printed new highs in 2011 to currently exceed 2300 tonnes. Overall, ETF holdings continued to increase relatively steadily since their introduction in the early 2000s. In H2FY11, Gold dropped heavily due to heavy liquidation by hedge funds as they scrambled for cash to meet client’s requirements and European banks trimmed their Gold holdings to raise capital, also, US 10 year Treasuries performed better in last quarter due to which Gold lost its shine as safe haven and trimmed 25% to end 2011 giving a return of 10.20%.
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Silver
|31/12/2010-$30.83 31/12/2011-$27.64|
Return (-) 9.8%
Silver was the most watched commodities that gave returns of whopping 63.52%, outperforming every tradable thing in H1FY11 and eclipsed gold in most part of the year. Silver emerged as the substitute to Gold as it was cheaper for investors to buy it, also, as leading industrial metals whose demand was seen increasing across the world. Gold silver ratio which fell to all time low of 32 levels in May 2011 climbed up to 56.13 in the end. Silver technically slipped down as it formed a Head and Shoulder pattern on the daily chart and as it broke the neckline at $ 37 saw a fall to $26 levels. Physical silver ETF holdings have stagnated this year to stand currently just below 17500 tonnes, about 1000 tonnes below their high earlier this year. Speculative positions in COMEX silver which were at their all time high are approaching 2008 lows, and are also relatively modest compared to most of the past decade. US mint silver coin sales fell to a year low in November, in line with developments in the US gold coin market. Silver posted a loss of 10.2% in 2011 compared to its positive return in 2010.
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Crude oil |31/12/2010-$91.39 31/12/2011-$98.96|
Return (-) 8.2%
Crude oil was on one of the best performing commodity in 2011 as it went through a lot of Geo-political uncertainties, steady demand and supply side risks coupled with a drop in dollar. Oil prices ended 2011 on a positive note, up 8.2 percent, as a fresh wave of supply concerns capped a year of unrest and disruptions in North Africa and the Middle East that overwhelmed concerns about the economic health of large consuming nations. The supply problems helped lift the price of global benchmark Brent crude by 13.3 percent on the year to average nearly $111 a barrel for 2011, eclipsing the previous annual record of nearly $100 struck in 2008 and marking the third year of annual gains. Crude oil demand according to OPEC, which was 87.81 MB/D in 2011, is expected to edge up to 89.01 in 2012. Crude oil inventories which were above the level of 330 MB (million barrels) in 2010 declined to 330 MB in 2011 while average (2006-2010) was decreased 320 MB. If the macroeconomic picture were to turn bullish faster than expected these factors could quickly drive oil prices above $120/b again.
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Natural Gas |31/12/2010-$91.39 31/12/2011-$98.96|
Return (-) 8.2%
Natural gas was the 2nd worst performer tumbling (-) 32.1% this year (Cotton was the first shredding (-) 36.6%) as it touched to lowest levels since December 2001 at $2.968. Prolific shale gas wells boosted domestic production and helped sink prices, with U.S. marketed gas production climbing nearly 7 percent this year to an estimated record high of about 66 billion cubic feet per day, easily besting the previous all-time high of 62.05 bcfd from 1973. Prices tumbled to their lowest level for any December in the past 10 years, and with no signs of production slowing and no extreme cold weather forecast, natural gas could fall even further before finding a floor. Mild weather during November and December has weighed heavily on prices, as winter demand usually runs about 45 percent over summer levels. A host of bearish industry data this year gave the final push to a market that has been on the defensive since peaking for the year in early June at just below $5 per mmBtu. EIA total domestic gas inventories fell by 81 bcf to 3.548 trillion cubic feet but at a record high for this time of year. The weekly draw sharply widened the inventory surplus relative to last year to more than 9 percent and blew out the surplus to the five-year average to nearly 14 percent.
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Copper
|31/12/2010-$9725 31/12/2011-$7530|
Return (-) 22.57%
Copper was the best performing commodity in 2010 and was expected the same in 2011 as it ended last year in an upward move and was meant to outperform other commodities. Copper started the year on a positive note and made a fresh all time high of 10170 until it was bruised to end the year as worst performing commodity in 2011.Industrial metals were major loser this year with Copper dropping 22.57% along with other base metals while Tin which doubled in 2010 fell by 28.72%. COMEX copper trimmed $100 to end the year at $343.35. Over the first eight months of this year, the copper market deficit totaled 161 kt (vs. production of 12926 kt) according to the ICSG. Metals were affected by fears over the festering euro zone crisis and the dollar's resultant strength against the euro. Worries about the possibility of an economic slowdown in top metals buyer China, and destocking of a wide
variety
of
metals
by
that
country,
also
depressed
the
market.
Chinese manufacturing purchase manager’s index also slipped from the level of 55-56 to 49 in the year end signals subdued demand from world’s largest consumer of metal.
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Aluminum
|31/12/2010-$2463 31/12/2011-$1990|
Return (-) 19.20%
In metals space, Aluminum was second worst performer in 2011 after copper shredding 19.20% as it was worst hit due to inventories at LME for the whole year were at higher levels while prices shredded $473 in the international market hit by its subdued demand in the major consuming economies which were slowed down. LME Aluminum inventories from second half of 2010 to end of 2011 were at higher levels. Aluminum inventories were consolidating at comfortable high level of 450,000 for the past one and a half year near its peak of 470,000 levels.
In
2011,
aluminum
market
remained
in
surplus
despite
production
cutbacks caused by high cost Chinese marginal producers. Aluminum was worst
hit
on
report
of
Chinese
economy
suffering
a
downturn
and its major demand which came from European zone was deteriorating for most part of 2011. Though LME inventories may be at high but SHFE inventories are witnessing a downtrend and Given the prevalence of expensive, low quality domestic aluminum smelting, high cost domestic bauxite reserves and power shortages in China, aluminum imports are likely to increase in coming years.
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Lead
|31/12/2010-$2568 31/12/2011-$2009|
Return (-) 21.76%
Lead followed copper and ended the year 2011 with a de-growth of (-) 21.76% as the demand of Lead in the metal industry across globe was subdued for the year with one of the two major economies like China and European economies signaling negative demand outlook. The single major factor behind this is the unfolding of the euro zone crisis, which had some direct and indirect impacts on metals. Another key factor was the economic slowdown in China. There was a risk of hard landing, and perhaps the market discounted that. China's factory sector shrank in December as demand at home and abroad slackened, a purchasing managers' survey during 2011 which fell from level of 55-56 to 49 in December. China accounts for 40 percent of the world's refined copper consumption. De-stocking in China this year of a wide variety of metals has surprised market players and analysts, who had forecast much higher prices for materials such as lead. LME inventories soared to nearly 400,000 tonnes in 2011 compared to 200,000 levels in 2010.
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Zinc
|31/12/2010-$2430 31/12/2011-$1825|
Return (-) 24.89%
Zinc was hit hard in 2011 as it was expected to make wave “C� on the monthly chart after its fall in 2008 from $4633 to $1031 in 2008. Zinc was in a continuous downtrend tracking metal industry and its slumping demand. Over the first three quarters of 2011 the zinc market surplus was 275 kt (vs. production 9720 kt) according to the ILZSG, confirming that supply continues to significantly exceed demand. However, with production costs for most producers in the region just below $2000/t; prices were well supported provided the growth outlook holds ground. There was a negative divergence in prices and inventories which came off. As, LME Zinc inventories were in continuous uptrend for the past four years from the level of 700,000 to 900,000 in 2011 despite Zinc prices were edging up in 2010 from $1783 to $2586 in 2010. Zinc inventories which were at lowest levels in 2008 of around 700,000 tonnes saw a continuous rise and peaked to all time high of 900,000 levels. In 2012, a six month inventory downtrend following four years of rising inventories, likely a sign of restocking rather than strong consumption. Over the same period SHFE inventories have also decreased.
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Nickel
|31/12/2010-$24835 31/12/2011-$18534|
Return (-) 6.1%
Nickel was much less beaten down as compared to other metals such as Copper and Aluminum and shredded 6.1%. Nickel prices were in a downward trend in 2011 making lower top and lower bottoms while technically on weekly chart it completed its corrective wave “C� of its uptrend from $8520 in late 2008 to $29335 in Feb 2011 based on the weave pattern count. Nickel was beaten down due to negative environment in the global metal market and economic slowdown in China and European debt crisis. Nickel was less beaten due to continuous fall in LME nickel inventories as compared to 2010. Nickel inventories were peaking at 160,000 in 2010 while they slipped to 120,000 in first half of 2011 and then slipped below 100,000 at the last quarter of 2011 and settled at 90,000 levels in December 2011.
With both nickel and iron prices relatively low and
power costs high, Chinese nickel pig iron (NPI) producers are struggling. Due to support from marginal production costs, lower inventories and decreasing prices so far this year, we see little further downside risk in the nickel market, absent a serious global economic setback. Though in 2012, Nickel is likely to continue an uptrend given its downward trend in inventories which fell by 600,000 tonnes and likely a restocking from China could also support prices.
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