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Two articles that were published in the Financial Times (FT) on the same day this week caught my attention: “Prices soar as China goes nuts for cashews.” and “Wary investors pull back on commodities.”
So are commodity prices heading to new highs or are we on a path to a sell-off?
Nuts are one more example of a commodity that has hit record prices driven by the growing middle class in China. China’s “appetite for healthier living among the country’s fast-growing middle class has stoked demand for nuts, sending prices of cashews and other snacks to record levels…. Cashews, walnuts and pecans, for example, are at record highs, with cashew kernels trading at $4.55 a pound, up more than 60 per cent from a year ago. Walnuts in their shells have risen 43 per cent and pecan kernels are up 38 per cent.”
The second article discusses commodity investors rapidly moving funds to other investments. “In the past two months, (investors) have pulled money out of the asset class at the fastest rate since the financial crisis. Barclays Capital estimates investors withdrew $6.9bn from commodity markets.”
So are commodity prices still going up driven by a growing population and middle class in countries such as China, or are prices going down as presaged by the investors withdrawing money?
A third article in the FT on copper prices might shed some light. “Copper prices touched $9,500 a tonne for the first time in more than two months as signs of improving Chinese demand encouraged investors to make a tentative return to the market. The price of copper had slipped 16 per cent from a peak of more than $10,000 in February to a low of $8,504.50 in May, amid signs of slowing demand from China, which accounts for 38 per cent of global consumption.”
Why could copper prices be telling? Copper has gained the nickname Dr. Copper — it’s said to have a Ph.D. in economics because of its ability to forecast the global economy. Copper is used by most industrial sectors, including housing, automobiles, appliances and electronics, and is typically a reliable leading indicator for directional changes in the economy. Copper came off its peak $10,000 per tonne, slid to $8,504, and now is back to $9,500. Maybe that’s the answer in the short-term — we’re not soaring to new peaks but we’re not in a sell-off either.
From a Triple Point perspective, the short-term moves in commodity prices are fun to watch but not the point. The key point is volatility, volatility, volatility, coupled with a longer term trend of higher prices. It seems very clear (read my previous blog on commodity prices and volatility) that we have a growing global population with more “western-like” appetites in food and consumer goods. And commodities are getting harder and more costly to get out of the ground, whether it is oil from tar sands in Canada or iron-ore from less developed regions like Zambia. I absolutely believe we will have higher commodity prices at the end of this decade than we do now. In addition to higher prices, we will see more and more volatility caused by a tighter demand/supply equation.