The current dynamics of commodity markets

Transcription

1 The current dynamics of commodity markets London Business School 16 March 2017 Jean-François Lambert

2 Dynamics of Commodity Trading 1. A crash course on commodities 2. The key drivers in

3 Dynamics of Commodity Trading 1. crash course on commodities 3

4 Dynamics of Commodity Trading Crash Course Commodities are the essentials Common features ü Strategic by nature ü Each with a unique nature ü Market price ü Mostly traded in USD ü Future markets 4

5 Dynamics of Commodity Trading Agri commodities (aka Softs ) Cereals: ü Grains : Corn, Wheat, Barley, ü Rice Oilseeds: ü Soybean, Palm Oil, Rapeseed Other Softs: ü Cocoa, Cotton, Rubber, Coffee, Sugar 5

6 Dynamics of Commodity Trading Idiosyncrasies of Agri Commodities Demand is foreseeable ü Demography ü Urbanisation ü Food habits Supply is the driving factor ü Climate and environment ü Crops diseases ü Research ü Policies 6

7 Dynamics of Commodity Trading When deflated, Food and Agri sub indexes, are flat over a long period 7

8 Dynamics of Commodity Trading Metals (and minerals) Base Metals (Raw commodities and Industrial Metals) ü Raw: Iron Ore, Coking Coal ü Ferrous: Steel, Ferro Chrome ü Non Ferrous: Copper, Aluminium, Nickel, Zinc, Lead, Tin ü Minor Metals: Cobalt, Lithium, Magnesium, Titanium Precious Metals ü Gold, Silver, Platinum, Palladium 8

9 Dynamics of Commodity Trading Idiosyncrasies of Metals Demand is the driving factor ü Economic development ü Urbanisation ü Emerging markets ü China Supply is driven by long term trends ü 5-7 year lag time from investment to production ü No foreseeable peak mineral phenomenon ü Technology 9

10 Dynamics of Commodity Trading Gold: commodity and /or a quasi currency A perfect mirror to USD A Geopolitical beacon A key play for central bankers Yet, physical demand is strong in India and China And like other precious metals, a technological play 10

11 Sources FinViz

12 Sources Capital Economics

13 Dynamics of Commodity Trading Energy Coal Natural Gas (conventional, unconventional, liquefied) Oil ( conventional and unconventional) Refined Oil products Ethanol 13

14 Dynamics of Commodity Trading Idiosyncrasies of Energy Commodities Oil is the king of commodities ü The bulk of commodity trade ü The most liquid market ü Dominant weight in various indexes ü The price of other energy commodities is highly correlated 14

15 Dynamics of Commodity Trading Idiosyncrasies of Energy Commodities (2) A Supply driven commodity as uncertainty over demand growth is low from short to mid term. The importance of stocks. Conventional vs unconventional: the new normal Rise of non fossil energy. A long term play 15

16 Dynamics of Commodity Trading What is the size of the cake? ü 4.5 Trillion USD ü 25 pct. of world trade How to assess the weigh of the 3 sectors? ü By value? By volume? ü One lead: Weight in trade (RICI)

17 Dynamics of Commodity Trading Metals 25 pct. Gold, Copper, Aluminium and Silver account for 70 pct. Agri 35 pct. Wheat, Corn, Cotton and Soybean account for 50 pct. Energy 40 pct. Crude oil accounts for 72.5 pct. of Energy 17

18 Dynamics of Commodity Trading Metals 20 pct Agri 41 pct. Energy 39 pct. 18

19 Dynamics of Commodity Trading Metals 15 pct. Agri 29 pct. Energy 56 pct. 19

20 Dynamics of Commodity Trading How commodity prices are formed? The Fundamentals: Physical supply and demand Financial markets: commodities are an asset class 20

21 Dynamics of Commodity Trading Physical vs Financial Players Complementary but seldom aligned Both are active on financial markets With a very different perspective 21

22 Dynamics of Commodity Trading Physical vs Financial Players (2) Traders: ü Avoid or hedge flat price risk but optimise physical sale through markets ü Play on optionalities (by harnessing origins, destinations, logistic, shape and time) ü Source and deliver physicals 22

23 Dynamics of Commodity Trading Physical vs Financial Players (2) Speculators: ü Take a view on flat price ü Never get too close to physical movements 23

24 Dynamics of Commodity Trading Contango vs Backwardation: the yield curve play Contango: when the shorter delivery prices are lower than future delivery prices ü Facilitate long physical positions: cash and carry ü The ideal trader s play Backwardation: when the shorter delivery proves are higher than future delivery prices ü Facilitate long play on flat price: cheap roll over ü The ideal speculator s market configuration 24

25 Source Bloomberg

26 The Brent Forward Curve as of 15 Mar 17 Sources Bloomberg

27 Dynamics of Commodity Trading 2. Discussion around the Key Drivers in

28 Dynamics of Commodity Trading a. The new normal for oil b. China s resilience c. The US infrastructure plan d. The USD s strength 28

29 Dynamics of Commodity Trading Key Drivers in 2017 a. The new normal for oil 29

30 The long term view until June 2014 Commodity super cycle OPEC Price management Financial crisis OPEC Price management Rebound Source FinViz

31 Closer June 2014: OPEC decides to let the market forces prevail OPEC/NOPEC cuts IP Week in London Source FinViz 31

32 And Closer again CERA week in Houston Call for more cuts Source FinViz

33 June 2014:Let s market forces prevail Hitherto, OPEC was in control Swing producer role to keep production under check so that supply matched demand Saudi engineered a tactical shift to preserve its long term objectives üto keep prices: high enough to feed the KSA budget deficit Attractive enough not to kill demand üto keep the competition under check within OPEC and beyond 33

34 What was the rationale behind Saudi s decision? The US Shale gas and tight oil revolution A weaker momentum in Oil demand s growth Iran successful negotiation with the US Why this did not work? The US Shale producers strong resilience The ramp-up of production in Iran notably vs a moderate growth in demand and strong stocks 34

35 Algiers: a turning point but questionable tactics In Sept 2016 OPEC abandoned its free market policy The first move to cut supply since 2008 Non OPEC Russia joined Saudi in the cuts Oil price initially moved up by around 15pct but is now falling down Same rationale for failure: ü US Shale producers are ramping-up faster than expected ü OPEC is no longer able to control prices. ü A very costly exercise, potentially ü More cuts? Think twice! 35

36 Yet Sources Financial Times

37 The US Shale Revolution: One To Last. US became the second largest oil producer almost at par with Saudi Arabia and the first natural gas producer ahead of Russia With very a different production pattern: large opex and smaller capex ü 15 days to drill a rig. Less rigs more wells and more productiivity per wells ümany Drilling profitable below 60USD per bl. Large productivity improvements. rig for the same output ücosts sharply down in the oil servicing industry übreak even at 40USD per bl. üwood Mackenzie reports a 60 pct Capex increase or 15bn $ amid the US focussed producers 37

38 Break even prices in the Shale oil production zones Source US Federal Reserve System 38

39 Current market dynamics: the oil band Prices hovering between a cap and a floor on average ü Petromatrix s Shale band from 45 to 65$ per bl. ü Current equilibrium between 45 to 55$ per bl. The rationale: ü US has become the new swing producer ü Conventional supply is strong and growing ü Demand is still growing but not very strongly ü The market is still over supplied 39

40 The oil band mechanics (1) If supply grows faster than demand: üprices will drop Conventional producers will have to cut production especially the most expensive ones Demand in the current context will take time to rebound übut if this lingers, peak oil concerns will emerge and the rebalancing of demand by supply will look plausible ü as a result prices bounce back 40

41 Sources Bloomberg Oil Trading Range

42 The oil band mechanics (2) If prices rebound too high: üthe unconventional producers will swiftly reactivate rigs and accelerate production üas demand is less elastic than supply, the rebalancing can occur rather fast üprices stabilize. And fall again 42

43 Viable Reserves vs Oil Price: an illustration World Reserves: 1,739 bn barrels Oil Price Per Country Reserve Breakdown btw viable & unprofitable at the highlighted oil price 43

44 44

45 45

46 46

47 47

48 48

49 49

50 50

51 How long could this situation last? How long for demand to exceed supply? üthe current scenario: 12 to 18 months Developed economies gather momentum Pull effect on developing countries China remains on track 51

52 What could derail the shale band theory? üfor bulls: Stronger demand : 1.4 mbpd vs 1.2 currently Long positions are still large although retracting since a few days: 357m barrels but after an 11m barrel decline earlier this week (WTI futures on Nymex) 1 trillion-dollar retrenchment in investments for the global oil industry as of june 2016 (Wood Mackenzie). üfor bears: Stocks are at all-time high: 528m barrels according to EIA Peak oil is no longer the issue: Peak Demand is (as soon as 2020s according to Shell. IEA says 2040). ü Facts for both: Global oil consumption rose from 84.5m b/d in 2006 to 96.6m b/d last year. alternative fuels and electric vehicles depend on the outlook for prices 52

53 Sources Financial Times

54 Sources Financial Times

55 Dynamics of Commodity Trading Key Drivers in 2017 b. China s resilience 55

56 Dynamics of Commodity Trading China in 2015 Absorbed 65pct of total seaborne iron ore trade Imported 45pct of refined copper trade represented 51pct of worldwide nickel consumption and 46pct of zinc and tin total consumption, produces 50pct of the world steel production represented 54pct of worldwide aluminium consumption source 56

57 China s weight on commodity markets Sources Financial Times

58 Sources HBSC

59 Sources Financial Times

60 China is doing well despite potential worries China delivered a 6.7 pct. GDP growth in QE Chinese way? China growth has been targeted at 6.5pct in This is mid term for Mr Xi and he will do everything to match or exceed the target Debt is a concern, but like Japan it is mainly denominated in local currency and locally held USD denominated debt represents 5.9 pct. of GDP (Capital Economics)

61 China commodity imports holding up well. ü Feb +38% YoY in USD ü Jan + 17% YoY in USD ü Import volumes were strong Watch out: copper (weak demand?) China steel and aluminium exports felt: high domestic prices and renewed optimism about demand Sources Capital Economics

62 Systemic risks are under control says Premier Li Forex reserves have bounced back exceeding 3TnUSD in Feb Sources Financial Times

63 The wild card: Geopolitics Sources Foreign Affairs Financial Times

64 Dynamics of Commodity Trading Key Drivers in 2017 c. US Infrastructure plan 64

65 US Infrastructure plan: really a game changer? A much debated issue. Metal prices welcome the election of M. Trump As much as needed, a massive infrastructure push will have little effect on metal prices (besides pure speculation) ü A sharp rebound took place in It is unlikely to keep on the same pace in 2017 ü The impact an (even bold) plan is unlikely to be significant

66 Dynamics of Commodity Trading US versus China: reality check Source Capital Economics 66

67 Dynamics of Commodity Trading Key Drivers in 2017 d. USD s strength 67

68 Commodity prices and USD: A close relationship Traditionally, USD and commodities have an inverted correlation This is no longer the case since mid November last year Can this last and be a new normal?

69 USD and Commodity correlation: USD Index Commodity Index Sources IMF and St Louis Federal Reserve Bank

70 USD and Commodity correlation: Inverted USD Index Commodity Index Sources IMF and St Louis Federal Reserve Bank

71 Anomaly? Let s look at the rationale: üusd : A justified strength US economy is strong 2.8pct growth in 2018 says OECD Interest rates are anticipated to go up America is going to be great again Strength is relative. Can Euro get stronger?

72 Anomaly? The rationale: ücommodities: kind of justified too! We are in the midst of a rebound OPEC/NOPEC cuts worked until last week China is doing well Infrastructure ambitions helped

73 So can this last? The USD should stay strong. The onus is on commodities üthe 2015 commodity rout was so violent that market can accommodate the current price level for now. übut trees don t grow to the sky. üa harbinger? Copper is seen as too expensive in China üthe glass ceiling above oil will be hard to break ümetals are already expensive üin Agri, yields seem ever stronger There is nothing like stable prices for commodities but upside looks limited