International commodities fall back before Russia-Ukraine conflict

International Business News – The decline in international commodities such as crude oil and metals is becoming evident. The Refinitiv Core Commodity CRB index, which shows volatility in composite prices, has fallen to levels seen before Russia’s attack on Ukraine in late February. Because there is a growing view that aggressive interest rate hikes by central banks to curb high inflation have led to subdued demand for commodities. Speculative outflows will accelerate, with net buying in major commodity futures halving from recent peaks. Sensitive to real demand, international commodities are selling off in the form of strong forecasts of a global recession.

The CRB index was 264 on Sept. 26, falling to its lowest level since Feb. 18. It is down 20% from the recent high in early June. The WTI (West Texas Intermediate) crude oil futures contract, which is a representative category of the index, fell to $76.71 a barrel on the same day, hitting a new low since early January. In early March after the Russian-Ukrainian conflict, it once rose to around $130, but it is now down 40% from the peak.

Non-ferrous metals, which are used in a wide range of industries, also hit new lows one after another. Judging from the closing price of 3-month futures on the London Metal Exchange (LME), aluminum hit a new low in about 1 year and 7 months, and lead hit a new low in 1 year and 11 months. In addition, copper known as “Doctor Copper” is also approaching a new low since the beginning of the year set in mid-July. Wheat and corn, which had risen after the Russia-Ukraine conflict, are now back at their pre-conflict levels. Gold’s New York futures (the most actively traded settlement month) once fell to about $1,620 an ounce on the 26th, hitting a new low in about two years since early April 2020.

The backdrop is the dramatic rate hikes in major countries. The U.S. Federal Reserve (FRB) started raising interest rates by 0.75% on September 21, and on this basis predicted that the real growth rate of the United States from October to December 2022 will be almost 0%. In response to the rapid rise in prices, the euro zone and emerging market countries are increasingly likely to maintain substantial interest rate hikes.

There is a high possibility that the U.S. and European economies will cool down due to sharp interest rate hikes, and concerns about a decline in international demand for goods are growing as business activity stalls. The head of a Japanese trader involved in non-ferrous metals said, “With the rise in electricity prices, there is basically no optimism (on demand) in Europe. Asia is even worse.” China was once expected to drive global economic growth, but the World Bank on September 26 lowered its 2022 growth rate forecast to 2.8%, a sharp cut from the previous forecast (5%).

A stronger dollar will also hit commodity prices. The “dollar index”, which shows the comprehensive strength of the US dollar against major currencies, once reached 114.4 to 114.6 on the 26th, hitting a new high since 2002 and a lapse of about 20 years. The appreciation of the dollar will exacerbate the overall high valuation of international commodities traded in dollars, which will be a factor that will hit demand.

In addition to this scenario, stocks and bonds have fallen at the same time, the risk tolerance of hedge funds and the like has declined, and speculative money will flow out of commodity markets. Statistics from the U.S. Commodity Futures Trading Commission (CFTC) show that the net buying volume of speculative funds in 10 major categories such as crude oil and corn listed in the U.S. market was 710,000 lots (hands are trading units) as of September 20. At most, it was reduced by half compared to mid-March. Nomura Securities’ Dai Yuelongwen pointed out that “the commodity market is experiencing a triple punch of reduced demand, dollar appreciation and capital outflow, with the interest rate hike as a turning point.”

At present, although international commodity prices have dropped significantly, there are still many categories that remain high compared to the previous year. Corn is 30% higher than a year ago, and the market remains vigilant about the deterioration of the harvest in the future. Natural gas prices in Europe have fallen 50% from their August record highs, but concerns over Russia’s cessation of natural gas supplies have not disappeared, with prices still 2 times higher than the previous year. Coming to winter, there is still a risk that commodity prices will intensify their gains again and global inflationary pressures will increase again.