The quickest way to lose all street cred is to opine on a topic you know nothing about, use incorrect vocabulary, or make spelling mistakes; I’m sure you could add to this list. The problem is especially acute when non-experts talk about commodities, so much so that traders at ADM, Bunge, Cargill, Glencore, Louis Dreyfus, Phibro and Vitol rarely speak to them. The sector uses precise and sometimes arcane terms, weights and measures, which quickly separate the wheat from the chaff. And why would they share specialist knowledge with all and sundry?; it’s not in the interest of the closed shop.
One of the most common traps is dividing this incredibly varied world into ‘hard’ and ‘soft’ materials. Stop and think a bit. Are crude oil, rope, wood pulp, freight rates and mercury hard or soft? The correct split should be between energy, agricultural and industrial commodities, metals and ‘other’ which includes carbon credits and emissions.
The second slip-up is focusing only on indices based on these groups. The oldest is the (now renamed) Thomson Reuters/CRB index or the newer BCOM Bloomberg one. Both have roughly a 50 per cent weighting to energy and gold, a minuscule sprinkling of the rest – so you might as well just buy a couple of futures. Exchange traded funds (ETFs) have been created loosely based on these, although many desks have been disbanded following the great financial crash and the end of the latest commodities boom in 2008-11.
Four very different charts for you this week, starting with the Dalian iron ore futures contract. Counter to consensus thinking, it’s doubled this year to a new record high of 900 yuan per metric tonne – admittedly with only five years of historical data.
Spot platinum is a sorry spectacle, despite the World Platinum Investment Council’s efforts to promote its use. A fraction of 2008’s record $2,290 an ounce, it has been desperately clinging to pivotal support around $750.
US corn futures have been subdued for ages, averaging 400¢ a bushel, a price first reached in 1973. Lots of rain in the corn belt (which also grows soybeans) this spring meant farmers couldn’t plant at all, or that it was too late. This explains the dramatic surge in May, with July price action so far suggesting another rally through to harvest time.
Another food where prices have rallied all this calendar year is apples, traded on Zhengzhou’s Commodity Exchange. I hadn’t realised, but China is the biggest producer – and consumer – of the fruit, not the phone. It’s a staple of the mainland diet and the authorities are worried as it has helped take inflation to an annualised 2.7 per cent – its highest in seven years. The reason here, too, is weather-related: frost in April and heavy rain in May.
As the biggest consumer, and often the biggest producer, of many commodities, China has an interest in bringing as much trading and hedging onshore. It has been very successful with base and minor metals. Their broad menu continues to increase, Zhengzhou adding jujube futures in April (red dates, seeing as you ask) and the securities regulator approved the listing of urea futures last Friday. This has been an important chemical for centuries; Thames barges and other boats known as ‘piss pots’ sailing from the city to the tanneries in Northumberland.
