Global commodity prices plunged 5.3% on a monthly basis in August, as against 1.5% increase in July. During the month under review global commodity prices dropped in 4 of the last 10 months. The poor performance reflected a sharp drop in energy prices, mostly led by plummeting oil and oil-derivative prices. Agricultural prices logged the steepest decline since March 2017, while base metal prices posted its fourth decline in the last five months. Overall, the price for the three commodity groups was negatively affected by escalating trade tensions between China and the United States and a dismal global economic outlook. On the flip side, precious metal prices benefited due to investors taking refuge in safe-haven assets, amid the uncertain global economic outlook. While energy and base metal prices are likely to decline, prices for agricultural commodities and precious metals may post significant increase.
Precious Metals
Precious metal prices rose 5.2%MoM in August, accelerating from July’s 4.3% increase. As a result, precious metal prices posted the ninth gain in the last 12 months. As in previous months, strong demand for safe-haven assets underpinned higher precious metal prices in August. An uncertain global economic outlook, the prolonged trade war between the two superpowers, widespread geopolitical risks and more accommodative monetary policies by key central banks are behind the recent rally in safe-haven assets, especially gold and silver. Although, platinum prices are catching up due to this flight to safety, there are also fundamental reasons behind the rally, such as signs that carmakers could start substituting expensive palladium for cheaper platinum. Meanwhile, palladium prices have been recovering in the last few weeks from a sharp decline in early August, which reflected weak auto sales in China and technical selling. Ahead, global growth is seen weakening further, bruised by heightened geopolitical uncertainty and ongoing trade wars, which, coupled with the lower interest rate environment, will continue to spur demand for safe-haven assets.
Energy Products
Energy prices declined 5.9%MoM in August, as against 2.0% rise in July and representing the third decline in four months. Soft demand from China continued to put a lid on coking and thermal coal prices, with both sinking around 10% in the month. Moreover, prices of oil and oil-related products declined in August on concerns about reduced demand as a result of subdued global growth prospects and spillovers from rising trade protectionism. Announced trade talks between China and the United States, more supportive fiscal and monetary policies among most of the world’s key economies and the successful implementation of the OPEC+ oil cut deal should support oil prices going forward. However, prospects remain fragile and highly dependent on political developments. Along with lower prices for oil and oil-related products, the sharp decline will be led by a sizeable fall in natural gas prices.
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Agriculture Commodities
Prices of agri commodities fell 8.0%MoM in August, following July’s 1.8% decline and marking the fifth drop in the last seven months. Moreover, August recorded the largest decrease in 29 months. Prices of all agricultural commodities, except rice and palm oil declined in August. Higher-than-anticipated agricultural plantings and production led the decline in corn prices. Thailand’s most severe drought in roughly a decade propelled hike in rice prices.
Base Metals
Base metal prices fell 3.1%MoM in August, contrasting a 1.2% increase in July. The downturn was mostly driven by a sharp drop in prices for iron ore, tin and zinc. Iron ore prices have been on a downward trend since early August on demand concerns from China, low steel prices and increased shipments from Brazil. Overall, low demand from China, which consumes roughly half of all base metals, had been weighing on most base metal prices. The main exception to this trend was nickel, which saw another month of double-digit growth in August, chiefly propelled by news that Indonesia would ban nickel exports in January 2020 as the country seeks to climb up the value chain. This move was originally planned for 2022.
Analysts see base metal prices falling on pessimism over growth dynamics in China and the United States as the possibility of a swift resolution to the trade spat between the two superpowers seems increasingly unlikely.