Commodity markets in 2020
Gold
International experts revealed that 2019 has been a golden year for precious metals as escalated trade disputes created a risk-averse environment among investors and demand for safe-haven assets increased. They expect the trend to continue in 2020 as most issues are still unresolved, even though both the US and China have been making efforts to prevent the situation from getting worse. Increased prices may continue to weigh on physical gold demand, particularly in emerging economies counting China and India. A stronger US dollar and higher import duties continue to add pressure on consumers. For platinum group metals, stronger demand from the automobile sector pushed palladium to a record high; however, the Pt/Pd ratio of almost 0.4 rise risks of substitution. They have also recorded that total known ETF holdings of gold increased by c.9.8mOz in 2019 as investors poured more money into the safe-haven asset. Physical demand for gold took a knock in 2H19 as price-sensitive Chinese and Indian gold demand dropped. And the trend is probable to be similar in 2020 where the economic slowdown should keep disposable income under pressure. India’s gold imports dropped 5 percent YoY to 642 tons over the first three quarters of 2019 (annualized c.830 tons) after falling 11 percent YoY to 872 tons for the full-year 2018 and could stay around 800-825 tons in this year. In China, the PBoC was a major purchaser of gold in 2019, buying almost 3.1mOz of gold; however, the bank appears to have put a brake on its gold buying for now, which may keep Chinese demand under pressure too. Palladium has been the best performer in the commodity market with a gain of c.40 percent in 2019. It is also said that a key pillar behind palladium’s stellar performance over recent years has been the persistent supply deficit and this has widened further. The Experts don’t imagine that’s going to change much in 2020 and they will continue to see a sizeable supply deficit.
The Nature of palladium supply is that it mostly comes as a by-product from platinum and nickel mines, leaving that supply more inelastic compared to the volatile demand picture. In recent eras, despite the price strength, both primary production and recycling growth has remained fairly stable. However, the demand picture has been more volatile, and more than 80 percent of palladium goes towards catalytic converters which have been the key driver behind stronger demand growth. China and Europe have seen the strongest demand. The Bullish fundamental picture for palladium has increased speculative interest in the metal. And looking at the CFTC data, experts think speculators still have room to add to their positions, with the current net long of 12,776 lots still some distance from the high of 27,471 lots seen in early 2018. Furthermore, the momentum may come under risk in 2020 as the Pt/Pd ratio increased to a record low of around 0.4 and some of palladium’s demand could be switched to platinum for gasoline vehicles.
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Soybeans
September 2019, saw renewed pressure on CBOT soybeans, with China retaliating to further US tariffs, by increasing them on US soybeans from 20 percent to 30 percent. However, Chinese buyers have returned to the market for US beans more recently, with the Chinese government providing tariff waivers. Right now, it does seem that trade talks are at a key juncture. Failure to come to a deal by 15th December would likely see the US impose further tariffs. The waivers provided over the latter part of 2019 have seen flows from the US to China pick up once again, with at least 10mt worth of tariff waivers provided. In the 2019-20 marketing year, soybean export sales to China have totalled 5.56mt so far. This is up significantly from just 271kt at the same stage last year. That said, it still falls short of the almost 15mt seen over the same period in 2017-18, prior, of course, to the start of the trade war. While tariffs have had an impact on flows, another factor which has weighed on total Chinese soybean demand is African Swine Fever, with the mass culling of swine reducing demand for soybean in feed. Soybean imports into China over the first ten months of 2019 totalled 70.8mt, down 8 percent YoY. However, the demand outlook does look more positive for the year ahead; while pork prices in China are still significantly above historical levels, they do appear to have peaked. That suggests experts are starting to see an improvement in pork’s domestic supply picture which should be supportive for soybean imports over 2020. Looking at supply, expectations for the US soybean crop in the 2019-20 season is that output will total 3.55b bushels, which is down 20 percent YoY. There are two factors which have driven output lower: Firstly, with China largely becoming absent as a buyer, US farmers reduced the planted soybean area, choosing to increase corn plantings instead. The USDA estimates that US soybean plantings fell a little more than 14 percent this year. Secondly, yields have been hit as a result of the very wet planting season, with them estimated to be 7.3 percent lower YoY. The longer the trade uncertainty lasts, the more likely it will have an impact on planting decisions for US farmers in 2020. Turning to South America, and the region continues to produce near-record levels. For the upcoming 2019-20 harvest, Brazil is expected to produce a record 120.86mt of soybeans, up from 115mt in 2018-19. Finally, the USDA estimates that US soybean ending stocks will total 475m bushels in 2019/20, down from 913m bushels the season before, while this is a significant decrease YoY, it is still well above the 13/14 -17/18 average ending stocks. Meanwhile, global ending stocks in 2019-20 are forecast to total a little over 95mt, down from almost 110mt last year.