Commodities see biggest falls since Lehman Brothers collapse

Global commodity markets could be signalling a severe downturn as indexes tracking the sector show the sharpest falls since late 2008.

Although prices have declined in the second quarter for the past two years, 2012 has seen the biggest falls in commodities indexes since the aftermath of the Lehman Brothers bankruptcy.

The DJ-UBS Commodities Index is down 15% since its peak in February and the S&P GSCI has seen a drop of 18.3% in the second quarter of this year, posting a year-to-date fall of 13.49%. The biggest losses were seen in energy, which is down 23.14% over the second quarter, and soft commodities, which has fallen 14.68%. Another worrying factor is that when significant declines occurred in previous years gold prices were rising, whereas they are currently also in retreat – the S&P GSCI for gold has fallen by 6.48% over the latest quarter, for example.

Speaking at a Barclays Global Outlook briefing (titled A Stressful Muddling Through) on June 21, Kevin Norrish, managing director of commodities research at Barclays in London, noted that the timing of the fall in commodities prices is different this year as it has occurred much earlier earlier in the growth cycle.

“We’re expecting to get a positive quarter of global GDP growth – somewhere around 3.1% – whereas when [commodities] prices were falling this far during the initial phase of the financial crisis, it didn’t really start until global growth had turned negative. So it does look as though in commodities markets we’re beginning to price in a very severe further deterioration in growth,” he said.

Norrish added that the positioning and sentiment within commodities is currently “very, very negative”, with tactical investors trading aggressively short in some markets. “Copper is quite a good way of gauging people’s view of the world through a commodity prism, if you like,” he said. “Short positions on copper are running at their highest in about three years.” The S&P GSCI for copper is down 12.74% for this quarter, and has seen a year-to-date fall of 3.03%.

However, there are some rays of light coming out of the positive outlook for China, said Norrish. If the Chinese economy continues to grow as predicted, then base metals should begin to perform better due to the increase in demand.

The fact that commodity prices are down almost universally across the board has also been reflected in exchange-traded product (ETP) trading volumes. Commodity ETPs fell by 24% during the week ending June 15. More than half of this is attributed to outflows from precious metal funds.

Dow Jones UBS Commodity Index Price Return (US dollars)






 This article was first published on Risk

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