Commodities are real natural materials that can be bought or sold on the exchanges. They have natural restrictions that affect pricing, while financial instruments can be created from figures on a spreadsheet. However, like any other world market, commodity prices fluctuate in response to political, financial, or any other relevant events with high economic significance. For example, during this fall, the most volatile commodities were mainly affected by the US-China trade war.
Commodity market review: what has actually been happening?
Over the past few years, commodity prices have been a true rollercoaster. Driven by the increasing demand from China, the market hit its peak in 2011. However, the following oversupply and concerns of an emerging market slowdown led to a sustained decline that lasted until 2016.
Once the prices started to recover, US President Donald Trump introduced American import taxes in 2018, spurring revenge from China. In late November 2019, Trump infuriated Beijing once again by signing a bill that supported the Hong Kong protesters. Prices have followed all these shifts and turmoils, fluctuating at a rapid pace. Here is our commodity market analysis to explore the reasons that have caused such dramatic volatility throughout 2019.
China is the world’s largest buyer of cotton, while America is the biggest seller of the commodity. Costs have fallen by a quarter since mid-2018. This situation is somewhat explained by the decreasing need for apparel, as China’s market has decelerated significantly. However, China increased its taxes on the US imports by 25 per cent, so that has also lowered demand substantially, prompting the prices of cotton to drop. Hedge funds have become bearish and American indices are estimated to be the highest in a decade.
This farm commodity was also hit with the rate regulations from China. As a result, Beijing is now taking a lower share of America’s exportation of soybeans than in 2017. A key request from Washington in trade disputes was that its opponent must purchase more of this commodity. Although China is consuming more soybeans as a result, the share of American exports has not recovered fully.
Metals are very vulnerable to the trade conflict because they are more closely connected to business cycles than farm goods. Trump’s latest set of tariffs (declared in August) struck metals prices more than earlier statements did. Copper, for example, is estimated as a touchstone because it is utilised in housing and building. In September, it reached a two-year low, only to start rising later by December. Gold, however, has continued to shine among this obscurity. Concerns about geopolitical tightness have raised interest from international investors, with the yellow metal’s prices reaching its new peak since spring 2013. However, as expectations of trade peace have grown, the commodity has lost some of its growth as copper prices have regained upward momentum. It is safe to suggest that gold will remain a safe haven for investors in 2020, particularly as the global economic conditions are predicted to worsen. Investors are exploring secure reserves amid the ongoing trade war, and gold is a precious asset that can provide long-term gains, offering an attractive opportunity of diversifying one’s portfolio.
Trade Gold Spot CFD
Trade war uncertainty has also had an impact on the oil market, and while demand is anticipated to increase in 2020, this will depend on how fast China and the US develop a decision in their continuing war. The forecasts are that ICE Brent will average US$59/bbl over the first part of 2020 while equating US$62/bbl for the whole year. However, this is considering that OPEC+ not only lengthens the output cut deal beyond March 2020 but that it also offers more extensive cuts at least over the first quarter of the year.
One effect in the chain reaction of the trade war between the US and China is an accent on pursuing energy independence, which has likely added to support for coal. Meanwhile, Beijing has signalled that coal power will be the first priority within the state energy strategy as the government prepares its next Five Year Plan. Coal prices, however, are still under pressure. In Europe, they are down more than 35 per cent since the beginning of the year. In this region, the forecast for the prices remains weak mainly due to two factors. Firstly, EU carbon prices have been reasonably stable. Secondly, gas prices in Europe have been vulnerable, as LNG export plans ratchet up.
Looking forward to 2020, it is expected that prices will be dictated by the same themes as in 2019. However, even with the continuing global difficulties, most commodities are still offer a good chance for short-term investments. The high volatility in the market presents an attractive opportunity for day trading.
Read more: Investing in precious metals: your ultimate guide to start trading precious metal commodities
Ready to get started?