Commodities | Apr 23 2010
By Chris Shaw
With the volcanic eruption in Iceland disrupting air travel the most obvious impact has been on passenger movement, but as Goldman Sachs notes there has also been a impact on agricultural markets.
Supply has been affected to some extent because Europe is a major importer of some large traded agricultural commodities, sugar and soybeans in particular. But as these are largely transported by road, rail or sea the sector most impacted has been the specialty products, which includes such items as exotic fruits.
This means the economic impact of the volcanic eruption has been limited to date, as these items are not diet staples and so have a fairly elastic demand response to price changes.
Medium-to-longer term there remains scope for a more significant impact in the view of Goldman Sachs, this coming from the potential for volcanic ash to lower atmospheric temperatures and/or accumulate on cultivated land. Such an outcome would impact on production as the acidity and sulfur content of ash can alter soil composition and reduce soil fertility.
As well, previous instances of cooler temperatures resulting from volcanic eruptions have also impacted on livestock numbers.
In the view of Goldman Sachs the current eruptions are unlikely to cause much of an impact on commodity prices, so unless things get significantly worse its views on the various agricultural markets are largely unchanged. For wheat in particular the broker is negative given high levels of inventory and a lacklustre demand growth outlook.
Cotton remains a favoured pick among the agricultural commodities for Barclay Capital thanks to a tightening market balance. The group's positive view gained further traction from the latest Chinese trade data for March, which showed the highest level of cotton imports since June of 2006.
As well, India this week announced a suspension on fresh cotton exports thanks to a rapid rise in domestic prices. As Chinese cotton imports had been shifting towards India, this move is likely to offer some good news for cotton exporters elsewhere, Barclays seeing US growers as a likely beneficiary.
Other Chinese March trade data of interest relate to the energy market, JP Morgan noting total apparent gasoline demand has largely flat-lined for the past three quarters. Year-on-year the data showed strong total demand growth for all products, with the March quarter up 18% and March itself up 13% on this basis. But in sequential terms demand for the quarter fell slightly for gasoline, diesel and kerosene.
What this suggests in JP Morgan's view is while Chinese car sales are still at record levels, this is not translating into gasoline demand growth. This can be partly explained by the likelihood some car sales are second or third cars or are being bought in second or third-tier cities, where people are driving less at current record gasoline prices.
Demand for diesel remains positive in year-on-year terms but this too is now coming off, March growth of 17% year-on-year comparing to 28% growth in January. The strongest demand growth has come from products such as kerosene, fuel oil, naphtha and LPG, with China becoming a net importer of naphtha this year thanks to its use as feedstock for most petrochemicals.
The most recent numbers show strong gasoline demand globally, Barclays Capital noting the overall number for April-to-date demand growth is a record for any April. This is despite the latest US weekly data coming in on the weaker side, reflecting inventory builds across crude and other products and relatively soft demand.
While growing Chinese car demand isn't translating into a similar level of gasoline demand growth, it is impacting on the platinum group metals in the view of Barclays, as the underlying demand picture continues to improve.
UBS has also noted this trend, pointing out Chinese platinum imports were 11.7 tonnes in March, an increase of 100% from February and more than 250% from last March. As jewellery demand is unlikely to be accounting for this increase, UBS suggests stronger auto demand has to be playing a part, while it also appears there is some additional industrial demand.
Barclays notes investor interest is also flowing through to the platinum group metals, as physical and ETF or Exchange Traded Fund holdings of palladium continue to grow. This has been enough to push prices higher, platinum at US$1,731 per ounce equaling its highest level since July of 2008. Palladium prices are also up and at around US$560 per ounce Barclays notes this is the strongest closing level since the start of March 2008.
The current strength leads UBS to suggest prices may break their highs of 2008, so it has lifted its forecasts. For platinum its one-month forecast has increased to US$1,800 per ounce from US$1,600 previously, while for palladium its forecast increases to US$600 per ounce from US$460 previously.
Some profit taking is expected once these levels are reached, so on a three-month view UBS is forecasting an unchanged platinum price of US$1,675 per ounce, while its palladium forecast increases to US$500 per ounce from US$480 previously.
