Gainers had a slight edge over decliners in the commodities market during the first quarter of 2018, buoyed by growth in global economies and weakness in the U.S. dollar.
The surge in demand “has put an end to the great commodity bear market that began in 2011,” says Sal Gilbertie, president and chief investment officer at Teucrium Trading. The S&P GSCI Index SPGSCI, +0.65% which tracks 24 commodities, had climbed 1.7% year to date through Wednesday.
Concerns over a potential trade war, however, are prompting mixed reactions as traders weigh the potential impact of the Trump administration’s import tariffs on steel and aluminum, and its plans to implement tariffs on at least $50 billion of Chinese goods.
The metals markets saw the biggest impact from changes in U.S. trade policy. Steel prices, based on S&P Global Platts’ data for U.S.-made hot-rolled steel coil, jumped 33% in the quarter through Wednesday.
“Steel demand has been strong and is running ahead of supply, and the three key consuming sectors of steel demand—construction, automotive and energy—are doing well,” says Joseph Innace, S&P Global Platts editorial director for metals in the Americas.
Cocoa CCK8, -1.42% however, scored the most impressive quarterly gain, with futures up 35%. Production issues in West Africa fueled the rise.
Soybeans SK8, +2.60% were a standout as well, with futures up 7% as a drought hurt crops in Argentina. U.S. farmers worry that China may limit purchases as a retaliation tool against U.S. tariffs.
Gold GCM8, -0.03% and oil futures CLK8, +0.82% were among the commodity winners, but gains were modest.
“Inflation concerns, geopolitical tensions and interest-rate levels, especially real yields” contributed to a rise in gold, says Will Rhind, chief executive of exchange-traded fund provider GraniteShares. Gold is likely to “maintain at current levels, but with the potential to breakout” depending on those factors.
West Texas Intermediate crude managed to climb despite expectations of record U.S. oil production for this year, amid oil-output cutbacks led by the Organization of the Petroleum Exporting Countries and expectations for a continued rise in demand, says Rhind.
Among the big decliners were coal MTFK8, -1.29% and natural gas NGK18, +1.22% which fell 31% and 9%, respectively. Natural gas took a hit from high U.S. production, says James Williams, energy economist at WTRG, and the lower price for natural gas in turn weighed on coal demand.
Sugar SBK8, +0.98% saw prices drop 17% in the quarter, pressured by increasing supplies from India, according to Andrew Hecht, host of The Commodities Hour on radio station network TFNN. Hecht says futures prices have been “making lower lows since October 2016 and are closing in on the August 2015 low” of 10.13 cents a pound, viewed as a critical support level.
Iron ore TIOK8, +1.80% has dropped 16% so far this year, based on the S&P Global Platts IODEX prices for 62%-iron fines (quality iron-ore grains) delivered to China amid “environmental factors and steel production constraints in China,” says Innace. But if warmer weather comes to China soon, that will boost construction—driving steel demand and supporting iron ore.
Looking ahead, commodities face some complex challenges. “Softening of global economic data seems to imply demand growth could be somewhat disappointing for commodities and limit further price gains,” says Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. There’s also the “risk of expansion of the U.S./China trade sanctions, which could limit global trade and growth,” he notes.
This story first appeared at Barrons.com on March 31, 2018.