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Commodity prices create a bumpy ride for emerging economies

The commodities are witnessing significant swings this year. Gold and silver came down a bit after better than expected US job data for February 2014. US Employers added 175,000 jobs to their payrolls in February 2014 after creating 129,000 new positions in January 2014. Precious metals rose recently as tension in Ukraine exacerbated by Russia’s seizure of Crimea boosted demand for a haven, with assets in bullion-backed exchange-traded products.

Commodity prices create a bumpy ride for emerging economies
18 March 2014 - 10:16

The commodities are witnessing significant swings this year. Gold and silver came down a bit after better than expected US job data for February 2014. US Employers added 175,000 jobs to their payrolls in February 2014 after creating 129,000 new positions in January 2014. Precious metals rose recently as tension in Ukraine exacerbated by Russia’s seizure of Crimea boosted demand for a haven, with assets in bullion-backed exchange-traded products.

Gold has surged by more than 14% YTD and is at 2014 high above $1380/ounce. Silver has surged by more than 10% YTD and is above $21/ounce. Precious metals have also surged this year on concerns in emerging economies such as Turkey, Brazil and South Africa. The improvement in economic data from the US had contributed to a fall in precious metals. However adverse developments in emerging markets can spur demand for precious metals as a safe haven resulting in surge in prices.

Brent crude and WTI arose to a yearly high of above $111/barrel and above $104 respectively in March 2014 on account of Ukraine crisis and better than expected US Job data for February 2014.

Brent crude and WTI closed by end of last week above $108 and $98 respectively after US crude stockpiles arose recently. Natural gas had crossed $6/MMBTU in February on account of extreme winter in US. However it came down on expectations of better summer in US. Concerns about gas supply disruption as well as threats of war were enough to boost gas prices sharply again after the Ukraine crisis.

Natural gas has surged by more than 7% YTD and is currently above $4.4/MMBTU. A disruption of natural gas supplies to Europe by an escalation of Russia’s military action in Ukraine may boost LNG demand and prices in Asia and South America. Russia, which provides Europe with more than a quarter of its natural gas mainly though Ukraine, has cut supplies twice since 2006.

Copper prices recorded their biggest drop in March on account of Chinese company bond default and signs of slowing growth from France to China. French industrial production unexpectedly dropped in January for the second straight month and business confidence declined. LME (London Metal exchange) copper is above $6400/tonne and has fallen by more than 11% YTD.

The Chinese company default was also worrisome because many Chinese companies use copper as collateral when they borrow, and that metal could wind up back in the market if they fail to pay their debts. In a default, lenders can sell the copper to cover losses on the loan. China’s exports unexpectedly tumbled by 18% in February, swinging the trade balance into deficit of $22.98bn. It highlighted concerns about slowing growth in the world’s biggest consumer of the industrial metal. LME aluminium prices fell by more than 3% in 2014 and is close to $1700/tonne mainly on account of slowdown in China.

LME nickel had risen by more than 13% in 2014 and is above $15,700/tonne mainly on account of export ban on unprocessed ore in Indonesia which triggered mounting supply concerns.

The corn and wheat prices at the Intercontinental Exchange (ICE) surged by close to 13% YTD and above 12% YTD respectively. Corn price is above $4.8/bushel and Wheat price is above $6.8/bushel. Corn and wheat prices had mainly gone up this year mainly on account of Ukraine tensions. Soybean price at ICE Futures surged by close to 6% YTD on account of Brazil drought which damaged crops and higher demand for US supplies from China. The cocoa price had surged by close to 9% YTD at ICE Futures and is near $3,000/tonne on mainly on account of Brazil drought and too much rain hampering Indonesia’s cocoa harvest. The coffee price had surged by more than 75% YTD at ICE futures and is above $198/tonne. The challenges in emerging economies are expected to persist and the surge in prices of commodities such as oil and gas and agricultural commodities will create a bumpy ride for emerging economies.

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