Commodity Wrap: Lackluster comeback for iron ore, tight copper inventories and oil rolls over

Welcome back to the Weekly Commodity Wrap from Market Index where we review and break down catalysts and trends across key commodities.

Weekly commodity summary

Commodity prices are trying to finish the week on a more positive note, with the Bloomberg Commodity Index up 0.4% overnight but down -2.5% so far this week.

Commodity markets were weighed by a strong US dollar, which tends to have a negative impact on demand and subsequently prices. The US Dollar Currency Index has rallied almost 18% in the last 12 months to levels not seen since November 2002.

Still, tightness in physical markets, falling inventories and strong futures pricing has helped prices rebound towards the end of the week.

Bloomberg Commodity Index futures (Source: TradingView)

Iron ore

Iron ore futures rose 4.6% to US$100.75 this week.

Note: Prices refer to week-to-date performance as at Friday, 12:00 pm AEST.

China's beleaguered property market is showing some early signs of stability with the city of Zhengzhou, which records the most mortgage boycott notices, expecting all housing projects to resume by October 6, according to state media.

Still, industry sources told S&P Global that Chinese steel prices are likely to remain volatile through September, which is otherwise a seasonally strong demand period backed by rising steel production.

"Due to the drag from the debt-laden property sector and another round of COVID resurgence, end-user demand, especially for long steel, has been modest so far in September," a market participant said. "Oversupply could surface again if demand fails to improve further."

Market participants were skeptical about more stimulus, expecting a limited boost to steel demand from previously introduced stimulus and not expecting another further stimulus until after October.

Singapore iron ore futures (Source: TradingView)

Copper

Copper futures rose 4.5% to US$3.56/lb this week.

Copper has recouped roughly half the late August selloff, where prices fell around -9% to US$3.36. Chinese copper imports jumped 26% year-on-year in August. “Lower copper prices in July and August sparked buying activities. Also, the open arbitrage between Shanghai and London led to more cargos inflow,” said He Tianyu, a copper analyst at CRU Group.

Copper spot and futures spreads widened as physical supplies remain strong contrary to the undemanding macro environment.

"The premium for cash copper over three-month futures on the London Metal Exchange rose by as much as 91% Thursday to a high of $145 per metric ton, an indication the market is paying more for units right now. That’s the biggest backwardation since November last year," Bloomberg reported.

Copper futures (Source: TradingView)

Oil

Brent crude oil prices fell -4.3% to US$89.4 a barrel this week.

Oil prices rolled over again following the demand shock from China's widespread lockdowns. As of Tuesday, approximately 12% of China's total GDP was impacted by covid-related controls on a weighted basis, up from 5.3% a week ago, according to Nomura.

"We believe supply disruptions will off-set some demand concerns. Supplies from Libya are stabilising but under-investment in many [OPEC] member countries will constrain production," ANZ analysts said in a note on Thursday.

"We expect supply to tighten once Europe's embargo comes into effect in December," the note added.

Brent crude oil (Source: TradingView)

Gold

Gold spot prices rose 0.25% to US$1,715 an ounce this week.

Who would want to hold the non-interest bearing gold as global central banks aggressively hike interest rates and the US dollar rallies to 20-year highs? Gold continues to stall around the US$1,700 level as the Fed reiterates its 'hike into the job is done' rhetoric.

Gold spot (Source: TradingView)

Coal

Newcastle coal futures rose 1.2% to US$440.4 a tonne after briefly rallying to a fresh all-time high of US$457.80 on Monday.

"Coal prices face upward pressure from strong European demand. An impending energy crisis in Europe is likely to switch power utilities from gas to coal, this could increase competition for seaborne coal," said ANZ analysts.

"Chinese coal imports have slowed in recent months, but a revival of industrial activity would see higher burning rates. That said, some relief could come as China and India import more Russian coal."

China plans to double down on coal to ease its ongoing energy crisis. Approximately 270 gigawatts of thermal capacity is expected to come online in the next five years, according to Bloomberg. This is well-above previous estimates of 100 to 200 gigawatts.

Newcastle coal futures (Source: TradingView)