AFKI Commodities Report: Supply-Demand Worries Boost Cocoa

AFKI Commodities Report: Supply-Demand Worries Boost Cocoa

Cocoa futures climbed to 28-month highs early this week amid concerns that demand will outpace supply, while sugar’s woes continued. Platinum prices are largely unaffected – so far – as the mine workers’ strike in South Africa enters its second week.

Cocoa for March delivery on New York’s ICE Futures U.S. exchange climbed to $2,933 a tonne on Jan. 28, its highest since September 2011, before settling at $2,900.50, as the market worried that rising demand for the principal chocolate-making ingredient could outpace supply this cocoa year (Oct. 1-Sept. 30). March cocoa on London’s NYSE LIffe settled £2 up on the day at £1,833 a tonne, having earlier touched £1,853 a tonne, also a level not seen by a front-month contract since September 2011.

Sydney-headquartered Macquarie Group recently revised downwards its estimate of the expected 2013/14 global deficit on account of higher production following improved weather in West Africa. But the group still anticipates a global supply deficit of 105,000 tonnes, down from its previous estimate of 170,000 tonnes.

“But the production improvements are no match to the global cocoa grindings growth we are seeing,” Macquarie said in its January Commodities Compendium report, released last week.

The bank said the recovery is broad-based, with Asian grindings, led by Indonesia, up 10 percent in the fourth quarter of calendar 2013 compared with the same-year earlier period, “in spite of overcapacity and competition pressuring margins”. Macquarie noted that origin grindings were also rising.

Cocoa was the best performing commodity last year and the bank expects the commodity to continue to outperform in 2014.

“While we expect prices to consolidate in the short term,  we would expect them to push upwards again from the second half of the year,” said Macquarie.

In contrast to cocoa, sugar’s woes continued this week, with raw sugar futures recording fresh three-and-a-half year lows. Raw sugar for March delivery on ICE Futures U.S. dipped to 14.77 cents a pound on Jan.28, the weakest level for the most active contract since early June 2010. At midweek, March sugar settled at 14.79 cents a pound, down 29 cents on the previous day’s close.

The decision by India, the world’s second biggest sugar producer, to delay a decision on export subsidies provided a small fillip for ailing prices on Jan. 30.   March raw sugar on ICE had rebounded to 14.99 cents a pound in early afternoon trade.

Refined, or white, sugar for March delivery on London’s NYSE Liffe on Jan. 27 fell below $400 a tonne for the first time for a front month contract since 2009, before settling at $402.45. Near close of trade on Jan. 30, it had bounced back to $409.35.

Most analysts though expect the downward pressure on sugar prices to continue. Bumper harvests by some of the world’s biggest producers, including Brazil and Thailand, have added to an already burgeoning global surplus of the sweetener.  The London-based International Sugar Organisation (ISO) in its last Quarterly Market Outlook published last November expected world sugar supplies to outpace demand by 4.73 million tonnes in 2013/14 (Oct. 1-Sept. 30), marking the fourth year of global surplus.  Macquarie Group recently revised upwards its estimate of global market surplus for 2013/14 from 3.2 million tonnes previously expected to closer to 4.5 million tonnes.

The ISO publishes its next quarterly outlook in late February and the organisation’s policy is not to anticipate changes ahead of the report’s preparation and release.

“Obviously, we are looking closely at India and Brazil as well as other countries where there may have been reasons our production estimates have been adjusted. But it would be premature to declare their impact on the world surplus,” an ISO analyst said.

However, he added it would be difficult to see a price recovery even if there were to be a revision to the surplus estimate to a smaller surplus given the level of stocks around the globe.

“For the foreseeable future, prices will remain under downward pressure. The market may show some short-term respite, but it is basically laboring under a huge market surplus and slow response of production to low prices,” said the ISO analyst.

ICE cotton futures were trading lower after last week’s rally to 88.13 cents a pound, basis the March contract. This was the highest level for a front month contract since late August and came largely on the back of a strong pace of U.S. exports.  March cotton had slipped to settle at 84.25 cents a pound on Jan. 27 although by midweek had regained some lost ground to close at 85.55 cents on Jan. 29.

The mixed price direction perhaps reflected the differing views as to which direction the fiber might take. Some market watchers anticipated further price consolidation while others pointed to tight U.S. supplies as likely to support buying.

Meanwhile, arabica coffee futures on ICE were trading higher this week, supported by short-covering. March arabica on the ICE Futures U.S. exchange settled 2.93 cents a pound up on the day at 117.48 cents on Jan. 29.  Robusta coffee on Liffe also finished up at midweek, with the March contract settling at $1,743 a tonne on Jan. 29.

South African platinum strike continues

A strike affecting the world’s top three platinum producers in South Africa has entered its second week as members of the Association of Mineworkers and Construction Union (Amcu) on Jan. 30 rejected a fresh wage offer from the three producers impacted by the mine workers’ walkout. The labor dispute is costing Anglo American Platinum (Amplats), Impala Platinum (Implats) and Lonmin, the world’s top three producers, about  a reported  9,900 ounces of platinum a day in lost output since the strike began on Jan. 23

Platinum prices seem largely unaffected by the continued deadlock. By midweek, the spot price had given up most of the gains made at the start of last week after Lonmin mine workers voted to join the proposed strike. Spot platinum had climbed to a near three-month high of $1,469.50 an ounce in London on Jan. 20, but by early Jan. 30, had slipped to $1,391 an ounce. Sister metal palladium was also lower with the spot metal at $712.97 an ounce.

However, at press time, there were concerns that the strike might widen at Amplats’ South African operations with reports that the National Union of Metal Workers of South Africa (Numsa) will on Jan. 31 issue a strike notice, but this could not be confirmed by press time. Numsa is the largest union at Amplats refineries and smelters, which to date have not been affected by the Amcu workers walkout.

Gold prices remained volatile but ended higher at midweek, boosted by concerns about economic growth in emerging markets as well as a dip in U.S. equities.  The market had largely discounted a likely decision by the U.S. Federal Reserve to continue its tapering program. The Fed indeed announced Dec. 29 that it would continue to reduce its bond-buying program by $10 billion a month, following a two-day meeting of its Federal Open Market Committee.

Gold for February delivery on the Comex division of the New York Mercantile Exchange (Nymex) settled the day $11.70 up at $1,262.20 an ounce.

U.S. oil dips on higher crude stocks

U.S. oil futures reached a one-month high this week amid market anticipation that the latest government oil data would show a drop in U.S. crude inventories, including those held at the Cushing, Oklahoma hub, the delivery point for the Nymex futures contract.  It was hoped that the recent opening of the southern leg of TransCanada Corp.’s  pipeline which links Cushing with Gulf coast refineries would help draw down stocks at the hub; crude inventories at Cushing reached 41.6 million barrels in the week ending Jan. 17, their highest since July.

Benchmark West Texas Intermediate (WTI) crude for March delivery on Nymex reached $97.41 a barrel on Jan. 28, marking a four-week high and the highest settlement so far this year.

But the U.S. light, sweet crude futures dipped to an intraday low of $96.34 on Jan. 29 before settling a shade lower on the day at $97.36 a barrel after the Energy Information Administration (EIA) reported inventories had increased.  The US Federal Reserve’s decision to continue to scale back its monthly bond-buying program was also a factor.   The Fed’s monetary stimulus package has been supportive to oil prices by weakening the U.S. dollar and making oil cheaper to buy in other currencies.

The EIA data showed U.S. commercial crude inventories rose by 6.4 million barrels in the week ending Jan. 24 to reach 357.6 million barrels, taking the market by surprise and marking the second straight week of increases.  Crude stocks at the Cushing hub were also up, at 41.8 million barrels from 41.6 million barrels the previous week.

However, supportive of prices was another decline in U.S. distillate fuel stocks, which the EIA said fell by 4.6 million barrels in the week ending Jan. 24, the third week of declines. The fall reflects strong demand amid cold weather. The U.S. government body reported distillate demand had risen 19.7% to 4.52 million barrels for the week ending Jan. 24.

Brent North Sea crude for March delivery increased 44 cents to settle at $107.85 a barrel on the ICE Futures Europe exchange at midweek. Analysts say Brent remains supported by the risk of supply disruption, including from Libya and Nigeria.

While care has been taken to ensure that the information contained in this report is accurate, it is supplied without guarantee. The author can accept no responsibility for any errors or any consequence arising from the information provided.