Commodities Market Upturn Ahead Following Slump?

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By Roland Morris
Portfolio Manager and Strategist, Commodities

Commodities declined in May mainly from China’s slowed recovery, though the UBS Constant Maturity Commodity Index’s positive roll yield YTD highlights its roll methodology and curve positioning.

Macro Outlook: China’s Lackluster Recovery Triggers Commodities Decline in May

China’s disappointing recovery following the COVID-19 reopening this spring has been the major reason for the declining commodities markets in May. The UBS Constant Maturity Commodity Index (CMCI) declined 5.78% and the Bloomberg Commodity Index (BCOM) declined 5.64%. Additionally, the U.S. Federal Reserve’s tightening cycle over the last year is expected to slow the U.S. economy this summer and fall.

All five sectors of CMCI declined during May. The energy and industrial metals sectors both fell about 7%, the agriculture sector was down 4%, the livestock sector fell by 3%, and the precious metals sector declined by 2%. Remarkably, a handful of commodities were up in May: cocoa, HRW (hard red winter) wheat, and live cattle.

Sector Review: Industrial Metals Were the Weakest Link

The industrial metals sector was the weakest sector during the month; LME (London Metal Exchange) Nickel and LME Zinc fell by over 14%. The LME launched two consultations recently on possible reforms in the wake of the nickel trading crisis in 2022. Both consultations are due to close in June and July of this year. Zinc’s slump is a result of China’s post-lockdown bounce-back, which has been lackluster.

The declines in the energy sector were consistent among the respective commodities; unleaded gas fared better than the rest with losses of less than 4%. Macroeconomic concerns were a major driver of crude oil prices as analysts expect oil to trade at around $80 per barrel. However, threats of possible production cuts from OPEC+ (Organization of the Petroleum Exporting Countries) in June will be in place as long as oil stays significantly below $80 per barrel, further impacting future prices.

Although the agriculture sector was down 4%, it was spared from worse losses with cocoa gaining around 4% and HRW wheat around 2%. The looming El Niño phenomenon has much of the agriculture sector on alert. Anticipated disruptions in the global supply chain of agricultural products due to heavy rainfall or droughts could cause crop losses, shipment delays and/or difficulty harvesting for key crops like wheat, corn and oilseed.

While live cattle climbed around 3%, lean hogs declined by almost 12%. Since the target weight in the index was less than 2%, the losses to the livestock sector were only 3%.

The precious metals sector losses were primarily from silver which was down 6%, while gold was down 1.3%, contributing to the overall loss in the sector by 2%.

Looking at the YTD estimated roll yield below highlights CMCI’s superior roll methodology and curve positioning. By maintaining a constant maturity and longer average duration, CMCI is generating positive roll yield and BCOM is generating negative roll yield.

Roll Yield Estimates YTD – May 2023

Roll Yield Estimates YTD – May 2023

Source: Bloomberg. Data as of May 2023. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest in an index.

Originally published by VanEck on June 15, 2023.

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