Why there are further falls ahead for commodities

Hue Frame

Frame Funds Management

One of the major benefits of analysing commodity markets is that we can look at the current price, inventory levels, and future prices, to better understand how producers, speculators, and money managers view the outlook for each commodity.

In the current environment of cost-push inflation, analysing the outlook for major producer inputs can help to provide us with a good understanding of what the outlook for inflation may be.

This update will look at current prices, inventory levels, and what the forward market is indicating.

Crude Oil - used in practically everything, is down approximately -35% from the highs seen in March.

Inventory levels are low, reflective of recent underinvestment.

The forward contract term structure is implying that traders have positioned for lower prices next year and beyond.

'Dr Copper' - generally a bell weather for economic growth, is down approximately -30% from the highs seen in March.

Inventory levels are at recent lows - reflective of a lack of new copper projects to add to supply.

The forward contract term structure shows that traders expect prices to be robust in the future.

Iron Ore - a key commodity used in steel production & linked to economic activity, is down over -50% since mid-2021.

Inventory levels held at Chinese ports have started to increase. Reflective of a slowdown in the Chinese property market and reduced global demand.

Wheat - a key input of food production and consumption, is down around -35% from highs seen in March.

The forward contract term structure shows that traders are expecting prices to stay elevated into 2024. Tightness is expected to reduce thereafter.

Corn - another key component of food production and consumption, is down approximately -12% from the highs seen in May.

The forward contract term structure shows that traders expect tightness to reduce, and prices to fall over the next 3 years.

Canola - another key input in food production, is down approximately -30% from the highs seen in May.

The forward contract term structure shows that traders expect prices to remain sticky until mid-next year.

Summary

In summary, most of these commodities are well off from the highs seen earlier this year, when Russia caused havoc to commodity markets. We can also see that on the whole, the term structure for these commodities leads us to believe that we will see further lower prices in the future.

The structural underinvestment (Crude) and lack of new deposit discovery (Copper), provides some food for thought regarding upcoming trading opportunities for these commodities

Within the core strategies of the Frame Futures Fund, we operate a commodity-only strategy called the 'B20'.

This strategy trades a universe of major commodities and uses statistical anomalies for entry signals, which allows it to enter positions to capture outliers (tail events). 

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This information is prepared by Frame Funds Management Pty Ltd (ACN 608 862 442) (Frame Funds, we or us) is a Corporate Authorised Representative (CAR No. 123 9068) of Primary Securities Limited (ACN 089 812 812 635) and is intended only for "wholesale clients" within the meaning of sections 761G and 761GA of the Corporations Act 2001 (Cth). This material is not intended to constitute advertising or advice (including legal, tax or investment advice) of any kind. These materials are not to be distributed to any person who does not qualify as a wholesale client and must not be copied, reproduced, published, disclosed or passed to any other person at any time without the prior written consent of Frame Funds. Primary Securities Ltd (ACN 089 812 635 635, AFSL 224 107) is the Trustee of, and issuer of units in, the Frame Futures Fund and the Frame Long Short Australian Equity Fund (Funds). In deciding whether to acquire, or to continue to hold, units in the Fund please read the current Information Memorandum available from Frame Funds. Past performance of the Funds is not a reliable indicator of future performance. The value of an investment in the Funds may rise or fall. Returns are not guaranteed by any person. Total returns are calculated before tax and after ongoing management costs. In preparing this information, we have not considered your investment objectives, financial situation or personal circumstances and therefore the Funds may not be suitable for you. Neither Frame Funds, Primary Securities Ltd, nor any of their respective related parties, directors or employees, make any representation or warranty as to the accuracy, completeness, reasonableness or reliability of the information contained in this publication or accept liability or responsibility for any losses, whether direct, indirect or consequential, relating to, or arising from, the use or reliance on any part of this material. Any rates of return, forecasts or estimates contained in this publication are not guaranteed. The content of this publication is current as at the date of its publication and is subject to change at any time. It does not reflect any events or changes in circumstances occurring after the date of publication.

Hue Frame
Founder & Portfolio Manager
Frame Funds Management

Hue Frame is the founder of Frame Funds Management and Portfolio Manager for the Frame Futures Fund and Co-Portfolio of the Frame Long Short Australian Equity Fund.

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