Brexit and the Commodity Markets
The United Kingdom’s vote to leave the European Union sent shockwaves Friday through many of the commodities that S&P Global Platts covers. Below are some of the moves seen in Friday’s trading. You may quote from this in part or full with attribution to S&P Global Platts.
CROSS-COMMODITY FACTBOX: Brexit and the markets
Living up to its reputation as a safe haven asset following a plunge in markets and currencies Friday, gold soared 8%, or $100, to a 2.5-year high of $1,359/oz overnight, before easing to around $1,320/oz by midday. In sterling, the price of gold soared nearly 20% to GBP 1,000/oz.
While the immediate impact is a race to safe haven assets, the longer term effect on the global economy may provide more support to gold in the months ahead.
As a non-yielding asset gold benefits from a low-interest rate environment and prices already gained this month from the decision by the US Federal Reserve not to raise interest rates, citing global economic concerns.
Investment demand in gold-backed exchange-traded funds are currently at three-year highs, and bullish positions on US commodity exchange COMEX are at their most bullish position since 2006, revealing the already high level of investment demand in the market. A lower interest rate environment on the back of elevated economic and financial market uncertainty, has a “more fundamental and sustainable positive impact” on gold, one analyst said.
A strong dollar should provide a headwind, however, while the increased volatility and prices should keep physical buyers out of the market for now. Yet as uncertainty in financial markets is expected to only increase in the months ahead, gold prices could benefit strongly in the medium term.
Oil prices moved sharply lower on heightened concerns about the global economy. However some commentators played down the long-term impact on oil markets, as the UK itself entered what could be a prolonged period of uncertainty.
In terms of oil supply, European production, centered on the North Sea, is relatively marginal, at less than 4% of the global total last year, while UK production is about 1% of the total, at around 1 million b/d.
Friday’s price rout partly reflected fears that the UK vote would trigger renewed political and economic instability in Europe. Europe’s oil demand amounts to about 14% of the global total and was unchanged last year on the previous year. However the continent is not the focus of demand growth expectations, with the long-term outlook already viewed as subdued in terms of European oil consumption and growth mainly driven by Asian economies such as China and India.
The UK’s Brexit vote will have a bigger impact on the country’s own sector than on the global steel marketplace. The UK produced 3.2 million mt of crude steel in the first five months of this year, compared to China’s output of almost 330 million mt.
The Brexit decision led to much talk about Tata Steel’s sale of its UK assets. The Indian conglomerate–whose shares slipped over 9% in Mumbai Friday morning–put its lossmaking UK subsidiary up for sale in March, but was co-opted by the government to postpone the sale until after the referendum. Since then market chatter has suggested it may retain its large Port Talbot plant in Wales, while selling smaller more profitable units.
The likelihood of European imports becoming less competitive after Brexit could help Port Talbot have a more captive domestic market, while the devaluation of the sterling to a 30-year nadir will help its export competitiveness immediately.
However, a source close to the company said the decision could prevent Tata keeping the plant; Europe is a large export market for Port Talbot, which produces too much for domestic consumption, but it is largely uncompetitive given a higher-cost base.
CARBON EMISSION AND POWER
The biggest market reaction across the power-related energy complex was felt in the carbon market amid uncertainty about the UK’s future participation in the European emissions trading scheme with EUA carbon allowances crashing up to 17% from Thursday’s close to trade at Eur4.91/mt by 13:30 London time.
German baseload power for delivery in 2017, the benchmark contract for European power, was down almost 3% on the day at Eur26.80/MWh by 13:30 London, pulled down by lower carbon emission price.
German power already had a very volatile week amid unprecedented swings in the coal market, however on Friday, a 3% decline for coal was largely offset by a similar decline in the euro/dollar exchange rate with the single currency falling back to $1.10.
UK baseload power for winter 2016 was quoted slightly higher early Friday afternoon at GBP46.00/MWh, compared with GBP45.10/MWh at the close Thursday, pulled by more expensive gas prices and the impact of exchange rate on the cost of coal fired generation.
UK wholesale natural gas prices were highly volatile during early Friday trading as traders filtered the effect of Brexit into NBP contracts, with strong bullish momentum from the pound crashing against the euro more than covering oil price losses.
The key Winter 16 NBP contract, assessed by S&P Global Platts at 42.15 pence/therm Thursday, was seen trading as high as 43.95 pence/therm shortly after the market open, before being sold down to 42.75 p/th ahead of being valued at 43.80 p/th at 1330 BST (1230 GMT).
Early reaction to the price movements from market participants indicated that Brexit would make the UK more attractive to gas exporters, with the higher NBP contract pricing against other European hubs potentially bringing pipeline import boosts in addition to higher LNG volumes.
In the Netherlands, July TTF dealt as low as Eur14.60/MWh before regaining some ground to stand at Eur15.00/MWh by 1330 London time, leaving the contract 20 euro cent down on the day, while day ahead and Winter 16 price were down 25 euro cent.
“Next week, we may see general weakness in European markets on recession fears [following Brexit],” one Germany-based trader said.
The CIF ARA year-ahead thermal coal futures contract saw a flurry of trading activity before the European trading window opened, with prices opening at $53.50/mt, $3.50 lower than Thursday’s close, before falling to $53/mt.
However, after 8am, activity slowed and prices edged back up to $54.10/mt, recovering further to an intra-morning high of $55.55/mt around 10am as liquidity remained low. “I think the initial drop just reflects nerves,” one London-based trader with a hedge-fund said. “I’m not seeing any fundamental valuation metric [for the moves] really.”
The global LNG market had yet to react to Brexit, trading sources said Friday. The Platts JKM was unchanged from Thursday’s close of $5.35/MMBtu, despite gaining since the start of the week.
The marker rose 25 cents since Monday on augmenting demand and rising bids from traders looking to backfill positions in Asian markets. On Friday, however, bids and offers were heard to have been withdrawn on uncertainty over the implications of Thursday’s vote.
European onshore markets have traditionally acted as market of last resort for spot LNG cargoes, with onshore prices -and specifically those in the UK’s National Balancing Point (NBP)- often considered as a floor for LNG prices.
The decision for the UK to leave the EU had no immediate impact on the London 5 front-month white sugar market by Friday afternoon. By the end of last week the contract had rallied to as high as $540/mt, up from $460/mt at the end of April amid global supply constraints. By Friday afternoon a gradual downward correction of the last few days continued, trading $7.40 lower on the day at $526.30/mt by 13:00 London time.
Sentiment in the market was that any change in position to Britain’s position in Europe would take as long as two years and that now was not a time to panic, but to reflect. There was however a list of unanswered questions to ask in the meantime.
A Platts Kingsman sugar analyst said the list starts with: What policy will the UK establish for beet farmers growers? What trade agreements will be in place within the EU and with all other countries? This rings true for suppliers of cane sugar for refining, as well as white sugar under the current agreements with the EU.
While a lot remains unclear, the analyst said the impact can be expressed through the numbers themselves. White sugar imports in the UK from the EU are on average at around 200-250,000 mt, with exports of UK sugar into EU at around 60,000-70,000 mt. These are the volumes that will remain under scrutiny alongside any change in import volume from outside of the EU community.
For more information on crude oil, visit the S&P Global Platts website at www.platts.com.