Inflation fears to spur fund demand for commodities in 2017
By Mike Verdin - Published 21/12/2016

Speculators including 5,000 Chinese hedge funds trading in commodities - are poised to extend into 2017 their greater interest in raw material markets, Sucden Financial said, foreseeing hopes of revival in coffee prices.

The closing weeks of 2016 have "until now been supportive of the majority of the commodities complex", Sucden said, flagging speculators' willingness in particular to support contracts with a bullish supply and demand story.

"A bullish fundamental picture has led to a promising outlook," the broker said, flagging in particular gains in prices of the likes of oil and zinc, and copper which has rallied more than 25% during the October-to-December quarter.

"However, moves have been exaggerated by speculators."

'Increase in speculative activity'

And the "increase in speculative activity" in commodities, a factor Sucden said had been evident "in the form of volatility", looks poised to extent into 2017, with issues such as Donald Trump's election as US president seen as encouraging interest.

"We anticipate investors may continue to use the asset class as an inflation hedge as well as hunting for greater returns," the London-based group said.

"Donald Trump is expected to target high levels of growth through infrastructure investment which also may boost commodity prices."

"We suspect and are hopeful that those commodities that boast a strong fundamental outlook will continue to attract interest from the non-commercial investors," which include retail investors as well as in China alone the estimated 5,000 hedge funds trading commodities.

"A few [are] managing assets of 10bn yuan ($1.4bn)."

Coffee price prospects

Among agricultural commodities, coffee near-term boasted upbeat fundamental factors, after a disappointing 2016 for robusta bean production, thanks to dryness in the likes of Brazil and Vietnam.

"Strong demand which supported the market throughout 2016 is set to continue into the coming year," Sucden said, if adding that prices will soften "towards the second half of 2017" as production recovers and eases supply "tension".

While saying it had been "surprised" by the extent of the pullback in coffee prices from highs last month, with spot New York arabica futures down 19% over the past seven weeks, mass liquidation by hedge funds of some of their unusually large net long position appeared to have been involved.

"We suspect that a combination of long liquidations along with algorithmic traders may have exaggerated moves."

The broker flagged hope that "if we see some stability [in arabica futures] around 140 cents a pound, we could see futures push back towards 150-160 cents a pound."

'Strong demand outlook'

Sucden underlined the potential for demand to "support" the soybean market too "going into 2017", given Chinese consumption forecast by the US Department of Agriculture hitting a record 100.8m tonnes this season.

"We feel due to the strong demand outlook futures could remain above $10.00 a bushel in the short term with potential for spike higher."

However, prices could "retreat back towards $9.50 a bushel" as South American harvests ramp up, with downward pressure also potentially lying ahead in terms of upbeat expectations for US spring sowings of the oilseed.

"Despite our reaffirmation that Chinese demand for soybeans will remain high, there are certainly factors that could impact prices, prompting a retreat to the downside," the broker said.

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