It was a tough start to the year for commodities. The S&P GSCI ended the first month of 2020 down 10.8%, the largest month-over-month decline since November 2018. The outbreak of the coronavirus in China’s Hubei Province flustered most financial markets, and the commodities markets were hit particularly hard given the potential impact on global supply chains and on the physical demand for commodities such as transportation fuel. There is also growing concern among market participants that, should the virus spread widely, it would weigh on global economic growth. Across the commodities markets, losses were driven by the petroleum complex and industrial metals, while only precious metals was accretive to headline performance.
China’s coronavirus outbreak rattled oil markets in January, sending prices sharply lower, as investors worried that efforts to prevent it spreading could harm the country’s economy and reduce demand for petroleum products. The S&P GSCI Petroleum was down 15.0% over the month. OPEC was reported to be mulling a cut in production to counter the decline in demand, but this news was not sufficient to allay price falls.
With approximately half of the base metals’ global demand coming from China, the S&P GSCI Industrial Metals dropped 7.09% in January. The S&P GSCI Copper and S&P GSCI Nickel contributed the most to the downside, falling 9.86% and 8.53%, respectively. Chinese businesses were allowed to request force majeure certificates, which excuse parties from not performing their contractual obligations due to the current conditions in which business with overseas partners is affected.
Gold broke to a new five-year high and was one of the only bright spots in the commodities space. The S&P GSCI Gold climbed 3.97% due to a safe haven bid on the back of heightened geopolitical tensions between the U.S. and Iran, along with the coronavirus contagion. The favorable environment for the S&P GSCI Palladium continued into 2020 and led to a positive outperformance of 16.67% for January.
The signing of the Phase One U.S.-China trade deal, which included a pledge by China to buy billions of dollars in additional agricultural goods from the U.S., had little immediate impact on the agricultural markets in January, with the focus shifting almost entirely to the ongoing health crisis gripping the world’s second-largest economy. The S&P GSCI Agriculture fell 2.65% in January. Even though China has recommenced purchasing U.S. soybeans, the S&P GSCI Soybeans was down 8.57% over the month, weighted down by plentiful supplies in North and South America. Sugar was the one sweet spot in the agricultural complex in January, with the S&P GSCI Sugar up an impressive 9.01% over the month. The International Sugar Organization has forecasted a global sugar deficit of 6.12 million metric tons in 2019-2020, and the slow pace of Indian exports has started to affect the market.
Lean hog prices nosedived in January, leaving the S&P GSCI Livestock down 10.23% over the month. Combined with concern regarding the persistence of demand in the largest market in the world for pork, China, was the fact that U.S. hog supplies continue to surprise to the upside, putting pressure on the U.S. slaughter capacity.