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While Tuesday's 3-per-cent selloff in the commodity market was payback time for a lot of raw materials that have seen spectacular gains in the past three months, lost in the shuffle are a handful of commodities that never really participated in the rally in the first place. Here we examine some names that the commodity rally left behind - and which are poised to play catch-up and which are doomed to remain in a rut

Natural Gas

(Return in the past three months: -16 per cent)

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The main story behind natural gas's woeful performance is basic Economics 101: Supply (too much) and demand (not enough).

"It's pretty straightforward - it's just oversupply," said Martin King, energy commodities analyst with oil and gas investment dealer FirstEnergy Capital Corp. in Calgary.

The influx of fresh supplies in the North American market - primarily from the rapid growth of once-undrillable shale gas and other unconventional deposits - has jacked up production, at a time when North American consumption remains sluggish. As a result, storage facilities are bursting at the seams.

"Storage really never came off during the summer [usually a high-demand period due to air conditioning needs] and now we're back to record levels," he said.

Another factor in the lag in natural gas prices, though, speaks to the impact the falling U.S. dollar has had on commodity prices in general. Most commodities trade globally, and are priced worldwide in U.S. dollars, so they have been trading off the currency on the logic that a lower greenback makes those commodities cheaper for non-U.S. buyers. But natural gas is much less transportable than other commodities, which means its markets are almost exclusively confined to the land masses where the gas is extracted. The result is that gas prices have been affected by local markets and not by currency gains.

Mr. King said prices may need to fall further before natural gas producers curtail their drilling in response to the weak market.

"Things could get weaker yet," he said. "Over the next four to six months we could grind lower."

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( Return in the past three months: -8 per cent)

Cocoa is another commodity held back by a supply glut, as the crop in West Africa - where two-thirds of the world's cocoa is grown - is poised to be a strong one.

"We've had ideal, absolutely perfect weather this year in Africa for crop production," said Florida-based financial adviser and commodity newsletter writer Shawn Hackett.

"We are short cocoa at these levels," said commodity trader John Kurgan of Lind-Waldock, predicting that cocoa prices could have another 20-per-cent downside.

But Mr. Hackett believes cocoa could be a "sleeper bull market." He noted that this year's big crop will "barely" put cocoa into a surplus situation, and is unlikely to be repeated. Meanwhile, political turmoil and economic woes in producing countries - especially Ivory Coast, the world's biggest producer - have stifled investment in the sector for years, which will eventually weigh on output.

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He predicted that in the next 12 months, "At a minimum, we're going back to re-test the highs" of $3,500 (U.S.) a tonne hit late last year.


( Return in the past three months: -6 per cent)

Wheat prices nearly doubled this summer, to nearly $8 a bushel amid a supply scare, as drought conditions in Eastern Europe fuelled crop fears and prompted a temporary export ban from Russia. But with strong crops from other regions such as Australia and Argentina making up for any shortfall, wheat has pulled back, as the market looks to be more than adequately supplied.

"In the wheat market, we never had any supply problem. There is plenty of wheat in the world and there always has been," said Mr. Hackett. "Don't get me wrong, the wheat market has tightened up considerably since the early summer, but a scarcity trade is not in the cards for now. Wheat should never have moved much above $6 a bushel, in my view."

Wheat specialist Mike O'Dea, a risk management consultant with FC Stone in Kansas City, also noted that commodity funds have been busy flocking to corn and soybeans during the rally, leaving wheat as the odd grain out.

He thinks that the fund money will eventually flow back in wheat's direction, and added that continuing crop concerns in Russia as well as North America could tighten supplies, but we could be a few months away from seeing any substantial price gains.

"I think we're finally getting down to [price]levels where it makes sense to be bullish," he said.


( Return in the past three months: -3 per cent)

Live hogs are another market wallowing in excess supplies, keeping prices in check.

But the low prices have been convincing hog farmers to reduce their herd, and now the surging price for corn - the key source of feed for hogs - could add to that trend. Canada has reduced its hog herd by 12 per cent this year, while the U.S. herd has also shrunk to a four-year low. Hog prices have jumped this month amid weakening forecasts for the corn crop, with the rising feed costs heightening the chance that hog supplies could shrink further, as farmers protect themselves against rising feed costs and weak prices.

Derek Burleton, deputy chief economist at Toronto-Dominion Bank, who recently authored a report on Canada's agricultural outlook, said there's often a "lagged effect" between corn and hog prices, suggesting the hogs may play catch-up as the impact of the feed costs work their way into the market. But it will come.

"At some point, you will get a supply impact," he said. "We believe hogs have the potential to be among the biggest gainers in the next year."


(Return in the past three months: -1 per cent)

While copper and many other base metals have been major beneficiaries of the commodity rally, nickel has been left behind. The problem, analysts say, is that nickel doesn't have the long-term supply worries that provide the fundamental base for historically high prices of some of the other industrial metals.

"Unlike copper, nickel has quite a significant amount of new production coming on stream," Mr. Burleton said. "That's helped keep it in a surplus."

He added that with more new projects in the pipeline, "If anything, the surplus may grow in the next few years."

However, others say that prospects for rising demand for stainless steel - the main source of nickel consumption - as the global economy recovers could offset those expected production gains. And some believe that some of the new nickel projects may not deliver as much nickel as projected, as some are relying on new technologies that could prove risky.

"If they fail - or are an economic failure - the supply-demand outlook would be radically altered," said commodity analyst Alan Heap of Citigroup in a recent report.

With files from Bloomberg News

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