Encouraging Commodity Demand Expectations for Second Half
July 17, 2023
Read Time 2 MIN
Macro Outlook: China’s Poor Economic Trends Continue to Affect Commodities
The UBS Constant Maturity Commodity Index (CMCI) underperformed the Bloomberg Commodity Index (BCOM) in the second quarter (Q2) by 0.5% but continues to outperform year-to-date by over 3.5%. Year-to-date outperformance is mostly due to CMCI’s lower exposure to natural gas which declined sharply in the first half of 2023. CMCI also outperformed BCOM in the agricultural sector due to owning both London and U.S. cocoa. BCOM does not own cocoa, which is up about 35% year-to-date.
CMCI’s underperformance in the second quarter was partly due to BCOM’s better roll yield capture in the energy and agricultural sectors. Front-month exposure helped BCOM in Q2 but over the longer term, it has hurt BCOM’s performance relative to CMCI. Additionally, CMCI has a higher exposure to the industrial metals sector which declined by about 10% in Q2 due to very disappointing economic news from China. The declines in all commodity indexes during Q2 2023 was mostly due to the poor economic trends in China. We anticipate changes in the second half of 2023, however, as China takes stronger monetary and fiscal policy actions to reignite its economy. More than any other economy, China’s is a command economy driven by policy. The second half of 2023 could be positive for most commodities after a down first half-year. U.S. interest rates will likely peak as the U.S. Federal Reserve completes this tightening cycle which we believe, could trigger new declines in the U.S. dollar. Combined with some stronger policy-driven Chinese growth, commodity demand expectations could improve.
Sector Review: Industrial Metals Slump; Live Cattle Price Rally Led Significant Livestock Jump
The energy sector declined about 2% in the quarter. BCOM benefited from a larger natural gas exposure and front-month exposure in both natural gas and unleaded gas.
The agricultural sector was mostly unchanged in Q2 but wheat and corn fell sharply and cocoa rallied by about 20%. Soybeans were close to unchanged but soy meal was down 6% while bean oil was up about 10%.
Industrial metals fell sharply in Q2. China’s weaker-than-expected economic performance dampened demand expectations for industrial metals. China is the largest buyer of industrial metals by a wide margin, representing more than 40% of global consumption for several metals. Aluminum, zinc, nickel and copper all fell in Q2.
The precious metals sector fell slightly in Q2; Gold declined 2.4% and silver dropped 5.0%.
The livestock sector was up for Q2 led by a 10% rally in live cattle prices. Live cattle prices continue to trade near all-time highs of $180.
Roll Yield Estimates YTD - June 2023
Source: Bloomberg. Data as of June 2023. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest in an index.
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Disclosures
Roll yield is the amount of return generated in the futures market after an investor rolls a short-term contract into a longer-term contract and profits from the convergence of the futures price toward a higher spot or cash price (Investopedia).
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. Past performance is no guarantee of future results.
The UBS Bloomberg Constant Maturity Commodity Index (CMCI) is a Total Return rules-based composite benchmark index diversified across 27 commodity components from within five sectors, specifically energy, precious metals, industrial metals, agricultural and livestock.
Bloomberg Commodity Index (BCOM) provides broad-based exposure to commodities, and no single commodity or commodity sector dominates the index. Rather than being driven by micro-economic events affecting one commodity market or sector, the diversified commodity exposure of BCOM potentially reduces volatility in comparison with non-diversified commodity investments.
UBS and Bloomberg own or exclusively license, solely or jointly as agreed between them, all proprietary rights with respect to the Index. In no way do UBS or Bloomberg sponsor or endorse, nor are they otherwise involved in the issuance and offering of the Fund, nor do either of them make any representation or warranty, express or implied, to the holders of the Fund or any member of the public regarding the advisability of investing in the Fund or commodities generally or in futures particularly, or as to results to be obtained from the use of the Index or from the Fund.
Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.
You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. Commodities are assets that have tangible properties, such as oil, metals, and agriculture. Commodities and commodity-linked derivatives may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes or political or regulatory developments. The value of a commodity-linked derivative is generally based on price movements of a commodity, a commodity futures contract, a commodity index or other economic variables based on the commodity markets. Derivatives use leverage, which may exaggerate a loss. An investment in the Fund may be subject to risks which include, but are not limited to, risks related to active management, commodities and commodity-linked derivatives, commodity regulatory, credit, derivatives counterparty, derivatives, government-related bond, index tracking, industry concentration, investments in money market funds, interest rate, LIBOR replacement, market, operational, and subsidiary investment risk, all of which may adversely affect the Fund. The use of commodity-linked derivatives such as swaps, commodity-linked structured notes and futures entails substantial risks, including risk of loss of a significant portion of their principal value, lack of a secondary market, increased volatility, correlation, liquidity, interest-rate, valuation and tax risks. Gains and losses from speculative positions in derivatives may be much greater than the derivative’s cost. At any time, the risk of loss of any individual security held by the Fund could be significantly higher than 50% of the security’s value. Investment in commodity markets may not be suitable for all investors. The Fund’s investment in commodity-linked derivative instruments may subject the Fund to greater volatility than investment in traditional securities.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© 2023 Van Eck Securities Corporation, Distributor, a wholly-owned subsidiary of Van Eck Securities Corporation.
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Disclosures
Roll yield is the amount of return generated in the futures market after an investor rolls a short-term contract into a longer-term contract and profits from the convergence of the futures price toward a higher spot or cash price (Investopedia).
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. Past performance is no guarantee of future results.
The UBS Bloomberg Constant Maturity Commodity Index (CMCI) is a Total Return rules-based composite benchmark index diversified across 27 commodity components from within five sectors, specifically energy, precious metals, industrial metals, agricultural and livestock.
Bloomberg Commodity Index (BCOM) provides broad-based exposure to commodities, and no single commodity or commodity sector dominates the index. Rather than being driven by micro-economic events affecting one commodity market or sector, the diversified commodity exposure of BCOM potentially reduces volatility in comparison with non-diversified commodity investments.
UBS and Bloomberg own or exclusively license, solely or jointly as agreed between them, all proprietary rights with respect to the Index. In no way do UBS or Bloomberg sponsor or endorse, nor are they otherwise involved in the issuance and offering of the Fund, nor do either of them make any representation or warranty, express or implied, to the holders of the Fund or any member of the public regarding the advisability of investing in the Fund or commodities generally or in futures particularly, or as to results to be obtained from the use of the Index or from the Fund.
Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.
You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. Commodities are assets that have tangible properties, such as oil, metals, and agriculture. Commodities and commodity-linked derivatives may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes or political or regulatory developments. The value of a commodity-linked derivative is generally based on price movements of a commodity, a commodity futures contract, a commodity index or other economic variables based on the commodity markets. Derivatives use leverage, which may exaggerate a loss. An investment in the Fund may be subject to risks which include, but are not limited to, risks related to active management, commodities and commodity-linked derivatives, commodity regulatory, credit, derivatives counterparty, derivatives, government-related bond, index tracking, industry concentration, investments in money market funds, interest rate, LIBOR replacement, market, operational, and subsidiary investment risk, all of which may adversely affect the Fund. The use of commodity-linked derivatives such as swaps, commodity-linked structured notes and futures entails substantial risks, including risk of loss of a significant portion of their principal value, lack of a secondary market, increased volatility, correlation, liquidity, interest-rate, valuation and tax risks. Gains and losses from speculative positions in derivatives may be much greater than the derivative’s cost. At any time, the risk of loss of any individual security held by the Fund could be significantly higher than 50% of the security’s value. Investment in commodity markets may not be suitable for all investors. The Fund’s investment in commodity-linked derivative instruments may subject the Fund to greater volatility than investment in traditional securities.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© 2023 Van Eck Securities Corporation, Distributor, a wholly-owned subsidiary of Van Eck Securities Corporation.