Commodities Watch: Commodity Prices Falling Everywhere; Glencore IPO Fully Subscribed (SLV, GS)

Today’s commodity news focuses on the dramatic decline virtually across the board in commodity prices. There’s also news on the Glencore IPO and on a big corn buy from China.

Led by a 6% drop in crude oil prices, commodity prices turned south today as general concern about the US economic recovery has hit the markets hard. Tomorrow’s employment report from the US Census Bureau is expected to show slower non-farm payroll growth in April than it did in March. Combined with today’s report on increased claim for unemployment benefits, the US economic recovery looks very shaky.

The crude markets see that as an indicator of falling demand for energy. The base metals markets also anticipate lower demand for metals like copper, zinc, and tin. Copper has fallen below $4/pound for the first time in almost two months.

Demand for precious metals is also falling today, with gold down to well below $1,500/ounce and silver headed for $36/ounce or lower. See today’s story on the iShares Silver Trust (NYSE: SLV) for a dead-cat bounce in silver for more details.

Ag commodities are falling just as dramatically as metals. Corn futures are down nearly 3%, as are coffee and soybean oil futures. Cocoa prices are off nearly 5% and rice is down 4.5%. Wheat is also off about 1.5%.

Cotton fell more than 4%, to a three-month low below $1.45/pound on US data that more orders were canceled last week than new orders placed. Cocoa prices too are down more than 4% on expectations that exports from Ivory Coast are about to resume in force.

In addition to concern about the US economy, other factors have hit the commodity markets today. First is tighter monetary policy in China and the expected policy tightening in Europe and in emerging market countries. Higher interest rates reduces the amount of cash available for leveraged investments in commodities.

A second factor is today’s strengthening of the US dollar, which raises the prices of commodities, almost all of which are priced in dollars. A third factor is that rising food and fuel costs will weigh on consumer demand.

Most observers see today’s across-the-board drop as a technical correction, with fundamentals remaining bullish for nearly all base metals and ag products. But for today at least, the US dollar is the only beneficiary of the technical moves.

The IPO of Glencore International PLC is going better than even the company itself may have dared hope. The company’s $10-billion share offering was reportedly fully subscribed within hours after the final prospectus was published. Some $3.1 billion of the shares have been taken by cornerstone investors, who have committed not to sell the shares for a year following the IPO.  Many are treating Glencore as what they used to expect from Goldman Sachs Group Inc. (NYSE: GS), but that is now comparing apples to carrots.

Final pricing on the IPO is scheduled for May 19th and the shares are set for trading in London on or about May 24th and in Hong Kong on or about May 25th. Glencore plans to over-subscribe its sale book during the next two weeks.

One likely result of the IPO is that Glencore will be able to go through with its plan to acquire the roughly 66% of Xstrata plc that it does not already own. One issue in the takeover has consistently been that there has been no way to value Glencore. That shouldn’t be a show-stopper any longer.

Paul Ausick