Commodities fall as Fed prepares to wind back asset purchases

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The US Federal Reserve’s move to taper bond purchases saw investor appetite wane. Energy bucked the trend, with gas and coal prices rallying.

Gold fell after the US Federal Reserve said it would begin winding down monthly asset purchases. But, with the move widely expected, the losses were relatively small. Chair Powell appeared less convinced that inflation will be temporary, but he downplayed the relationship between tapering and an eventual rate hike, which provided some support for gold.

Base metals were up in early trade alongside a rally in Chinese coal futures. That eased concerns that power shortages in China would hurt industrial activity. However, the sector saw a wave of selling push most metals into the red by the end of the session. This was despite further signs of tightness amid supply shortages in the copper market. A large premium for spot prices over futures and low inventories has been enough to lure exports from smelters in China. Supply issues have played their part in the drop in inventories. Chile reported that its output in September was down 7% y/y to 447.4k tonnes. This was driven by sharp falls at Escondida and Collahuasi.

Iron ore futures edged up in yesterday’s main session, but it remains below USD100/t as pressures on China’s steel industry linger. Industry group China Iron & Steel Associations said its survey of members indicated steel output was down 2.8% m/m and 13.5% y/y in the middle third of October.

Coal futures in China surged amid expectations of colder-than-normal temperatures boosting demand for power and heating. This is despite government action to limit future price gains. The most active futures contract on the Zhengzhou Commodity Exchange rose 9.7% to close at CNY978/t. This flowed into the international market, with Newcastle coal futures rising more than 11% to USD157.5/t.

European gas futures rallied as further falls in Russian shipments raised concerns about shortages over winter. Despite President Putin directing Gazprom to start refilling its European storage facilities from early November, flows actually declined over the weekend and again on Monday. So much so that flows were reversed on a key transport route to Poland, with the country receiving gas from Germany. The Kremlin reiterated on Tuesday that Russia remains committed to pumping additional gas to Europe once its own domestic inventories have been filled. The market is now starting to see supply shortages becoming the norm for the foreseeable future. North Asian LNG prices rallied alongside the gains in European gas markets. This was exacerbated by supply outages in Malaysia. Ongoing uncertainty over winter weather also pushed buyers in the region to seek additional cargo.

Crude oil fell sharply as pressure mounted on OPEC to increase output more than scheduled. The US, India and Japan all called for the alliance to raise supply faster. This comes as data shows US inventories of gasoline are hovering at their lowest level since 2017. EIA data showed they declined 1,488kbbl last week to 214,258kbbl. This has seen demand on a four-week rolling average rise to 9.41mb/d. This is just shy of where it stood at this time in 2019 prior to the pandemic. The OPEC+ alliance is due to meet to discuss its supply agreement this Thursday.

The rally in coal and gas prices dragged European carbon prices higher. EUA’s climbed to a six-day high of EUR59.82/t.