Dow Jones-UBS Commodity Indexes Fall as Metals Reverse

Dragged down by poorly performing single-commodity indexes for silver, copper and lead, The Dow Jones-UBS Commodity Index fell 14.74% for the month of September. Market participants also braced for sharp decreases in metals tied to the production of goods for consumer use and cited downgrades to global growth forecasts as other key factors in the index’s hefty monthly plunge.

Notable among the forecasts was the September 20 International Monetary Fund (IMF) announcement that the IMF had lowered its growth outlook through 2012, saying the global economy has entered a “dangerous new phase.”

The three most significant downside performing single commodity indexes were silver, copper and lead, which were down 27.98%, 25.03%, and 23.16% respectively, in September.

Down 27.98% in September, silver suffered its second-biggest monthly dollar loss in history, raising red flags on technical charts along the way. Silver, used in manufacturing and industrial applications, took a big hit when China indicated its manufacturing sector had contracted for the third consecutive month. As of yet, U.S. manufacturing sector demand has not shown the level of weakness seen in China.

Indexes for copper, which plunged 25.03%, and lead, off 23.16%, followed silver lower in September. Over the course of the month, copper and lead fell to their lowest levels in about a year. Barclays Capital research said on Sept. 30 that, despite concerns the risk of a repeat of the 2008-09 crisis and slowing growth could mean further weakness in prices, if the European economic situation can be stabilized, conditions for a price recovery may start falling into place. Barclays research indicated that, while its economic team believes the world is experiencing a pronounced mid-cycle slowdown, these conditions will not spiral into a recession, mainly because of continuing expansion in emerging economies and an improvement in the U.S.

“This would imply that while base metals demand will be weaker than previously forecast, it will not experience the scale of collapse witnessed during the previous downturn,” Barclays’ researchers wrote in the report. “However, the outlook is extremely uncertain, and if the market’s worst fears about debt and growth are realized, the significance of fundamentals will further diminish, and they will not be likely to prevent further sharp price declines.”

In September, the Dow Jones-UBS Single Commodity Indexes for lean hogs, live cattle, and feeder cattle had the strongest gains with month-end returns of 7.69%, 7.67%, and 7.67%, respectively. An outlook released by researchers at Rabobank International Food & Agribusiness Research and Advisory (FAR) predicted U.S. meat and poultry production could drop as much as 5% in 2012; this also caught the attention of market participants. According to Rabobank, supplies were expected to tighten as production increasingly lags behind GDP growth.

Year to date, the Dow Jones-UBS Commodity Index is down 13.67% with the Dow Jones-UBS Gold Sub-Index posting the highest gain,13.61%, so far in 2011 – the index’s jump was largely credited to flight-to-safety buying in the asset. The Dow Jones-UBS Wheat Sub-Index had the most significant downside YTD performance, sliding 35.98% as demand expectations plummeted on speculation that less grain was fed to livestock than the government had estimated.

Data courtesy of Dow Jones Indexes