Cold Winds Blow on Raw Material Funds Amid Demand Decline Caused by COVID-19

[Asia Economy Reporter Song Hwajeong] Due to the decline in demand caused by the novel coronavirus infection (COVID-19), raw material prices have fallen, resulting in poor returns for raw material funds. Since the raw material market remains unstable, a short-term recovery in returns is unlikely.

According to financial information company FnGuide on the 15th, raw material funds and natural resource funds showed the poorest performance among theme funds, with returns exceeding -20% over the past month. Raw material funds recorded a return of -21.26% over the past month, while natural resource funds recorded -27.58%. Among 43 theme funds, only four funds showed negative returns over the past month: raw material funds, natural resource funds, exchange-traded funds (ETF) (others), and agricultural product funds, with natural resource funds showing the worst returns followed by raw material funds.

Funds that had been flowing in with expectations of a rebound in international oil prices have recently turned to outflows. Over the past month, 5.5542 trillion KRW flowed into raw material funds and 5.5476 trillion KRW into natural resource funds, but in the past week, outflows occurred with 244.7 billion KRW and 249.4 billion KRW withdrawn respectively.

The weakness of these raw material funds was largely influenced by the sharp drop in oil prices. International oil prices plunged last month, even briefly turning negative. Among funds, those related to crude oil experienced the largest declines in returns. Samsung KODEX WTI Crude Oil Futures Special Asset ETF [Crude Oil-Derivative Type] (H) was the worst performer with -42.97%, Samsung WTI Crude Oil Special Asset Investment Trust 1 [WTI Crude Oil-Derivative Type] (A) recorded -24.92%, and Mirae Asset TIGER Crude Oil Futures Special Asset ETF [Crude Oil-Derivative Type] recorded -14.80%.

In particular, while major assets including stocks have recently shown signs of recovery, raw materials have been notably slow to recover. Lee Jinwoo, a researcher at Meritz Securities, said, "Raw materials and real assets are representative of slow recovery," adding, "Since the beginning of the year, major asset performance shows that the representative safe asset, U.S. Treasury bonds, rose 14%, gold prices rose 12%, and stocks, which had large declines, reduced losses to -14%, but oil prices remain at -60%, the lowest among major assets."

The slow recovery of raw material prices is analyzed to be due to the inelasticity of supply. From the principle of demand and supply that determines product prices, during typical economic slowdowns, not only demand but also supply decreases due to production adjustments. However, in the case of raw materials or real assets, supply is difficult to adjust due to supply inelasticity. The researcher explained, "Due to this supply inelasticity, price volatility can rapidly increase during periods of oversupply," adding, "Especially in the recent oil market, where demand sharply declined due to COVID-19 while oil-producing countries raised production, the price decline inevitably became steeper."

Recent decreases in oil inventories and demand recovery due to the resumption of economic activities are positive factors. On the 14th (local time), West Texas Intermediate (WTI) crude oil for June delivery on the New York Mercantile Exchange (NYMEX) closed at $27.56 per barrel, up 9.0% ($2.27). This was because concerns over declining oil demand eased as countries around the world restarted economic activities.

Kim Kwangrae, a researcher at Samsung Futures, analyzed, "U.S. crude oil inventories, which turned to a decline after 16 weeks, and gasoline inventories, which have decreased for three consecutive weeks, support the possibility of further inventory reductions," adding, "Inventories in the Cushing area, a major cause of negative oil prices, also decreased by 3 million barrels in one week due to the resumption of economic activities in the U.S., showing signs of gradual stabilization." Considering the arrival of the full driving season and the U.S. refinery utilization rate remaining at a significantly low level of 68% compared to the previous 90%, there is a high possibility of a sharp decline in crude oil inventories and a rise in oil prices within weeks as utilization rates recover.

This content was produced with the assistance of AI translation services.