Concerns about the arrival of a new El Niño weather phenomenon have increased in recent weeks. A possible new El Niño cycle has a major impact on the global commodities market. El Niño - a weather phenomenon that occurs once every five years on average - involves periodical warm ocean water temperatures off the western coast of South America which can cause climatic changes across the Pacific Ocean. Its impact on harvests and the world varies; sometimes passing almost unnoticeable (such as in 2010) but it can also be felt worldwide.
Australia's Bureau of Meteorology stated at the beginning of April 2014 that chances of the arrival of a new El Niño cycle this year are estimated at more than 70 percent. At the start of last month, the institution projected a 50 percent chance of a new El Niño cycle in 2014.
A major side effect of the El Niño cycle is that less rainfall in Southeast Asia and Australia results in declining production of agricultural commodities in countries such as Indonesia, Vietnam and Thailand (and it can spur forest fires). Affected commodities include crude palm oil (CPO), cocoa and coffee. As a result of the looming El Niño, prices of palm oil and cocoa have increased by 10 percent in the last three months. Meanwhile, the price of coffee surged 60 percent. However, the latter is particularly brought on by severe drought in Central Brasil, the world's most important region for (arabica) coffee production.
There is, however, another remarkable consequence of El Niño cycles. In previous cycles, the price of nickel has been heavily impacted by the weather phenomenon as low rainfall in Indonesia causes a lower level of electricity generation at hydropower plants thus leading to blackouts at energy intensive mining activities. Historically, the price of nickel increased 14 percent due to an El Niño cycle. However, as current inventory levels of nickel are much higher than in previous El Niño cycles, while the current global nickel demand is relatively weak, the impact of a new El Niño cycle on nickel prices is expected to be less severe compared to previous cycles.
Palm oil production in Indonesia in the first quarter of 2014 has already been affected by dryness. The onset of a possible new El Niño later this year can further increase declining CPO production rates. Last week, the Goldman Sachs Group mentioned palm oil among the crops that could be hurt by the new El Niño cycle. Combined, Indonesia and Malaysia account for nearly 90 percent of global palm oil output.
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