Bears to dominate global commodities market well into 2023

The global commodity market will likely be in the grips of bears well into 2023 on a slowdown in the major economies, slack demand and the US dollar’s continued strength, two research agencies have said. 

“There is already evidence of slowing Western demand for commodities as central banks battle inflation. Recovering business activity in China and the easing of strict Covid-19 restrictions should offset this until the fourth quarter of this year. Thereafter, commodity prices could succumb to weaker global economic growth,” said Deutsche Bank in its “industry update”.

“Economic momentum continues to ebb, as elevated market volatility, ongoing supply-side pressures and tightening financial conditions sap growth, weighing on commodity prices,” said Fitch Solutions Country Risk and Industry Research (FSCRIR), a research unit of the Fitch group.

Metals down sharply

The outlook comes on the heels of commodity prices witnessing a sharp decline over the past month. The S&P GSCI Index, a composite index of commodity sector returns comprising 24 commodities including energy products, industrial metals, precious metals and agri products, has declined nearly 5 per cent in the past month. The CRB Index, which takes into account the average futures price of 19 commodities, had dropped nearly two per cent during the same period. “Metals prices have posted heavy declines this month, with year-to-date returns flipping into negative territory. Further weakness is expected over the coming months, as Chinese lockdowns and rising recession risks undermine sentiment and lower consumption,” Fitch Solutions said.

Copper prices are down a tad, steel by six per cent, HRC steel by 11 per cent, cobalt by 23 per cent, aluminium by over one per cent and tin by 5 per cent. 

Chinese influence

Pointing out the influence of China, the second-biggest growth engine, Deutsche Bank said its economic health has almost as great a bearing as the US on the course of commodity prices, particularly metals. “The housing recovery has been slower than expected. Recent data shows a rebound in sales from April lows, although a sustained recovery in construction activity may not come through until late 2022 or 2023,” said the Deutsche Bank Industry Update.

Fitch Solutions said as inflation continues to rise across major economies, central banks will increasingly target price stability, even at the expense of economic activity.  “This, in turn, paints an increasingly bearish picture for commodities demand. The aggregate commodity price index appears firmly past its peak and, short of a black swan event unfolding, we do not expect the index to return to its H1 highs over the coming years,” it said.

Deutsche Bank said demand for construction commodities will likely see a “relief rally”, with prices being temporarily buoyed by China’s rebound. But soon after they will “succumb to weaker global growth and some degree of supply recovery across the complex, reaching a trough around the middle of 2023”.

Metals, agri weakest

FSCRIR said though major economies would avoid recession over the next 12-18 months, the risk continues to increase. The probability of a recession in the US is 30-40 per cent and for the EU it is 45-50 per cent. 

Fitch Solutions said performances have been highly varied across different commodities baskets, with metals and agricultural commodities posting the weakest returns in the year-to-date, while energy prices have soared. However, even if prices were to be revised lower for various commodities, they are likely to be at historically “elevated” levels. 

Deutsche Bank said a deeper recession than anticipated could create an even bigger surplus. “The relatively low level of global inventories, coupled with accelerating investments into renewables and electric vehicles (EVs), should limit the downside,” it said. 

Fitch Solutions said prices of grains have also fallen sharply and will likely ease further in the second half due to “strong harvests and softening demand”.  “We currently forecast wheat to average $9.20/bushel this year, implying an H2 average of $8.45/bushel, far below the $9.95/bushel averaged over H1. Moreover, the balance of risk to the forecast lies squarely to the downside, more so following the July 22 signing of a grains deal between Russia, Ukraine, Turkey and the UN, which will allow for the resumption of exports from Ukraine’s Black Sea ports,” FSCRIR said.

With Russia too set to resume exports, adding to Ukraine’s shipments, the impact on supplies would be “substantial”, it said. 

Energy to outperform

However, the energy subcomplex would continue to outperform, with the fallout from the Russia-Ukraine war cushioning prices against a deteriorating economic outlook. “The European gas market is most exposed to the conflict, with Moscow actively curbing gas flows to the region, driving volatility and high prices.” Fitch Solutions said.

Deutsche Bank said crude oil could continue ruling in the region of $100–115 a barrel in the near term with “strained refining capacity” before increasing demand concerns and signs of a growth slowdown provide a moderate easing to $90/barrel in 2023.

Fitch Solution forecast Brent crude oil to average at $105/barrel this year, implying a neutral outlook for the rest of the year.  However, risks to the demand outlook were increasing, while negative sentiment will likely cap any near-term upside in prices, it said.

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