The global commodities complex looks to be under pressure to rise, particularly due to the Red Sea crisis. Still, it faces resistance due to price-related destruction on the demand side and potential headwinds to economic growth stemming from the latest geo-political crisis, say research analysts. 

According to research agency BMI, a unit of Fitch Solutions, the aggregate commodity price index has lost 5.6 per cent of its value since October 7, the day when the Palestinian militant group Hamas launched its attack on Israel. 

This is despite the seven-day moving average number of cargo and tanker ships transiting the Bab el-Mandeb Strait falling by 55 per cent, per PortWatch data. 

BMI said a range of factors are influenceing commodities prices, diluting the impact of the Red Sea disruptions. “Moreover, while the Bab el-Mandeb strait is a key chokepoint for maritime trade, few commodities originate from the region itself,” it said.

No fundamental impact

ING Think, the financial and economic wing of Dutch multinational financial services firm ING, said the increased tension poses supply risks for commodity markets, with energy markets being the most vulnerable. “However, for oil and LNG, we are not seeing any fundamental impact on supply yet,” it said.

BMI said the Loss of access to the Red Sea, as such, does not necessarily translate into loss of supply on a global scale. “Freight rates are rising, though (more so given drought-related pressures on flows through the Panama Canal), and this – combined with longer average shipping distances and higher insurance premiums – is raising costs overall. Delays to deliveries, potential port congestion and increased pressure on spare freight capacity could ultimately weigh on exports, but likely only at the margins,” it said. 

The research agency said it expects tensions in the Red Sea to remain elevated over the coming months as the war in Gaza drags on.

The World Bank said in its Global Outlook that the recent conflict in West Asia the Middle East “has heightened geo-political risks and raised uncertainty in commodity markets, with potential adverse implications for global growth”. 

Global inflation warning

This comes while the world economy is continuing to cope with the lingering effects of the overlapping shocks of the past four years—the Covid-19 pandemic, the Russian Federation’s invasion of Ukraine, and the rise in inflation and subsequent sharp tightening of global monetary conditions.  

Last week, JP Morgan warned that the fight against global inflation could stall if shipping costs push up commodity prices.  

BMI said: “The broader macroeconomic backdrop remains challenging for commodities, with our economists forecasting global real GDP growth to slow from 2.5 per cent year-on-year in 2023, to a below-consensus 2.1 per cent in 2024. All else equal, this is bearish for commodities – particularly energy and industrial metals – impacting prices via lower demand and weaker sentiment.”  

The research agency said the slowdown in China will weigh to the downside, particularly for industrial metals. That being said, growth prospects should improve over the second half, supporting the price performance heading into 2025.

Aluminium outlook bullish

For metals shipped in containers, the Red Sea conflict poses an upside risk, said ING Think. “Container freights are the most affected by rerouting, increasing shipping times, delaying shipments and boosting freight costs,” said its head of commodities strategy, Warren Patterson, and commodities strategist, Ewa Manthey.

The is bullish for aluminium, particularly for premiums, rather than the LME price. “Primary aluminium premiums in Rotterdam have increased by around 10-15 per cent since the beginning of December after months of decline,” the ING experts said.

Metal prices are set to decline again as the slower growth in China further weighs on metal demand, said the World Bank global outlook.

BMI said industrial metal prices have taken a hit between January 1 and 23, with the Bloomberg Industrial Metals sub-index declining by 3.8 per cent. “The Chinese recovery in conjunction with US dollar strength has exerted downward pressure on metal prices. That being said, the metals complex enjoyed a small lift over the past week on the back of strengthened optimism for the Chinese stimulus,” it said.

Tug-of-war in 2024

The research agency said it holds a “mildly positive” view on the overall metals complex in 2024, with most metals averaging slightly higher compared to 2023 levels on an annual average basis, although there will be no return to 2022 levels. “Overall, we believe 2024 will be a close tug-of-war between fundamentals and sentiment driven by macro factors throughout the year,” it said.

On energy commodities, ING Think said it does not see any fundamental impact on the supply of crude oil and LNG yet. ‘Refiners and consumers could initially face some tightness as supply chains adjust to the longer route,” it said.

BMI said crude oil has posted the strongest gains (3.4 per cent) among energy commodities, reflecting the ongoing trade disruptions in the Red Sea. “Henry Hub has also edged higher (0.4 per cent), after a cold snap in the US led to a spike in power and heating demand, while freeze-offs dented domestic production. In contrast, bearish fundamentals continue to weigh heavily on European gas and thermal coal,” it said.

ING Think experts said: “Given the uncertainty and the risk of a spillover, oil prices are likely to remain relatively well supported. In order to see oil prices breaking significantly higher, we will need to see an even further escalation and/ or a meaningful loss in oil supply.” 

Food prices to soften

The World Bank said despite recent volatility triggered mainly by the conflict, and assuming hostilities do not escalate, average oil prices in 2024 are projected to edge down as global growth weakens and oil production increases. 

BMI said it views the upside risk to oil prices as being “relatively well-contained” given the ample spare production capacity held by OPEC+ and the downside pressures on demand stemming from a slowing global economy. “As such, we hold to our current forecast for Brent crude to average $85/bbl in 2024,” it said.

The World Bank global outlook said food prices are expected to soften further this year amid ample supplies for major crops, but remain elevated. ING Think said agricultural flows are less likely to be significantly disrupted by developments in the Red Sea. 

“We have been seeing increased volumes of US grain taking the longer route via the Suez Canal and onwards to Asia, rather than through the Panama Canal. These increased flows have come about due to the ongoing restrictions at the Panama Canal,” it said. 

Bearish bets

The voyage times will likely increase further as these shipments are now going around the Cape of Good Hope to avoid the Suez Canal. BMI said between January 16 and 23, the Chicago grain markets found rare price support on increased tensions in the Red Sea. 

“During this period, CBOT-listed second-month corn, soyabean, and (soft red winter) wheat futures all chalked up gains, led by a 1.8 per cent upward movement in wheat prices, while corn and soyabean prices both edged up by under one percentage point,” the research agency said. 

But, BMI said, market speculators have remained bearish, with the net short positions held by money managers in corn, soyabean, and wheat futures and options contracts all widening through 2024 to date. “In broad terms, this reflects an optimistic production outlook in the major exporting economies, as well as questions as to the near-term strength of mainland Chinese demand for feed grains,” it said. 

On a year-on-year basis, corn futures lost 31.2 per cent as of January 23, while soyabean and wheat futures were 16.2 per cent and 16.7 per cent lower, respectively. Meanwhile, CBOT-listed rough rice futures, buoyed by India’s export restrictions and El Niño-related production anxieties, remain outliers, with prices down just 4.2 per cent y-o-y, the research agency said.

Agri-chemical price hikes

ING Think said in addition, there are several standalone sugar refineries in the Red Sea, which may find it more difficult to export containerised refined white sugar due to container ships avoiding the region. “This could potentially lead to some tightness in several domestic markets within the region and parts of Africa. Obviously, this is not only applicable to sugar. A number of containerised agri commodities could see disruptions as a result,” the experts wrote.

BMI said regarding the softs complex, the cocoa market has experienced a remarkable upward trend, maintaining nearly unbroken momentum throughout 2023. Currently, prices are at a 48-year peak, edging ever closer to the historical zenith of $5,000 per tonne.

The research agency said Compounding these issues, a shortage of agricultural chemicals, triggered by price hikes, has exacerbated pest and disease challenges. Simultaneously, soaring prices have suppressed fertiliser application rates, casting a shadow on future cocoa yields.