High price. ‘Energy crisis to keep commodity prices high in near-term’

Prices of commodities will likely remain supported in the near term due to the energy crisis, but neither surging fuel prices nor power shortage might see a quick solution, according to rating agencies.

The energy crisis could also drive agricultural prices higher as it will support demand and weigh on production in the coming quarters.

“The energy crisis is increasingly impacting a number of sectors, including commodities supply and demand trends. Despite rising macroeconomic headwinds, commodity prices have continued to push higher in recent weeks as fundamentals remain tight for most markets,” said Fitch Solutions Country Risk and Industry Research (FSCRIR).

Output cut, weak demand

The development has resulted in metals’ inventories decreasing sharply, it said in a commentary on “Monthly Commodities Strategy”. In the case of metals, the power crisis is leading to both production curtailment and weak demand in China, leading to concerns over a potential supply crunch, it said.

Dutch multinational financial and banking services firm ING’s economic and financial analysis arm Think said there were greater uncertainties around demand in China, which is undergoing triple-shocks, including the property slowdown, Covid-19 outbreaks and the power crisis.

The energy crisis and the acute power shortages in China are already having repercussions in global metals, impacting both production and consumption of metals and ultimately tightening markets, supporting prices, Fitch Solutions said.

“This has worked to undo the downward pressure on prices associated with Evergrande’s financial difficulties. China's power crunch is acting as a double-edged sword for metals,” it said.

Volatile energy market

FSCRIR said energy prices are expected to remain volatile throughout winter and the market could rise even further before peaking since demand will drop in response to the elevated prices and warm weather.

But the risk of prolonged or extreme weather could see inventories remain lower than average, resulting in higher prices next year. This could curtain energy consumption, which could affect economic production, it said.

ING Think said comments from the Saudi energy minister suggesting that OPEC+ will continue to be cautious in increasing output is likely providing some support to the market, particularly with other members of OPEC+ echoing the Saudi view.

FSCRIR said globally, producers were also halting operations voluntarily due to the spike in energy prices that make production uneconomical. This was adding to investor concern over an imminent metals supply crunch.

Risk to agri investment

On the other hand, soaring prices of natural gas and fertiliser besides rising crude oil prices are supporting agriculture prices this year.

“The energy crisis poses risks to investment in crops in the coming quarters (planted area, fertiliser usage, etc), and therefore downside risks to production in the next calendar year,” Fitch Solutions said.

Many farmers could opt for alternative and less-resource intensive crops such as soyabean instead of corn (maize), it said. ING Think said soyabean prices have been rising, while its crushing margin, too, was increasing.

High crude oil prices have resulted in biofuel and biodiesel rates spiking. This was adding support to corn, soyabean, sugar and palm oil prices in particular, as well as their alternative, FSCRIR said, adding that cotton would also stand to gain since there were will be upward pressure on prices of polyester, a crude oil derivative and a competitor to the natural fibre.

In view of the power crisis and rise in commodity prices, Fitch Ratings has lowered its forecast for global growth to 5.6 per cent. China’s GDP growth, in particular, has been cut to 7.8 per cent.

Going a step further, FSCRIR said elevated crude oil prices and energy shortage would lead to demand destruction for commodities.

“We are bearish on all commodity sub-sectors on a 12-month horizon and see prices averaging lower year-on-year in 2022, with the exception of gas and lithium prices,” Fitch Solutions said.

COMMENT NOW