Prices of commodities in the global market are expected to ease next year, but they are likely to average higher than the levels seen during the last five years as macro-economy and low stocks are expected to provide support, according to research analysts.

“We expect commodity prices to ease in 2022 from current levels and forecast most commodity prices to average lower year-on-year basis, as we see supply improving while demand growth will ease,” said Fitch Solutions Country Risk and Industry Research (FSCRIR).

“Going into 2022, we expect the disruption we have seen in supply chains to improve, while the balances for several commodities will look less tight than in 2021. This should mean that prices edge lower from current leaves,” said Warren Patterson, Head of Commodities, ING Think - an economic and financial research arm of Dutch multinational banking firm ING.

Best performing asset class

Fitch Solutions and ING Think said prices of commodities were expected to remain above long-term averages, particularly seen during the last few years.

Fitch Solutions said its Aggregate Commodity Price Index - an equal-weighted index of annual averages of main commodities across energy, metals and agriculture - will likely decrease by 7.9 per cent next year in nominal terms. This follows an impressive growth of 43.8 per cent expected this year compared with 2020.

Commodities are likely to end 2021 as the best performing asset class. The S&P GSCI index, a major commodity index in which investments can be made, has gained 36.10 per cent so far at 2,690.56.

“Recovering demand following Covid, supply chain disruptions, government policy and adverse weather have all contributed to a tightening in markets this year, which has propelled prices higher,” said ING Think commodities strategy head.

Ferrous metals south-bound

Fitch Solutions said of the 27 key commodities - including crude oil, thermal coal, base metals, minor metals, precious metals, and agriculture -19 of them are likely to average lower than this year.

“Most notably, we see ferrous metals (iron ore, steel), natural gas NBP, thermal coal, and oil crops (palm oil and soybean) averaging sharply lower; while we expect Asia LNG, US Henry Hub, tin, lithium, milk and cocoa averaging higher. Brent will mostly average flat next year,” the research agency said.

ING Think said several macro headwinds would limit the upside for the commodities complex. One, central banks are set to tighten their monetary policy during 2022. Two, the US dollar is likely to rule strong next year and third, there are concerns over the Chinese property market.

“If we see a further slowdown within this sector, it will likely put downward pressure on the complex, particularly for metals. However, the risk of this occurring is less likely,” Patterson said.

Supporting macro-economy

Fitch Solutions said the macro-economic backdrop will remain supportive for commodities demand next year, which will keep prices elevated compared with the 2017-2021 averages. “Our Country Risk team forecasts that the global economy will grow by 4.1 per cent in 2022, well above the average recorded between 2015 and 2019,” it said.

Though developed markets will record stronger-than-usual growth, the pace of growth in global economic activity will be slower than the 5.5 per cent estimated for this year, FSCRIR said.

This will put downward pressure on demand for commodities, particularly when the Chinese economy faces many risks, particularly in the real estate sector.

Fitch Solutions has forecast a slowdown in China with Beijing’s real GDP expected to grow 5.4 per cent next year against 7.8 per cent this year. On the other hand, it said monetary policy tightening will continue and spread to the developed markets throughout 2022. Most banks will start ending their quantitative easing programmes early next year and there would be a 25-basis points interest hike in the US.

Agri commodities

Strong prices this year will incentivize production next year, particularly in agriculture. Though the labour market will remain tight with rising salaries across many markets, improving vaccine access will help loosen travel restrictions resulting in migrant labour availability, said Fitch Solutions.

“We would expect agricultural commodity prices to ease through next year, but they will remain above long-term averages. Due to weather hitting the crops, the wheat market has traded to multi-year highs… Assuming normal weather in 2022, wheat should see ending stocks edging higher,” ING Think’s Patterson said.

However, there is uncertainty over sugar and coffee going into next season with La Niña weather risks building in Brazil. The coffee market has already suffered from drought and frost damage. “How much of an impact this will have on next season’s crop will depend on precipitation over the rainy season. Given the uncertainty, coffee prices are likely to remain elevated until the market gets a better idea of how big Brazil’s next crop will be,” he said.

Metals to slip

On the metals front, Fitch Solutions said slowing economic growth, tightening monetary policy and property sector woes in China could drive metals lower next year. Prices would be higher than pre-Covid levels, as the market balance for most metals is tight and stocks are at historical lows.

ING Think concurred with the view and said the sentiment around the outlook for demand in the medium-term is constructive due to growing investments in green projects that are metal-intensive - a view supported by Fitch Solutions. Patterson said the research team was bullish on aluminium as it was heading into structural deficits and there were no quick-fix solutions.

FSCRIR has forecast its Industrial Metals index to decline by 10.8 per cent next year after a projected 44.1 per cent rise this year. It said iron ore and steel prices may decline, while tin prices may average higher. Copper, nickel and aluminium could see declines than ferrous metals.

Both research agencies said that strong supply from nations outside the Organization of Petroleum Exporting Countries (OPEC) and easing of OPEC supply cuts could cap crude oil prices.

They also see tightening monetary policy and strengthening the US dollar putting downward pressure on precious metals, particularly gold.