- China’s demand weakness contributed to the softness in energy and metals prices last year.
- US-led supply side response certainly tempered energy prices.
- But markets appear buoyed by a likely recovery in Chinese demand.
- Additional boost to global commodity supply looks unlikely this year.
- While a price surge is unlikely, a commodity turnaround could end the ongoing disinflation trend.
Commentary: Commodity cycle
A sharp rise in interest rates since 2022 notwithstanding, global economy has been resilient. And yet, the demand side was not strong enough to pull up food and energy prices 2023. On the supply side, despite many worries, primary related to wars and climate change, production of commodities held up well. A surge in investment toward technology-intensive products has not caused a surge in industrial metals prices either. Only gold has done well, which itself is confounding given the high rate of return from risk free bonds and a buoyant equity market.
What to make of all this? First, China. In recent decades, China’s strong industrial and construction growth fuelled seemingly inexhaustible demand for commodities, a dynamic that has weakened since 2020. At the same time, a move toward green transition has had a sobering impact on fossil fuel prices, Russia’s invasion of Ukraine and unrest in the middle-east notwithstanding. Second, on the supply side, the US has pursued numerous channels to prevent geopolitics from spilling into energy prices. From boosting local production and releasing a record 180mn barrels from its strategic reserves in 2022 to arranging for oil and gas supplies to move to Europe seamlessly, the US has played a key role in stabilising the global energy supply.
But the commodity soft patch may be behind us. Commodity traders are increasingly encouraged by signs of demand bottoming in China. This optimism is reflected in fledgling buoyancy in the markets, as critical commodities like crude oil, cocoa, cotton, sugar, palm oil, nickel, aluminium, and copper rallied in 1Q24. There is also lingering headache with respect to the supply side. An escalation of security risks in Ukraine and the middle-east is always on the cards, threatening to affect the supply-demand balance at a time when global energy inventory levels are lean. We don’t think a price surge is around the corner, but a turnaround in commodity prices could well mark the end of the disinflation trend that has soothed equity, bond, and credit markets in the past year.
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