Not out of the woods yet - Capital Economics
Commodities Overview

Not out of the woods yet

Commodities Outlook
Written by Caroline Bain
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Subdued economic growth will weigh on the prices of most industrial and energy commodities for the remainder of 2019. What’s more, our view that there will be a further escalation in the US-China trade war could have particularly negative consequences for industrial metals demand. In contrast, the price of gold will remain supported by the economic uncertainty and safe-haven buying.

  • Overview – Subdued economic growth will weigh on the prices of most industrial and energy commodities for the remainder of 2019. What’s more, our view that there will be a further escalation in the US-China trade war could have particularly negative consequences for industrial metals demand. In contrast, the price of gold will remain supported by the economic uncertainty and safe-haven buying.
  • Looking further ahead, the macro-economic backdrop for commodities is more positive. By 2020, the Fed should be firmly in easing mode, which should prompt a rise in risk appetite. Meanwhile, stimulus in China should prevent its economy slowing too sharply and, by 2021, we expect the US economy to be embarking on a cyclical recovery which should give a lift to commodity prices. In the case of industrial metals, there may be some marked price rises given that, in many cases, supply growth will be constrained. (Pages 2-4.)
  • Short-term Forecast Summaries – Quarterly average and end-period projections to Q4 2020. (Page 5-6.)
  • Economic and Financial Backdrop Global economy to slow and trade war to intensify. (Pages 7-8.)
  • Oil – Oil prices unlikely to recover lost ground. (Page 9.)
  • Coal, US Natural Gas & LNG – Lower natural gas and coal prices here to stay. (Page 10.)
  • Industrial Metals – Demand in the driver’s seat this year. (Page 11.)
  • Copper, Iron Ore & Steel – Copper to weather the storm. (Page 12.)
  • Precious Metals – Gold’s six-year high to prove temporary. (Page 13.)
  • US Grains & Soybeans – High stocks to weigh on wheat prices. (Page 14.)
  • Other Agriculturals – Government efforts to support farmers won’t boost cocoa prices. (Page 15.)
  • Long-term Commodities Outlook – Twenty-year forecasts for oil, copper and wheat prices (Pages 16-17.)
  • Long-term Forecast Summaries – Annual average and end-period projections to 2021 and forecasts for 2025. (Pages 18-19.)

Overview

Commodity prices to see better days from 2020

  • The prices of most industrial and energy commodities fell in the second quarter of 2019 (see Chart 1) amid concerns about the global growth outlook and commodities demand. We echo these concerns and expect further declines in prices this year based on our forecasts of a weakening global economy, falling equity markets and a persistently strong US dollar.
  • While commodity prices appeared to interpret the sharp drop in US bond yields as a sign of a weaker global economy, equity markets rallied (see Chart 2), presumably on the hope that looser monetary conditions would boost growth. However, we anticipate that the US economy will still slow sharply, weighing on earnings growth, and that this will lead to lower equity prices later this year.
  • What’s more, the US dollar, which typically has an inverse relationship with commodity prices, initially fell on the prospect of interest rate cuts, but subsequently recovered. (See Chart 3.) We expect the US dollar to continue to benefit from safe-haven demand in the remainder of 2019.
  • We suspect that global growth will remain subdued in the second half of the year (see Chart 4) and that this will translate into weaker commodity demand and prices.
  • Our forecast of the macro-economic backdrop in 2020-21 is more positive for commodity prices, owing to looser monetary conditions in the US and China and some recovery in equity markets. And, in the case of many industrial metals, constrained supply will become more of a problem as demand revives. We forecast that the prices of most commodities, and particularly the more cyclical commodities, will rise in 2020-21.

Chart 1: S&P GSCI Commodity Price Indices
(1st Jan. 2019 = 100)

Chart 2: US Equity & Commodity Price Indices

Chart 3: US Dollar & Commodity Price Indices (2019)

Chart 4: Global GDP & Commodity Prices (% y/y)

Sources: Refinitiv, Bloomberg, Capital Economics

Overview (continued)

Oil price to ease back in the near term

  • After a strong first quarter, oil prices plunged in late-May on worries about global demand. They have since struggled to recover much lost ground, even as tensions between the US and Iran escalated and OPEC+ extended its 1.2m bpd output cut. Despite constrained supply, weaker GDP growth (and crude demand) in oil importers (see Chart 5) means that we expect the market to return to a surplus in the second half of 2019.
  • As such, we forecast that the price of oil (Brent) will ease back to $60 per barrel by end-2019. We are slightly more upbeat on the outlook for the price of the US benchmark, WTI, as we expect additional pipeline capacity to facilitate US exports. This should lead to a narrowing of the Brent-WTI price spread (see Chart 6) to just $5. Our end-2019 forecast for WTI is $55pb.
  • By 2020-21, we expect oil prices to recover a little as investor risk appetite increases but ample supply, including rising US production, will act as a lid on prices.
  • The biggest upside risk to our forecast is that US-Iran tensions spiral out of control into a military conflict. In this scenario, we estimate that prices could soar to around $150 per barrel. Chart 7 illustrates earlier spikes in prices in response to geopolitical events. However, history shows that prices typically fall back relatively quickly as supply fears ease or demand falters as a result of the higher prices.
  • Elsewhere, the slowdown in China’s manufacturing sector has been weighing heavily on the prices of most industrial metals. (See Chart 8.)

Chart 5: Global GDP & Oil Consumption

Chart 6: Brent-WTI Price Spread (US$ per Barrel, 2019)

Chart 7: Real and Nominal Oil Prices
(Brent, US$ per Barrel)

Chart 8: China Manufacturing PMI & Industrial Metals Prices

Sources: Refinitiv, Bloomberg, BP, IEA, Markit, Capital Economics

Overview (continued)

Some agriculturals have risen too far, too fast

  • Admittedly, China’s construction sector has held up well, which has translated into high Chinese steel production and prices. (See Chart 9.) But we expect activity to slow in the second half of the year, prompting a sharp fall in Chinese steel and iron prices. By contrast, the outlook for base metals prices in 2020-21 is more positive, in part because of low exchange stocks and subdued growth in mine supply.
  • In recent months, gold has benefitted from economic uncertainty, heightened geopolitical tensions and falling US rate expectations (see Chart 10) and we expect this to continue. That said, we see little upside for the gold price in the remainder of this year for two key reasons. First, the scale of Fed easing is likely to be less than the market currently anticipates. Second, Asian physical demand will probably fall further due, in large part, to higher prices. What‘s more, we think that that the price of gold will fall back in 2020-21 owing to rising risk appetite and a cyclical upturn in the US economy in 2021.
  • Adverse weather, particularly in the US, has given a boost to grains prices this year and sent investors scrambling to close short positions. (See Chart 11.) However, we think prices may have risen too far, too fast.
  • For example, even factoring in a smaller US crop, the stocks-to-consumption ratio for corn remains comfortable. (See Chart 12.) Indeed, assuming ‘normal’ weather, global production of agricultural commodities appears more than adequate in the coming years, suggesting that price gains will be limited.
  • We remain cautiously positive though. Our forecast of a somewhat higher price of oil in 2020-21 should be supportive of agricultural commodity prices, as it raises productions costs.

Chart 9: China Steel Output & Prices

Chart 10: US 2-Year OIS Rate & Gold Price

Chart 11: Futures Position in Agriculturals
& Price Index

Chart 12: Global Corn Stocks
& Stocks-to-Consumption Ratio

Sources: Refinitiv, Bloomberg, USDA, Capital Economics

Short-Term Forecast Summary

Table 1: Key Forecasts – End-Period

Actual

Forecast

2019

Latest

2019

2020

Q1

Q2

19th Jul.

Q3

Q4

Q1

Q2

Q3

Q4

Commodity Indices

S&P GSCI Commodity Index

434

425

413

415

405

415

420

430

435

Bloomberg Commodity Index

345

343

339

340

340

345

345

345

350

 

Energy

Crude Oil (Brent) (US$ per barrel)

68

67

63

63

60

62

64

65

65

Crude Oil (WTI) (US$ per barrel)

60

58

56

56

55

57

59

61

62

US Natural Gas (US$ per mBtu)

2.66

2.31

2.28

2.60

3.00

3.00

2.80

3.00

3.30

Spot Asian LNG (US$ per mBtu)

4.40

4.80

4.60

5.50

7.20

4.00

5.00

5.50

7.50

Coal (Rotterdam, US$ per tonne)

70

49

58

60

65

64

62

60

60

Coal (Newcastle, US$ per tonne)

93

71

74

75

80

80

79

78

75

 

Industrial Metals (US$ per tonne)

Alumina

401

401

370

360

340

340

340

350

360

Aluminium

1,893

1,780

1,836

1,725

1,650

1,650

1,700

1,750

1,800

Cobalt

30,000

28,600

27,592

26,500

25,000

28,750

32,500

36,250

40,000

Copper

6,487

5,982

5,971

6,000

6,000

6,200

6,400

6,600

6,800

Iron Ore

85

117

121

100

80

75

70

70

70

Lead

2,002

1,917

2,049

1,900

1,800

1,825

1,850

1,875

1,900

Nickel

12,897

12,617

14,817

13,000

11,000

11,250

11,500

11,750

12,000

Tin

21,447

18,833

17,811

18,250

18,500

18,750

19,000

19,250

19,500

US Steel (HR Coil, Sh. ton)

691

520

556

535

525

500

475

475

500

Chinese Steel (Rebar, RMB per tonne)

4,137

4,212

4,237

3,800

3,500

3,250

3,000

2,750

2,600

Zinc

3,000

2,565

2,456

2,400

2,300

2,300

2,300

2,300

2,300

 

Precious Metals (US$ per troy ounce)

Gold

1,292

1,409

1,437

1,400

1,400

1,385

1,375

1,360

1,350

Silver

15.14

15.31

16.30

16.00

16.00

15.75

15.50

15.25

15.00

Platinum

846

833

857

850

850

885

925

975

1,000

Palladium

1,384

1,538

1,525

1,400

1,300

1,350

1,400

1,450

1,500

Rhodium

3,240

3,290

3,540

3,000

2,700

2,750

2,800

2,850

2,900

Agriculturals

Cocoa (US$ per tonne)

2,280

2,450

2,465

2,450

2,425

2,425

2,450

2,475

2,500

Arabica coffee (USc per Ib)

95

108

107

107

110

110

110

105

100

Robusta coffee (US$ per tonne)

1,456

1,421

1,393

1,450

1,500

1,550

1,550

1,525

1,500

Corn (USc per bushel)

357

420

426

450

460

450

440

425

410

Cotton (Cotlook A, USc per Ib)

85

77

74

75

75

76

77

78

80

Lumber (N.Am. US$ per 1,000 bd ft)

360

379

335

330

300

310

325

340

350

Palm Oil (MYR per tonne)

2,001

1,865

1,905

1,900

2,000

2,050

2,100

2,150

2,200

Rice (Thai white, US$ per tonne)

459

476

462

465

470

470

475

480

485

Soybeans (USc per bushel)

884

900

887

885

875

870

865

860

850

Sugar (No.11, USc per lb)

12.53

12.32

11.62

12.50

12.75

13.00

13.25

13.50

13.75

Wheat (USc per bushel)

458

528

497

500

475

460

440

435

430

Sources: Refinitiv, Bloomberg, Capital Economics

Short-Term Forecast Summary (continued)

Table 2: Key Forecasts – Quarterly Average

Actual

Forecast

2019

Latest

2019

2020

Q1

Q2

19th Jul.

Q3

Q4

Q1

Q2

Q3

Q4

Commodity Indices

S&P GSCI Commodity Index

416

430

413

419

409

410

418

426

432

Bloomberg Commodity Index

341

344

339

340

340

340

345

345

350

 

Energy

Crude Oil (Brent) (US$ per barrel)

64

67

63

65

62

61

63

65

65

Crude Oil (WTI) (US$ per barrel)

55

59

56

57

56

56

58

60

62

US Natural Gas (US$ per mBtu)

2.88

2.49

2.28

2.45

2.80

3.00

2.90

2.90

3.15

Spot Asian LNG (US$ per mBtu)

6.88

4.60

4.60

5.15

6.35

5.60

4.50

5.25

6.50

Coal (Rotterdam, US$ per tonne)

76

60

58

54

63

65

63

61

60

Coal (Newcastle, US$ per tonne)

97

82

74

73

78

80

80

79

77

 

Industrial Metals (US$ per tonne)

Alumina

414

401

370

381

350

340

340

345

355

Aluminium

1,862

1,836

1,836

1,752

1,688

1,650

1,675

1,725

1,775

Cobalt

35,164

29,300

27,592

27,550

25,750

26,875

30,625

34,375

38,125

Copper

6,216

6,234

5,971

5,991

6,000

6,100

6,300

6,500

6,700

Iron Ore

82

101

121

109

90

78

73

70

70

Lead

2,034

1,959

2,049

1,909

1,850

1,813

1,838

1,863

1,888

Nickel

12,365

12,757

14,817

12,809

12,000

11,125

11,375

11,625

11,875

Tin

21,002

20,140

17,811

18,542

18,375

18,625

18,875

19,125

19,375

US Steel (HR Coil, Sh. ton)

695

605

556

528

530

513

488

475

488

Chinese Steel (Rebar, RMB per tonne)

4,067

4,175

4,237

4,006

3,650

3,375

3,125

2,875

2,675

Zinc

2,704

2,782

2,456

2,483

2,350

2,300

2,300

2,300

2,300

 

Precious Metals (US$ per troy ounce)

Gold

1,303

1,351

1,437

1,405

1,400

1,393

1,380

1,368

1,355

Silver

15.56

15.22

16.30

15.65

16.00

15.88

15.63

15.38

15.13

Platinum

820

860

857

842

850

868

905

950

988

Palladium

1,431

1,461

1,525

1,469

1,350

1,325

1,375

1,425

1,475

Rhodium

2,730

2,820

3,540

3,145

2,850

2,725

2,775

2,825

2,875

Agriculturals

Cocoa (US$ per tonne)

2,256

2,365

2,465

2,450

2,438

2,425

2,438

2,463

2,488

Arabica coffee (USc per Ib)

99

101

107

108

109

110

110

108

103

Robusta coffee (US$ per tonne)

1,514

1,439

1,393

1,436

1,475

1,525

1,550

1,538

1,513

Corn (USc per bushel)

373

388

426

435

455

455

445

433

418

Cotton (Cotlook A, USc per Ib)

82

81

74

76

75

76

77

78

79

Lumber (N.Am. US$ per 1,000 bd ft)

380

370

335

354

315

305

318

333

345

Palm Oil (MYR per tonne)

2,094

1,933

1,905

1,883

1,950

2,025

2,075

2,125

2,175

Rice (Thai white, US$ per tonne)

452

468

462

471

468

470

473

478

483

Soybeans (USc per bushel)

905

892

887

892

880

873

868

863

855

Sugar (No.11, USc per lb)

12.69

12.43

11.62

12.41

12.63

12.88

13.13

13.38

13.63

Wheat (USc per bushel)

490

493

497

514

488

468

450

438

433

Sources: Refinitiv, Bloomberg, Capital Economics

Economic and Financial Backdrop

Global economy to slow and trade war to intensify

  • The global slowdown has further to go and we expect 2020 to be the worst year for annual world GDP growth since 2009. The recovery into 2021 should be modest, leaving global growth subdued at around 3%.
  • Q1 global GDP growth came in a bit stronger than much of the monthly data had led us to believe, partly due to one-off factors. The world economy has since lost further momentum. Global industrial production has continued to weaken as the US manufacturing sector has entered recession, the boost from stimulus measures in China has petered out, while German industry has remained in the doldrums. What began as a manufacturing-led slowdown in the world economy has in recent months spread to the services sector. (See Chart 13.)
  • The near-term outlook for investment growth is poor. Admittedly, financial conditions have loosened since the start of the year and bank credit conditions are therefore likely to ease. But even though finance is becoming cheaper and easier to access, bank lending and business surveys reveal that firms’ appetite to invest has waned. As corporate earnings disappoint, and commodity prices stabilise or fall, investment intentions are unlikely to recover soon.
  • What’s more, after another short-lived truce, the trade war between the US and China will probably escalate. We expect the US to impose a 10% tariff on the $300bn of imports from China not already subject to tariffs this year and to raise that to 25% in 2020. China will retaliate with tariff hikes on remaining US exports and extend administrative restrictions to other goods. Combined with measures undertaken so far, the trade war is likely to leave global GDP 0.5% lower than it would have otherwise been by the end of 2020.

Chart 13: Markit Global PMIs

Chart 14: Hiring Intentions & Job Vacancies
in Major Advanced Economies*

Chart 15: Real Compensation of Employees &
Private Consumption in Advanced Economies (% y/y)

Chart 16: Oil Price & Energy Contribution to
OECD Headline CPI Inflation

Sources: Refinitiv, Markit, Capital Economics

Economic and Financial Backdrop (continued)

Weak growth and low inflation to prompt looser policy

  • More generally, private consumption growth is likely to decelerate in the coming quarters. Employment growth has already weakened to its slowest pace in six years in advanced economies. Falling job vacancies and softening hiring intentions (see Chart 14) suggest that jobs growth will slow further, and wage growth will stop accelerating. In turn, this should weigh on growth in labour incomes. (See Chart 15.)
  • As wage inflationary pressures ease and consumer demand softens, core inflation should stay low. And if oil prices remain roughly around their current level, as we expect, there should be a small drag on headline inflation from lower energy prices in the second half of 2019 and a broadly neutral effect over 2020 as a whole. (See Chart 16.)
  • Against a backdrop of weaker global growth and low core inflation, policymakers are likely to loosen monetary policy. (See Chart 17.) In addition to a 10 basis-point rate cut later this year, the ECB is likely to re-launch QE, with corporate bonds featuring more heavily than in the previous programme. Meanwhile, renewed growth concerns in China should prompt fiscal stimulus alongside looser monetary policy.
  • However, Chinese stimulus should do little more than temporarily stabilise growth by the turn of the year, and policy easing elsewhere should lay the ground for a modest global recovery starting only in 2020. (See Chart 18.) In the meantime, in contrast to consensus expectations, we expect global growth to slow to its slowest rate since 2009. (See Chart 19.)
  • World trade growth should remain subdued for the foreseeable future. Leading indicators point to near-zero growth in 2019 and a limited economic recovery will cap the potential for trade growth to rebound. (See Chart 20.)

Chart 17: Changes in Key Policy Interest Rates
by End-2020 (Basis points)

Chart 18: World GDP

Chart 19: World GDP Forecasts (% y/y)

Chart 20: World Trade Volumes & Leading Indicators

Sources: Refinitiv, Bloomberg, IATA, Capital Economics

Energy

Oil prices unlikely to recover lost ground

  • We expect that higher production and weaker demand growth will weigh on oil prices for the remainder of this year. In contrast, coal and natural gas prices should receive their typical seasonal uplift.
  • Despite warmer-than-usual weather in Europe and Asia, coal and natural gas prices have slumped in the past few months (see Chart 21) on the back of slower economic growth and ample supply. Meanwhile, even as geopolitical tensions surrounding Iran escalated, oil prices have also fallen.
  • Nonetheless, we expect the price of oil to ease back to $60 per barrel, by the end of this year for three key reasons. First, we think that global supply will increase, particularly from the US (see Chart 22) as new pipeline capacity comes on stream. What’s more, we suspect that Saudi Arabia, currently undershooting its OPEC+ quota, will produce more in an effort to offset the US sanctions-related loss of Iran’s exports.
  • Second, we expect global economic growth to remain subdued, leading to weak growth in oil consumption and a market surplus. (See Chart 23.) Third, we anticipate that global crude stocks will remain high and should continue to build. (See Chart 24.)
  • Admittedly, if there is a US-Iran war then we suspect that Iran will try to close the Strait of Hormuz. If it succeeds, then we would expect oil prices to surge to around $150 per barrel.
  • Further ahead, an uptick in risk appetite owing to the Fed’s shift towards a looser policy stance should lift prices. Our forecasts for the price of Brent are $65 and $68 per barrel by the end of 2020 and 2021, respectively.

Chart 21: Energy Prices (1st Jan. 2018 = 100)

Chart 22: US Oil Production (Mn. BpD)

Chart 23: Global Oil Market Fundamentals (Mn. BpD)

Chart 24: CE Estimate of Global Crude Stocks
(Mn. Barrels)

Sources: Refinitiv, EIA, IEA, NBS, PPAC, ANRE, Capital Economics

Energy (continued)

Lower natural gas and coal prices here to stay

  • The prices of both coal and natural gas have plunged in 2019. While a seasonal boost to prices is likely later in the year, ample supply looks set to limit any gains further ahead.
  • Despite the ongoing push towards cleaner fuels, and surging import demand from China and Europe, global gas prices have so far failed to emerge from their slump this year. (See Chart 25.) This has, above all, reflected surging global supply. Not only has record high US output put downward pressure on domestic gas prices, growing exports have also added to the glut of LNG exports worldwide. (See Chart 26.)
  • While gas prices are likely to receive a seasonal boost later this year, we nonetheless expect the price of spot Asia LNG to average just $5.8 per mBtu in 2019, down from $9.1 in 2018. What’s more, it is hard to see much of a pick-up in 2020 given the raft of US LNG export plants due to come online. However, given our positive view on the long-term outlook for demand, we see the market moving closer to balance in 2021, which should lift prices.
  • Coal prices have also fared poorly recently. Weak demand in coal-intensive economies such as China and Germany has played a part. But the fall in prices this year has been far sharper than trends in electricity generation would suggest. (See Chart 27.) That seems largely due to coal having to compete with significantly cheaper natural gas. (See Chart 28.)
  • Given the seasonal upturn in natural gas prices that we expect by year-end, we think that coal prices will receive a small boost too. But further ahead the outlook is bleak. Not only do we see countries continuing to pivot their energy mix towards cleaner fuels, but we also expect a structural slowdown in Chinese growth. Coal prices are therefore likely to continue to slide in 2020 and 2021.

Chart 25: Natural Gas Prices (US$ per mBtu)

Chart 26: Contribution to Annual Growth Rate of Global LNG Exports (%-pt)

Chart 27: CE Coal Demand Proxy & Price

Chart 28: European Coal & Natural Gas Prices

Sources: Refinitiv, BP, Fraunhofer Institute, Capital Economics

Industrial Metals

Demand in the driver’s seat this year

  • A negative reassessment of global growth prospects has been steering industrial metals prices lower in recent months. And we think there are further bumps ahead for most metals. (See Chart 29.) Crucially, we see China’s economy slowing further in the second half of this year, particularly as robust growth in construction activity starts to run out of steam.
  • Our forecast of a sharp fall in the S&P by end-2019, as earnings underwhelm and looser Fed policy fails to prevent weaker growth in the US, also bodes ill for metals prices. (See Chart 30.) What’s more, we don’t think the latest US-China trade truce will last. As such, dwindling demand growth and rising risk aversion are likely to lead to further falls in prices this year.
  • Further down the road, we are more positive on industrial metals prices. (See Chart 31.) Come 2020, we expect most major central banks to be in easing mode which should encourage an increase in risk appetite. What’s more, we think that global growth will rebound modestly by 2021, which should bolster demand.
  • As demand starts to pick up, the low levels of exchange stocks will become more of an issue for metals markets. Indeed, stocks of most base metals have plunged over the last year, and we expect that they will remain low. While this has so far failed to translate into higher prices, we think they could amplify any upward pressure on prices next year.
  • One exception is tin, where the typical inverse relationship between stocks and prices has held up well. (See Chart 32.) That said, we think that much of this owes to previously off-exchange stocks being moved onto exchanges, rather than surging supply. As such, we think tin prices could recover a little by end-2019.

Chart 29: Forecast Changes in Prices to End-2019
(%, as of 19th Jul.)

Chart 30: Rolling 6M Correlation of Daily Changes in the S&P 500 & the S&P GSCI Industrial Metals Index

Chart 31: Forecast Changes in Prices
in 2020 & 2021 (%)

Chart 32: Tin Exchange Stocks & Price

Sources: Bloomberg, Refinitiv, Capital Economics

Industrial Metals (continued)

Copper to weather the storm

  • The price of copper fell by nearly a tenth in Q2. Its close tracking of the renminbi against the US dollar reflects their common driver, namely China’s economic outlook. (See Chart 33.) However, we think that the copper price will prove more resilient than other metals in the remainder of 2019. This view hinges largely on constrained mine output, which we now expect to grow by just 0.5% this year. (See Chart 34.) In addition, China’s recent tightening of restrictions on scrap imports is also likely to boost demand for refined copper. Beyond 2019, a limited pipeline of new mines and expansions should continue to support prices.
  • Meanwhile, the price of iron ore has extended its rally after breaching $100 per tonne in May, as substantial disruption to output has coincided with a surge in demand from China’s steel sector. This has prompted an increase in our forecast for China’s iron ore demand in 2019 of almost 40 million tonnes. What’s more, delays to the restart of the Brucutu mine in Brazil have led us to cut our annual production forecast. As a result, we now expect a sizeable market deficit this year. (See Chart 35.) However, we don’t see iron ore prices being sustained at current levels for much longer as production restarts continue and construction activity in China softens.
  • Strong construction demand has also bolstered Chinese steel rebar prices. But we think that the recent downturn in land sales is a clear sign that construction growth should start to tail off in the coming months. (See Chart 36.) We anticipate that the weakness will continue into 2020-21. This, coupled with the direct and indirect effects of our call that there will be a renewed escalation in US-China trade tensions, should mean that the prices of iron ore and Chinese steel fare poorly.

Chart 33: LME Copper Prices & RMB/US Dollar

Chart 34: Copper Mine Supply Growth (% y/y)

Chart 35: Iron Ore Market Balance &
Iron Ore Price Change

Chart 36: China Land Sales & Construction Starts (Sqm, 3m/3m, % y/y)

Sources: Bloomberg, Refinitiv, ICSG, Capital Economics

Precious Metals

Gold’s six-year price high to prove temporary

  • The price of gold has picked up strongly since late May as concerns about weak global growth, and rising geopolitical tensions in the Middle East, encouraged demand for safe havens. (See Chart 37.) In addition, investment demand has been spurred by an explosion in negative yielding debt (see Chart 38) and there has been stellar demand from central banks. What’s more, we forecast a sharp drop in global equity prices this year which should further boost demand for safe havens.
  • However, we think that gold prices will still stagnate over the remainder of 2019 as they face two headwinds that offset the bullish factors. Crucially, the market should start to price in a shallower rate of US Fed cuts. Moreover, we expect Asian physical demand to dwindle given the rise in prices and the recent increase in India’s duty on gold imports. (See Chart 39.)
  • From next year, we suspect that the price of gold will decline as the Fed’s looser monetary stance prompts a return of investor risk appetite, and a cyclical recovery in the US economy.
  • Meanwhile, silver has been caught in the cross currents of concerns over industrial demand and rising investor demand this year. However, we expect falling equities to spark enough safe-haven demand for prices to be well supported in the remainder of 2019. As such, we suspect that silver prices will outperform most industrial metals this year. Furthermore, the gold-silver price ratio, which has surpassed a 26-year high, should ease back. (See Chart 40.)
  • In conclusion, we think that the prices of gold and silver will end 2019 at around $1,400 and $16.00 per ounce respectively. Thereafter, we see the prices of gold and silver easing to $1,250 and $15.00 by end-2021 respectively.

Chart 37: Japanese Yen/Dollar Exchange Rate
& Gold Price

Chart 38: Negative Yielding Debt & Gold Price

Chart 39: India Gold Imports (Mn. Ounces)

Chart 40: Gold/Silver Price Ratio

Sources: Bloomberg, Refinitiv, ICSG, Capital Economics

Agriculturals

High stocks to weigh on wheat prices

  • Despite the ongoing spread of African Swine Fever (ASF), the prices of the major grains rose in the second quarter, owing primarily to wet weather in the US. We are downbeat on the outlook for wheat prices for the rest of this year as high stocks should weigh on prices. That said, corn prices should hold steady owing to lower supply.
  • Elsewhere, the push by governments to reduce carbon dioxide emissions will provide support to some tropical commodities, including sugar and palm oil. (See Chart 41.) The possibility of a US-China trade deal and the spread of fall armyworm in Asia are the biggest upside risks to our forecasts.
  • Starting with wheat, the Q2 heatwaves in Europe and Asia prompted fears of reduced supply. But we still think that global output, boosted by Black Sea producers, will increase in 2019-20, moving the market into a surplus (see Chart 42) which would dampen prices. In 2020, the supply picture is uncertain, but high stocks suggest that prices will fall.
  • Turning to corn, the recent flooding in the US will mean that supply falls there, supporting prices in 2019. What’s more, the ongoing spread of fall armyworm poses an upside risk to our forecasts. Looking ahead, we expect consumption to decline as ASF reduces the need for pigfeed. This should result in the stocks-to-consumption ratio remaining fairly high, weighing on prices. (See Chart 43.)
  • ASF will also curb soybean consumption and we think that it is unlikely that Chinese tariffs on US soybeans will be lifted. As a result, we expect soybean prices to tick down this year and next. However in the coming seasons, US farmers are likely to switch production away from soybeans (see Chart 44), and we suspect that this will eventually put a floor under prices.

Chart 41: Forecast Changes in Prices
(%, as of 19th July)

Chart 42: Wheat Market Surplus (Mn. Tonnes)

Chart 43: Corn Stocks & Stocks-to-Consumption Ratio

Chart 44: Soybean Market Balance (Mn. Tonnes)

Sources: Bloomberg, Refinitiv, ICSG, Capital Economics

Agriculturals (continued)

Government efforts to support farmers won’t boost cocoa prices

  • Weak US housing starts, in part owing to labour shortages within the construction industry, and our forecast of a 6% fall in the Canadian dollar are why we are downbeat on lumber prices this year. However, given that we expect a pick-up in housing starts next year, particularly of the more lumber-intensive single-family units (see Chart 45), and a modest appreciation of the loonie, we forecast an uptick in the lumber price by end-2020.
  • Meanwhile, we think that the price of coffee will rise slightly over the next year as it is the ‘off-year’ for Brazilian production. The risk of heavy frost in Brazil is the biggest upside risk to our coffee price forecast in the 2019-20 season. Looking ahead, relatively low coffee prices are likely to deter production in the coming seasons. Even so, we expect a larger market surplus in 2020-21 (see Chart 46) owing to a recovery in output from Brazil and higher production elsewhere, notably Ethiopia. As such, arabica coffee prices should fall in 2020.
  • Elsewhere, we forecast that cocoa prices will fall a touch in the coming months owing to subdued demand growth. As prices are low, the Ivory Coast and Ghana, the world’s two largest producers (see Chart 47), are planning to enact policies to support farmers. While the details of the proposals aren’t yet clear, we suspect that they are likely to incentivise supply and could pose a downside risk to our price forecasts.
  • We forecast that the price of palm oil will hold steady for the remainder of this year as resilient demand offsets high stocks. (See Chart 48.) However, next year, we think that the price of palm oil will track the oil price higher.
  • Finally, we expect sugar prices to rise a little over the next couple of years, as Brazil’s ethanol industry continues to absorb more sugarcane.

Chart 45: Annual Growth in US Housing Starts (%)

Chart 46: Coffee Market Balance (Mn. 60kg Bags)

Chart 47: World Cocoa Production (%, 2018)

Chart 48: Malaysia Palm Oil Stocks

Sources: USDA, ICCO, MPOB, Refinitiv, Bloomberg, CE

Long-Term Commodities Outlook

Global oil demand to peak

  • Slower global economic growth and rapidly rising fuel efficiency mean that growth in oil demand will slow and will eventually peak over the next twenty years. At the same time, plentiful oil reserves mean that supply should be ample. As a result, we expect real oil prices to trend down over the next two decades. (See Chart 49.)
  • Global oil consumption has been rising by an annual average of around 1.4% since 2000. But we expect a considerably slower pace of growth over the coming decades. Advances in engine technology and lighter materials mean that fuel efficiency in all forms of transport should improve.
  • In addition, we expect rapid growth (admittedly from a low base) in electric, and other types of alternatively-fuelled, vehicles. This should more than offset the expected growth in transport demand in emerging markets in 2020-40.
  • Declining global economic growth will also weigh on oil demand. (See Chart 50.) This is particularly the case as future economic growth is likely to be driven more by services and technology, which will not necessarily result in a proportionate increase in oil demand. The upshot is that we expect global oil demand to peak at just under 115m bpd in 2035, up from around 100m bpd today, before starting to fall.
  • There is more than enough oil in underground reserves to meet this level of demand. Once growth in consumption starts to weaken, OPEC is likely to ramp up output to prevent significant amounts of its oil reserves being left underground. What’s more, the continued increases in shale oil production in the US, and the transfer of this technology to other countries, should make oil supply much more responsive to changes in prices. Indeed, the marginal cost of production is likely to fall as advances in shale technology force more expensive forms of supply out of the market. In this scenario, we expect OPEC (if it is still in existence) to be losing its pricing power.
  • Stagnating demand, ample output and lower marginal costs should all contribute to lower oil prices. We estimate that the real price of Brent will fall to $47 per barrel (in 2018 prices) by 2040, down from just over $60 today.
  • In contrast, we think growth in the green economy will support global demand for copper over the forecast period and more than offset the negative impact of slower, and more services-intensive, growth in China (the largest consumer by far). Both renewable energy and electric vehicles are copper intensive. At the same time, the current project pipeline for copper mine supply looks thin, pointing to higher prices over the next decade. (See Chart 51.) In the longer term, we think that supply will pick up to meet demand, and that the real price of copper will ease back.
  • The long-term outlook for agricultural commodity prices is particularly uncertain given that climate change may have an adverse effect on production. Our forecast for wheat assumes a somewhat lower level of supply growth but this is, at least in part, due to softer growth in demand.
  • Slower global population growth and rising real incomes will probably mean only sluggish growth in demand for staple foods, such as wheat. (See Chart 52.) From mid-2020, we expect real wheat prices to be falling.

Charts

Chart 49: Real & Nominal Oil Prices (Brent, US$ per Barrel)

Chart 50: Growth in GDP & Oil Demand (% y/y)

Chart 51: Copper Market Balance & Real Copper Price

Chart 52: Global Wheat Consumption & Real Wheat Price

Sources: BP, ICSG, USDA, Capital Economics

Key Forecasts (Averages)

2000-2007

2008-2012

2013-2017

2018-2022

2023-2027

2028-2037

Oil

Nominal oil price (US$ per barrel)

39.7

92.5

72.2

67.0

69.0

69.0

Real oil price (US$ per barrel)

58.9

110.3

77.8

64.0

59.0

50.0

Nominal oil price (% y/y)

20.9

13.4

-10.3

5.4

-0.1

0.7

Real oil price (% y/y)

18.0

10.2

-12.2

3.0

-2.3

-1.5

Copper

Nominal copper price (US$ per tonne)

3,395

7,291

6,150

6,795

9,345

9,265

Real copper price (US$ per tonne)

4,675

8,706

6,588

6,475

7,985

6,705

Nominal copper price (% y/y)

24.2

4.9

-3.8

5.0

4.4

0.3

Real copper price (% y/y)

21.2

2.1

-5.8

2.6

2.1

-1.9

Wheat

Nominal wheat price (US cents per bushel)

362

673

530

465

515

550

Real wheat price (US cents per bushel)

507

806

569

450

440

400

Nominal wheat price (% y/y)

13.5

5.8

-10.1

1.4

3.2

0.8

Real wheat price (% y/y)

10.7

2.9

-12.0

-1.0

0.9

-1.4

Long-Term Forecast Summary

Table 3: Key Forecasts – End-Period

Actual

Forecasts

2015

2016

2017

2018

2019

2020

2021

2025

Commodity Indices

S&P GSCI Commodity Index

312

398

442

374

405

435

455

495

Bloomberg Commodity Index

271

334

359

321

340

350

365

415

 

Energy

Crude Oil (Brent) (US$ per barrel)

37

57

67

54

60

65

68

70

Crude Oil (WTI) (US$ per barrel)

37

54

60

45

55

62

65

70

US Natural Gas (US$ per mBtu)

2.30

3.70

3.00

2.90

3.00

3.30

3.50

5.00

Spot Asian LNG (US$ per mBtu)

6.90

9.50

11.20

9.10

7.20

7.50

8.50

11.00

Coal (Rotterdam, US$ per tonne)

48

90

95

87

65

60

55

40

Coal (Newcastle, US$ per tonne)

51

88

101

102

80

75

70

60

 

Industrial Metals (US$ per tonne)

Alumina

250

428

439

427

340

360

390

425

Aluminium

1,500

1,704

2,256

1,863

1,650

1,800

2,000

2,300

Cobalt

23,950

32,734

75,205

55,000

25,000

40,000

50,000

60,000

Copper

4,706

5,523

7,207

5,949

6,000

6,800

7,500

9,900

Iron Ore

44

79

73

73

80

70

65

60

Lead

1,797

2,000

2,485

2,007

1,800

1,900

2,000

1,600

Nickel

8,780

9,964

12,706

10,605

11,000

12,000

13,500

16,000

Tin

14,591

21,205

20,096

19,520

18,500

19,500

21,000

25,000

US Steel (HR Coil, Sh. ton)

379

588

647

740

525

500

550

600

Chinese Steel (Rebar, RMB per tonne)

2,001

3,341

4,511

4,031

3,500

2,600

2,400

2,250

Zinc

1,593

2,558

3,338

2,519

2,300

2,300

2,400

2,200

 

Precious Metals (US$ per troy ounce)

Gold

1,061

1,151

1,302

1,283

1,400

1,350

1,250

1,350

Silver

13.83

15.93

16.95

15.48

16.00

15.00

15.00

16.00

Platinum

891

900

924

792

850

1,000

1,100

1,150

Palladium

562

679

1,061

1,261

1,300

1,500

1,600

1,300

Rhodium

630

760

1,705

2,450

2,700

2,900

3,000

2,500

 

Agriculturals

Cocoa (US$ per tonne)

3,211

2,126

1,892

2,416

2,425

2,500

2,560

3,000

Arabica coffee (USc per Ib)

127

137

126

102

110

100

115

130

Robusta coffee (US$ per tonne)

1,491

2,159

1,714

1,506

1,500

1,500

1,600

1,500

Corn (USc per bushel)

359

352

351

375

460

410

420

450

Cotton (Cotlook A, USc per Ib)

71

79

90

81

75

80

90

94

Lumber (N.Am. US$ per 1,000 bd ft)

258

317

448

333

300

350

400

445

Palm Oil (MYR per tonne)

2,398

3,218

2,444

2,004

2,000

2,200

2,400

2,650

Rice (Thai white, US$ per tonne)

390

395

449

440

470

485

460

485

Soybeans (USc per bushel)

871

997

952

883

875

850

900

1,000

Sugar (No.11, USc per lb)

15.24

19.51

15.16

12.03

12.75

13.75

14.25

17.00

Wheat (USc per bushel)

470

408

427

503

475

430

450

525

Sources: Refinitiv, Bloomberg, Capital Economics

Long-Term Forecast Summary (Continued)

Table 4: Key Forecasts – Annual Average

Actual

Forecasts

2015

2016

2017

2018

2019

2020

2021

2025

Commodity Indices

S&P GSCI Commodity Index

388

348

393

456

420

420

445

495

Bloomberg Commodity Index

312

303

336

357

340

345

355

415

 

Energy

Crude Oil (Brent) (US$ per barrel)

54

45

55

72

65

63

67

70

Crude Oil (WTI) (US$ per barrel)

49

45

55

357

57

59

64

70

US Natural Gas (US$ per mBtu)

2.60

2.60

3.00

3.10

2.70

3.00

3.20

5.00

Spot Asian LNG (US$ per mBtu)

7.50

5.70

7.10

9.70

5.80

5.50

6.50

11.00

Coal (Rotterdam, US$ per tonne)

57

66

88

10

63

62

57

40

Coal (Newcastle, US$ per tonne)

59

6

7

60

82

79

73

60

 

Industrial Metals (US$ per tonne)

Alumina

377

310

431

452

385

345

380

425

Aluminium

1,664

1,605

1,969

2,108

1,775

1,700

1,900

2,300

Cobalt

28,438

25,491

55,952

72,920

29,500

32,500

47,000

60,000

Copper

5,509

4,871

6,174

6,527

6,100

6,400

7,150

9,900

Iron Ore

56

58

71

70

96

73

68

60

Lead

1,787

1,867

2,314

2,239

1,950

1,850

1,950

1,600

Nickel

11,835

9,597

10,416

13,110

12,500

11,500

12,650

16,000

Tin

16,053

17,961

20,064

20,134

19,500

19,000

20,400

25,000

US Steel (HR Coil, Sh. ton)

458

522

622

833

590

490

525

600

Chinese Steel (Rebar, RMB per tonne)

2,324

2,611

4,033

4,343

3,975

3,025

2,500

2,250

Zinc

1,929

2,093

2,892

2,920

2,575

2,300

2,350

2,200

 

Precious Metals (US$ per troy ounce)

Gold

1,159

1,248

1,258

1,269

1,375

1,375

1,300

1,350

Silver

15.68

17.09

17.04

15.68

15.60

15.50

15.40

16.00

Platinum

1,051

985

947

877

845

930

1,050

1,150

Palladium

688

612

869

1,028

1,425

1,400

1,550

1,300

Rhodium

947

681

1,095

2,209

2,875

2,800

2,950

2,500

 

Agriculturals

Cocoa (US$ per tonne)

3,092

2,852

2,005

2,307

2,400

2,450

2,550

3,000

Arabica coffee (USc per Ib)

133

136

133

113

105

110

110

130

Robusta coffee (US$ per tonne)

1,713

1,737

2,035

1,692

1,475

1,525

1,550

1,500

Corn (USc per bushel)

377

358

359

368

415

440

415

450

Cotton (Cotlook A, USc per Ib)

70

74

84

91

79

77

85

94

Lumber (N.Am. US$ per 1,000 bd ft)

269

299

385

462

355

325

375

445

Palm Oil (MYR per tonne)

2,191

2,657

2,786

2,252

1,975

2,100

2,275

2,650

Rice (Thai white, US$ per tonne)

421

420

431

462

465

475

470

485

Soybeans (USc per bushel)

945

988

976

932

900

875

875

1,000

Sugar (No.11, USc per lb)

13.14

18.16

15.80

12.26

12.55

13.25

14.00

17.00

Wheat (USc per bushel)

508

436

436

495

495

445

440

525

Sources: Refinitiv, Bloomberg, Capital Economics


Caroline Bain, Chief Commodities Economist, +44 20 7808 4055, caroline.bain@capitaleconomics.com
Ross Strachan, Senior Commodities Economist, +44 20 7808 4058, ross.strachan@capitaleconomics.com
Samuel Burman, Assistant Commodities Economist, +44 20 7811 3911, samuel.burman@capitaleconomics.com
Kieran Clancy, Assistant Commodities Economist, +44 20 3974 7422, kieran.clancy@capitaleconomics.com
Oliver Allen, Assistant Economist, +44 20 7811 3918, oliver.allen@capitaleconomics.com

Written by
Samuel Burman Assistant Commodities Economist
Samuel.Burman@capitaleconomics.com +44 (0)20 7811 3911
Kieran Clancy Commodities Economist
kieran.clancy@capitaleconomics.com +44 (0)20 3974 7422
Oliver Allen Assistant Economist
oliver.allen@capitaleconomics.com +44 (0)20 7811 3918