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Sky-high commodity prices on borrowed time

  • Overview – Supply shortages have directly pushed up the prices of energy commodities and have indirectly raised prices of other commodities by boosting production costs. We think this will remain the case for at least another few months. But as we move away from winter in the Northern Hemisphere and these supply shortages ease, we forecast that commodity prices will fall across the board.
  • In the oil market, a rise in both OPEC+ and US supply will be the main factor dragging prices lower, while subdued Chinese demand will be the key factor weighing on the prices of industrial metals. Meanwhile, we now expect the Fed to raise interest rates four times this year, which should mean that the recent move higher in real yields is sustained. Consequently, we are also negative on the outlook for the gold price.
  • Short-term Forecasts – Quarterly average and end-period projections to Q4 2023.
  • Global Economic Backdrop Growth set to disappoint, but rates will rise regardless.
  • Energy – Energy prices to fall, but by less than we previously expected.
  • Metals – Boost to prices from supply crunch to give way to weaker demand.
  • Agriculturals – Supply to pick up in 2022-23.
  • Long-term Commodities Outlook – Meaningful boost to demand from green economy still several years away.
  • Long-term Forecasts – Annual average and end-period projections to 2025.

Overview

Sky-high commodity prices on borrowed time

  • Following an impressive run in 2020-21, we expect the prices of most commodities to fall back from their extreme highs this year. Energy supply shortages are likely to ease from here, and demand growth should slow further as the post-lockdown rebound in the global economy fades. Together with higher interest rates and a slightly stronger US dollar, this will increasingly weigh on commodity prices.
  • Energy prices were the star performers of 2021 (see Chart 1), with major gains in the prices of crude oil and coal and an unprecedented surge in European natural gas prices. Commodity prices also benefitted from a favourable backdrop in financial markets last year, with strong gains in US equities (see Chart 2) and a depreciation in the US dollar. (See Chart 3.)
  • However, both trends are likely to turn against commodities in 2022. We expect four rate hikes from the Fed in 2022, starting in March, leading to higher yields on US Treasuries and, consequently, a somewhat stronger US dollar. This should also mean that global equity prices experience limited gains from here.
  • At the same time, we anticipate that the oil market will move into a surplus this year, allowing currently low inventories to be rebuilt. (See Chart 4.) On the supply side, OPEC should continue to raise output, even if it falls short of target, and we expect steady increases in US production. Meanwhile, we also expect oil demand growth to slow as the boost provided by economies emerging from virus-related lockdowns fades. (See Chart 5.)
  • We are also negative on the outlook for industrial metals prices. We expect demand in China to remain subdued this year, as the downturn in the metals-intensive construction sector deepens.
  • Admittedly, industrial metals prices were unusually resilient in 2021 despite softer Chinese demand (see Chart 6), as supply disruptions led to falling exchange stocks and spiralling energy prices raised the cost of production (and in some cases led to the suspension of production).
  • However, these disruptions to metals supply should ease this year as energy availability begins to improve. We think industrial metals prices could fall particularly sharply when this happens, not least as the marginal cost of production will fall dramatically.
  • Meanwhile, we doubt that the gold price will be able to shrug off higher US real yields and a drop-off in investment demand for much longer. (See Chart 7.) That said, gold prices should still outperform silver prices, as silver faces an additional drag in the form of weaker industrial demand.
  • Finally, we think that the prices of most agricultural commodities will also decline in 2022. If we are right and energy prices fall, this will lead to lower agricultural production costs. We also assume that the price rises of 2020-21 will incentivise planting. And while investors have already begun to unwind their net-long position in agricultural futures markets over the last year or so, it remains high by past standards. (See Chart 8.) What’s more, if there is a repeat of the widespread adverse and unseasonal weather that weighed heavily on agricultural commodity supply last year, we may have to revise up our price forecasts.

Chart 1: S&P GSCI Sub-Indices (1st Jan. 2020 = 100)

Chart 2: S&P GSCI & US Equities

chart001-262.pngchart002-192.png

Chart 3: S&P GSCI & Trade-Weighted US$

Chart 4: OECD Crude Oil Stocks* (Mn. Barrels)

chart003-116.pngchart004-103.png

Chart 5: Global Oil Consumption (% y/y)

Chart 6: China Manufacturing PMIs &
S&P GSCI Industrial Metals

chart005-59.pngchart006-56.png

Chart 7: SDPR Gold ETF Holdings & Gold Price

Chart 8: S&P GSCI Agricultural &
Non-Commercial Net Long Futures Position

chart007-50.pngchart008-47.png

Sources: Refinitiv, EIA, IEA, BP, IHS Markit, Capital Economics


Short-term Forecasts

Table 1: Key Forecasts – End-Period

2022

2023

Latest (26th Jan.)

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Commodity Indices

S&P GSCI Commodity Index

611

565

535

505

480

470

460

450

440

Bloomberg Commodity Index

535

500

465

440

420

410

400

390

380

Energy

Crude Oil (Brent) (US$ per barrel)

89

80

78

74

70

69

68

66

65

Crude Oil (WTI) (US$ per barrel)

86

78

76

72

68

67

66

64

63

US Natural Gas (US$ per mBtu)

4.3

4.0

3.0

3.0

3.5

3.4

3.4

3.3

3.3

Spot Asian LNG (US$ per mBtu)

26.0

28.0

24.0

20.0

16.0

15.0

14.0

13.0

12.0

European Natural Gas (€ per MWh)

91.2

70.0

60.0

50.0

40.0

37.5

35.0

32.5

30.0

Coal (Rotterdam, US$ per tonne)

166

140

120

100

85

79

73

66

60

Coal (Newcastle, US$ per tonne)

227

180

160

145

100

94

88

81

75

Industrial Metals (US$ per tonne)

Alumina

357

340

329

318

300

295

290

285

280

Aluminium

3,104

2,950

2,700

2,550

2,400

2,300

2,200

2,100

2,000

Cobalt

70,704

67,600

65,100

62,600

60,000

62,500

65,000

67,500

70,000

Copper

9,836

9,500

9,200

8,900

8,500

8,250

8,000

7,750

7,500

Iron Ore

136

108

96

83

70

65

60

55

50

Lead

2,345

2,300

2,215

2,130

2,000

1,950

1,900

1,850

1,800

Nickel

22,604

21,000

20,300

19,600

18,000

17,500

17,000

16,500

16,000

Tin

41,821

39,000

36,700

34,400

30,000

29,000

28,000

27,000

26,000

US Steel (HRC, Sh. ton)

1,340

1,475

1,375

1,275

1,200

1,100

1,000

900

800

European Steel (HRC, € per tonne)

925

850

800

750

700

650

600

550

500

Chinese Steel (HRC, RMB per tonne)

4,904

4,550

4,375

4,200

4,000

3,875

3,750

3,625

3,500

Zinc

3,598

3,400

3,205

3,010

2,800

2,700

2,600

2,500

2,400

Precious Metals (US$ per troy ounce)

Gold

1,844

1,770

1,715

1,660

1,600

1,590

1,580

1,570

1,550

Silver

23.9

22.2

21.1

20.1

19.0

18.9

18.8

18.6

18.5

Platinum

1,044

945

930

915

900

875

850

825

800

Palladium

2,265

1,800

1,850

1,900

2,000

2,100

2,200

2,300

2,400

Agriculturals

Cocoa (US$ per tonne)

2,526

2,500

2,475

2,450

2,400

2,430

2,460

2,490

2,500

Arabica coffee (USc per Ib)

240

230

200

175

150

145

140

135

130

Robusta coffee (US$ per tonne)

2,230

2,300

2,000

1,900

1,800

1,688

1,575

1,463

1,350

Corn (USc per bushel)

617

580

545

500

450

450

450

450

450

Cotton (Cotlook A, USc per Ib)

135

125

110

100

85

85

86

86

86

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

1,054

1,000

800

700

600

575

550

525

500

Natural Rubber (SMR 20, USc per kg)

176

175

166

157

140

138

135

133

130

Palm Oil (MYR per tonne)

5,506

5,000

4,650

4,300

3,750

3,500

3,250

3,000

2,750

Rice (Thai white, US$ per tonne)

472

450

430

425

400

419

438

456

475

Soybeans (USc per bushel)

1,406

1,250

1,175

1,100

1,000

975

950

925

900

Sugar (No.11, USc per lb)

18.7

18.0

17.0

16.0

15.0

14.8

14.5

14.3

14.0

Wheat (USc per bushel)

803

750

700

650

600

575

550

525

500

Sources: Refinitiv, Bloomberg, Capital Economics, *Iron Ore, Chinese Steel, Cotton and Rice latest prices are 25th Jan. 2022

Table 2: Key Forecasts – Quarterly Average

2022

2023

Latest (25th Jan.)

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Commodity Indices

S&P GSCI Commodity Index

611

563

550

520

493

475

465

455

445

Bloomberg Commodity Index

535

501

483

453

430

415

405

395

385

Energy

Crude Oil (Brent) (US$ per barrel)

89

79

79

76

72

69

68

67

66

Crude Oil (WTI) (US$ per barrel)

86

77

77

74

70

67

66

65

64

US Natural Gas (US$ per mBtu)

4.3

3.9

3.5

3.0

3.3

3.5

3.4

3.3

3.3

Spot Asian LNG (US$ per mBtu)

26.0

29.2

26.0

22.0

18.0

15.5

14.5

13.5

12.5

European Natural Gas (€ per MWh)

91.2

70.2

65.0

55.0

45.0

38.8

36.3

33.8

31.3

Coal (Rotterdam, US$ per tonne)

166

139

130

110

93

82

76

69

63

Coal (Newcastle, US$ per tonne)

227

175

170

153

123

97

91

84

78

Industrial Metals (US$ per tonne)

Alumina

357

342

334

323

309

298

293

288

283

Aluminium

3,104

2,878

2,825

2,625

2,475

2,350

2,250

2,150

2,050

Cobalt

70,704

68,897

66,350

63,850

61,300

61,250

63,750

66,250

68,750

Copper

9,836

9,620

9,350

9,050

8,700

8,375

8,125

7,875

7,625

Iron Ore

136

115

102

89

76

68

63

58

53

Lead

2,345

2,319

2,258

2,173

2,065

1,975

1,925

1,875

1,825

Nickel

22,604

20,940

20,650

19,950

18,800

17,750

17,250

16,750

16,250

Tin

41,821

39,187

37,850

35,550

32,200

29,500

28,500

27,500

26,500

US Steel (HRC, Sh. ton)

1,340

1,514

1,425

1,325

1,238

1,150

1,050

950

850

European Steel (HRC, € per tonne)

925

877

825

775

725

675

625

575

525

Chinese Steel (HRC, RMB per tonne)

4,904

4,640

4,463

4,288

4,100

3,938

3,813

3,688

3,563

Zinc

3,598

3,495

3,303

3,108

2,905

2,750

2,650

2,550

2,450

Precious Metals (US$ per troy ounce)

Gold

1,844

1,799

1,743

1,688

1,630

1,595

1,585

1,575

1,560

Silver

23.9

22.7

21.7

20.6

19.5

18.9

18.8

18.7

18.6

Platinum

1,044

954

938

923

908

888

863

838

813

Palladium

2,265

1,846

1,825

1,875

1,950

2,050

2,150

2,250

2,350

Agriculturals

Cocoa (US$ per tonne)

2,526

2,510

2,488

2,463

2,425

2,415

2,445

2,475

2,495

Arabica coffee (USc per Ib)

240

228

215

188

163

148

143

138

133

Robusta coffee (US$ per tonne)

2,230

2,394

2,150

1,950

1,850

1,744

1,631

1,519

1,406

Corn (USc per bushel)

617

587

563

523

475

450

450

450

450

Cotton (Cotlook A, USc per Ib)

135

126

118

105

93

85

85

86

86

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

1,054

1,074

900

750

650

588

563

538

513

Natural Rubber (SMR 20, USc per kg)

176

175

171

162

149

139

136

134

131

Palm Oil (MYR per tonne)

5,506

5,080

4,825

4,475

4,025

3,625

3,375

3,125

2,875

Rice (Thai white, US$ per tonne)

472

446

440

428

413

409

428

447

466

Soybeans (USc per bushel)

1,406

1,289

1,213

1,138

1,050

988

963

938

913

Sugar (No.11, USc per lb)

18.7

18.4

17.5

16.5

15.5

14.9

14.6

14.4

14.1

Wheat (USc per bushel)

803

760

725

675

625

588

563

538

513

Sources: Refinitiv, Bloomberg, Capital Economics, *Iron Ore, Chinese Steel, Cotton and Rice latest prices are 25th Jan. 2022


Global Economic Backdrop

Growth set to disappoint, but rates will rise regardless

  • The world economy has entered 2022 facing several headwinds. Once Omicron setbacks are overcome, shortages will ease only gradually, high inflation will erode purchasing power, fiscal policy will be less supportive, and higher interest rates will begin to bite. We expect recoveries in most major economies to slow this year, with growth disappointing consensus expectations in the US, euro-zone, and China.
  • In the run-up to Omicron, the recovery gained some pace. Industrial output rose meaningfully for the first time all year, the downward trend in trade seemed to abate, there were some big gains in retail sales, and surveys suggested that overall activity was growing at a decent clip. The global composite PMI rose to levels seen at the peaks of recent growth cycles. (See Chart 9.)
  • Omicron will take some steam out of the recovery. Consumer caution has risen, and chunks of the workforce are unable to work due to isolation. Fortunately, with few exceptions, restrictions haven’t been tightened much in response to the resurgence in cases. So, the hit to output should be limited to 1% in advanced economies, which is smaller than in previous waves. And with cases having peaked in some places (see Chart 10), the damage should fade quickly as some of the lost output is made up.
  • As economies normalise once again after the worst of the Omicron wave, there is still some scope for catch-up growth. GDP remains below trend almost everywhere (see Chart 11), with output in the pandemic-sensitive industries still well below pre-virus levels in DMs.
  • But three key factors will limit growth in 2022. First, while product shortages showed signs of easing in a couple of cases at the tail end of last year, the big picture is that they remain acute and will take time to unwind. (See Chart 12.)
  • Second, inflation will eat into purchasing power. Admittedly, tight labour markets should generate a pick-up in pay growth, and excess savings built up during lockdowns could also cushion the hit to spending. But pay is unlikely to pick up enough to meaningfully compensate for the higher cost of living. And lockdown savings accumulated largely to higher-income households, who have a lower propensity to run down their savings to fund consumption.
  • Third, fiscal and monetary conditions are set to become less accommodative. The fiscal give-aways of 2020 and 2021 are now in the rear-view mirror, and with inflation well above target in most major economies (see Chart 13), central banks are now in tightening mode. True, headline inflation rates will fall across the board this year due to a combination of base effects, fading ‘re-opening inflation’, and lower energy prices. But we expect underlying inflation to stay uncomfortably high for policymakers. This is especially true of the US, where the labour market is tightest and wage pressures strongest.
  • Tightening cycles in some EMs are already well advanced, and they will be joined increasingly by DM central banks, with the Fed lifting off in March and the ECB in early 2023. We think that investors are underestimating how far the Fed will hike rates but suspect that they won’t rise quite so far in some EMs. (See Chart 14.) China stands out as a major economy where interest rates are likely to fall further this year.
  • In all, we continue to forecast global growth to slow from about 6% last year to 4% this year and to 3.5% in 2023. This will take world GDP from being 3.5% below our pre-virus forecast currently to 2% by the end of next year. (See Chart 15.) Relative to other forecasters, we are more downbeat on the growth outlook in the world’s biggest economies. (See Chart 16.)

Chart 9: Global Composite PMI

Chart 10: Daily New COVID-19 Cases
(7d MA, Peak = 100)

chart009-37.pngchart010-37.png

Chart 11: % Difference in GDP from Trend in Q4 2021

Chart 12: CE G7 Shortages Indicators (Z-Scores)

chart011-37.pngchart012-37.png

Chart 13: Consumer Price Inflation* Less Central Bank Targets or Mid-Point of Target Range (%-pts)

Chart 14: CE End-2023 Forecasts for Policy Rate Less Overnight Rate Implied by Overnight Indexed Swaps (bp)

chart013-37.pngchart014-37.png

Chart 15: World GDP (International $, Trillions, Annualised, 2020 Prices & PPP Exchange Rates)

Chart 16: CE Less Consensus Forecasts for
GDP Growth in 2022 (%-pts)

chart015-34.pngchart016-34.png

Sources: Refinitiv, CEIC, IHS Markit, Bloomberg, Capital Economics


Energy

Energy prices to fall, but by less than we previously expected

  • We continue to forecast that energy prices will fall this year, but by less than we had previously anticipated. This is primarily because supply has been a little slower to respond than we expected, which has meant that stocks have declined substantially. As a result, even if supply continues to rise from here as we expect, a rebuilding of stocks should provide somewhat of a floor under prices this year.
  • Energy prices have had a strong start to the year. Coal prices in Asia have undergone a renewed surge following the decision by the Indonesian government to ban coal exports in January to shore up domestic supply, although the ban has since been eased. (See Chart 17.) Coal prices in Europe also rose, but by less because Europe is not as dependent on Indonesian coal. In any case, coal prices generally remain sensitive to renewed shocks to supply, given the low level of stocks available to be drawn down. (See Chart 18.)
  • European natural gas prices have been given a fresh boost by building tensions between Russia and Ukraine. This tension could ultimately lead to reduced Russian natural gas flows to Europe. But, for now, the uncertainty alone has boosted prices, especially given low stocks. (See Chart 19.)
  • Working against this upward pressure on European natural gas prices has been a surge in LNG imports into Europe. And exports from the US will continue to climb this year as new export facilities come online. (See Chart 20.) Strong LNG supply to Asia last year helped support LNG stocks in the region, with inventories at Japanese power plants now 20% above seasonal norms for this time of year. This has contributed to a sharp fall in Asia LNG spot prices recently.
  • Oil prices have also received a boost, owing to two key factors. First, fears that the Omicron wave would lead to a steep decline in oil demand have faded. And second, there have been several new supply disruptions, such as unrest in Libya causing a sharp decline in oil output there in December. In addition, OECD oil stocks are now below pre-pandemic levels.
  • A key factor behind our forecast for lower energy prices this year is our call that global economic growth will be weaker than the consensus expects, especially in the US and China. We forecast that global economic growth weighted by oil consumption will slow to 4.2% this year, down from 5.8% last year. Moreover, we expect investor risk appetite to wane as monetary and fiscal policy become less accommodative. Meanwhile, high prices should incentivise further additions to supply.
  • On oil, we expect global demand to rise by 3.0m bpd in 2022, down from an estimated increase of 5.3m bpd in 2021, while supply should rise by 6.6m bpd, up from a 1.3m-bpd gain in 2021. Over half of the increase in supply will come from the unwinding of the OPEC+ collective output cut. We don’t expect it to meet its target quotas, but the increase in output will still be substantial. (See Chart 22.) As a result, we think the global oil market will flip into a surplus. (See Chart 23.)
  • Turning to gas, we expect European natural gas prices to fall this year on weaker demand growth and improved supply. Prices in Asia and the US should also fall, but from much lower levels and less steeply because those regions have higher stocks. And while LNG export capacity should grow in the US, there’s still not enough global capacity to eliminate regional price differences. Finally, we think coal prices in Asia and Europe will fall on weaker demand growth, greater supply, and lower shipping costs. (See Chart 24.)

Chart 17: Change in Energy Prices (% Year-to-date*)

Chart 18: Coal Stocks at Chinese Ports*
in January (Mn. Tonnes)

chart017-34.pngchart018-34.png

Chart 19: Europe Natural Gas Stocks* (% Full)

Chart 20: US LNG Exports and Capacity*
(Bn. Cubic Feet per Day)

chart019-34.pngchart020-28.png

Chart 21: Global GDP and Oil Consumption Growth

Chart 22: OPEC Oil Production and Quotas* (Mn. Bpd)

chart021-28.pngchart022-27.png

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

Chart 24: Baltic Dry Index

chart023-28.pngchart024-28.png

Sources: Refinitiv, AGSI+, EIA, IEA, OPEC, Capital Economics


Metals

  • We expect industrial metals prices to stay elevated so long as high energy costs continue to weigh on supply. As a result, we have revised up our near-term forecast for industrial metal prices (see Chart 25) but continue to expect prices to retreat later in 2022 as power shortages ease, output rebounds, and demand from key consumer China remains soft.
  • Most industrial metal prices made gains through Q4 on the back of concerns that poor weather, high power costs and the Omicron variant would dent supply. A fall in exchange stocks (see Chart 26) has amplified these concerns and goes some way to explain the increase in investor net-long positions since the start of 2022. (See Chart 27.)
  • But at the same time, demand for metal has been softening. Chinese economic activity has continued to slow, led by weaker activity in the metals-intensive construction sector. We think this trend will continue despite new policies that will allow developers to access pre-sales money held in escrow, while is more likely to put a floor under activity than it is to lead to a renewed surge.
  • For now, though, the drag on metal prices from weaker Chinese demand has been more than offset by supply fears. And while energy prices remain high, there remains a risk of further curtailments to primary metal production.
  • The aluminium price is one of the most exposed prices to high power costs due to the energy-intensive nature of aluminium smelting. Power rationing in China in late 2021, as well as recent output cuts in Europe, saw daily average aluminium output trend down throughout 2021. (See Chart 28.) Yet, we think output is set to increase in 2022. Power rationing in China has now ended and output in Europe should rise once energy prices fall, allowing for higher capacity utilisation rates at smelters. Accordingly, we expect prices to fall.
  • Sky-high power prices have also impacted zinc production, particularly at smelters in Europe. Following Nyrstar’s announcement to reduce output, Glencore’s smelter at Porto Vesme (nameplate capacity of 100,000 tonnes per year) was placed into care and maintenance from end-December. While we expect these operations to return to full production once power prices fall, we now expect a smaller surplus of refined zinc in 2022. (See Chart 29.)
  • Low stocks of copper through the latter parts of 2021 helped to put a floor under prices, but recently stocks have started to rebuild. (See Chart 30.) The reopening of the Las Bambas mine in Peru, which accounts for over 2% of global copper ore output, is helping to shore up supply. What’s more, China’s imports of refined copper fell in 2021 as construction activity cooled. We expect this to continue and weigh on copper prices in 2022.
  • Chinese steel production fell by almost 3% in 2021, owing in part to government policies aimed at reducing excess steelmaking capacity. (See Chart 31.) And while we are unlikely to see such a severe drop in output this year, last year’s falls have already resulted in significantly lower demand for iron ore in China, which will depress seaborne prices.
  • Elsewhere, our forecast that the Fed will tighten monetary policy aggressively this year means that the recent rise in US real Treasury yields could be a sign of what’s to come. (See Chart 32.) As a result, we expect the gold price to fall to $1,600 by end-year.

Chart 25: S&P GSCI Industrial Metals

Chart 26: End-2021 Exchange Stocks
(LME, ShFE & COMEX, Mn. Tonnes)

chart025-28.pngchart026-26.png

Chart 27: S&P GSCI Industrial Metals &
Non-Commercial Net-Long Position

Chart 28: Global Daily Average Aluminium Ouput
(Th. Tonnes, Monthly)

chart027-26.pngchart028-26.png

Chart 29: Zinc Market Balance (Th. Tonnes)

Chart 30: Copper Stocks & Price

chart029-25.pngchart030-25.png

Chart 31: China Steel Output (Mn. Tonnes)

Chart 32: Gold Price & US 10Y TIPS Yield

chart031-25.pngchart032-24.png

Sources: Refinitiv, Bloomberg, WBMS, CEIC, Capital Economics


Agriculturals

Supply to pick up in 2022-23

  • After a good run in 2020-21, we expect the prices of most agricultural commodities to fall back in 2022-23 on the back of improved supply. (See Chart 33.) High prevailing prices in recent months will have incentivised farmers to increase planted area. Farmers may also have had more capital to invest in fertilisers and pesticides, which should boost yields. That said, the surge in natural gas prices and, by association, fertiliser prices may have acted as a constraint, notably in emerging economies.
  • On the demand side, we expect slower growth in feed demand – particularly in China – for the grains and soybeans. And we expect only subdued growth in demand from the biofuel sector to be a factor weighing on the prices of corn, sugar and palm oil.
  • The price of wheat has risen by 70% since its July 2020 low. The most recent leg-up in price probably reflects fears over escalating tensions between Russia and Ukraine, as together they account for 28% of global exports (2020).
  • Otherwise, the sharp downturn in North American production in 2021/22 owing to drought has also been boosting prices. And while global stocks are comfortable by any standards (see Chart 34), stocks in the main exporting countries have been falling. (See Chart 35.) And China’s massive stocks are unavailable to the international market.
  • However, all the signs are that wheat output will pick up in the coming season, while growth in demand, particularly in the feed sector, will be fairly subdued. Accordingly, we forecast that prices will fall sharply.
  • Our forecast of slower growth in feed demand is a factor underpinning our forecasts of lower prices for corn and soybeans too. China’s government is actively encouraging farmers to reduce the protein content of feed (typically very high in China) which will weigh on demand there. For soybeans, there could be an offsetting boost to demand from the latest US biofuel blending requirements which included a sharp increase in, mainly soy oil-based, biodiesel. That said, after a poor 2021/22 season, we expect a jump in soybean output in 2022/23 to push the market into a surplus and to depress prices. (See Chart 36.)
  • Turning to some of the soft commodities, we expect coffee prices to fall back sharply in the coming season as Brazil moves into its biennial “on year” and supply rebounds. As a result, we expect the price of arabica to fall by more than robusta, although it will remain at a relatively high premium. (See Chart 37.)
  • We are more positive on the outlook for the price of cocoa, which has not rallied to the same extent as other agriculturals in the last year or so. (See Chart 38.) The outlook for supply is poor with most producers in West Africa facing logistical problems, such as labour shortages.
  • Palm oil prices have scaled new highs in recent months on supply concerns. However, sky-high prices will dent demand as consumers switch to alternative oils. If we are right about the price of soybeans, soy oil prices should ease back in 2022, which will be an additional factor pushing palm oil prices lower. (See Chart 39.) We expect growth in output of about 5% in 2022/23, which should create a large surplus in the market and facilitate stockbuilding.
  • And finally, US lumber prices should ease back in 2022 as growth in US housing starts slows (see Chart 40) and supply improves.
  • A big caveat to all our forecasts for agricultural commodities is that they assume “normal” weather and growing conditions. However, this may prove unrealistic given the sheer number of extreme weather events in 2020-21.

Chart 33: Price Forecasts (% Change, as of 25th Jan.)

Chart 34: Global Wheat Stocks & Stock Ratio

chart033-24.pngchart034-23.png

Chart 35: End-Season Wheat Stocks (Mn. Tonnes)

Chart 36: Global Soybean Market Balance (Mn. Tonnes)

chart035-23.pngchart036-23.png

Chart 37: Arabica/Robusta Coffee Price Spread
(US Cents per lb)

Chart 38: Agricultural Commodity Prices & Cocoa
(1st Jan. 2020 = 100)

chart037-23.pngchart038-23.png

Chart 39: Soy Oil & Palm Oil Prices (US$ per Tonne)

Chart 40: US Housing Starts & Lumber Prices

chart039-23.pngchart040-23.png

Sources: Refinitiv, USDA, Capital Economics


Long-Term Commodities Outlook

Meaningful boost to demand from green economy still several years away

  • Despite the strong performance of commodity prices over the last year or so, we are sceptical that we are on the cusp of a new ‘supercycle’. Some metals used intensively in the green economy to benefit from a rise in demand later this decade, but over the next few years we expect prices to ease back as the structural slowdown in China’s economy deepens.
  • We forecast that global oil demand will peak in the latter half of the decade. While we anticipate that non-OECD consumption will continue to grow until the early 2030s, the rate will slow in the years ahead. In addition, there is little prospect of a shortage of oil in the medium-to-long term. Although the US shale sector has recently struggled to raise output despite rising prices, it is still too early to write off the sector as a source of flexible oil supply in the future. In any case, lower-cost producers, such as Saudi Arabia and Iraq, still have plentiful reserves. In fact, they will almost certainly be the last ones producing.
  • All told, declining demand, ample supply and lower marginal costs will progressively weigh on oil prices. We forecast the real price of Brent crude falls to $35 per barrel by 2050.
  • Meanwhile, policymakers around the world have rolled out fresh subsidy schemes for electric vehicles (EVs) in the wake of the pandemic (notably in Europe), and extensions of existing schemes (China). Consequently, we are quite upbeat on the pace of EV adoption, with our estimates exceeding the IEA’s optimistic Sustainable Development Scenario (SDS) in Europe. (See Chart 41.)
  • As a result, the relationship between economic growth and oil demand should weaken significantly in the years ahead as the oil intensity of GDP growth diminishes. (See Chart 42.) What’s more, we think the adoption of renewable sources of electricity will also accelerate in the decades ahead (see Chart 43). That will spell bad news for coal prices. And while natural gas should initially benefit from the transition away from the most polluting fossil fuels, it too will suffer a significant drop-off in demand further ahead.
  • Turning to the industrial metals, we think that economic activity in China will remain the key driver of prices until the middle of the decade at least. Our forecast of structurally slower growth in China’s economy, particularly in the metals-intensive property sector, will drag on demand growth and most metal prices.
  • The outlook for metals from the adoption of EVs will be mixed. On the one hand, demand for palladium and platinum in autocatalysts and lead in batteries of ICE vehicles will diminish. On the other hand, EV’s contain significantly more copper and aluminium per unit compared to conventional ICE vehicles. As a result, by 2030, we think demand for copper and aluminium will start to rise sharply, which should translate into upward pressure on prices later this decade.
  • Turning to agricultural commodities, a near-term revival in supply will help to cap any price gains. Meanwhile, we think that the adoption of new technologies, such as precision agriculture, will allow global agricultural production to more than keep up with demand growth over the long term. As such, we forecast the real price of wheat to fall throughout our forecast horizon. (See Chart 44.)
  • The largest uncertainty is the significant implications of climate change. It is already evident that extreme weather events are becoming more common and will be particularly important for the supply of agricultural commodities. Though recent experience shows weather can disrupt the supply and demand for other commodities too.

Chart 41: Europe EV Sales Share (%)

Chart 42: Oil Demand & GDP Growth (% y/y)

chart041-23.pngchart042-23.png

Chart 43: Global Electricity Generation by Source (TWh)

Chart 44: Wheat Consumption & Real Price

chart043-23.pngchart044-21.png

Sources: ACEA, IEA, BP, Refinitiv, Capital Economics

Table 3: Long-Term Forecasts (Averages, unless otherwise stated)

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Oil

Nominal oil price (US$ per barrel)

97

56

68

65

77

Real oil price (US$ per barrel)

112

58

62

50

42

Nominal oil price (% y/y)

-3.7

-1.1

10.0

1.8

1.2

Real oil price (% y/y)

-6.1

-3.1

6.6

-1.2

-1.7

Copper

Nominal copper price (US$ per tonne)

7,295

5,950

8,100

7,500

12,720

Real copper price (US$ per tonne)

8,413

6,110

7,210

5,680

6,600

Nominal copper price (% y/y)

-5.4

3.2

4.0

3.7

3.2

Real copper price (% y/y)

-7.7

0.6

0.8

0.7

0.3

Aluminium

Nominal aluminium price (US$ per tonne)

1,960

1,840

2,200

1,810

2,910

Real aluminium price (US$ per tonne)

2,258

1,890

1,960

1,370

1,520

Nominal aluminium price (% y/y)

-4.8

1.3

2.3

2.9

2.6

Real aluminium price (% y/y)

-7.1

-1.2

-0.8

-0.1

-0.3

Wheat

Nominal wheat price (US cents per bushel)

643

492

620

540

660

Real wheat price (US cents per bushel)

741

504

590

410

350

Nominal wheat price (% y/y)

-0.7

4.1

-1.7

1.5

1.9

Real wheat price (% y/y)

-3.2

1.5

-4.8

-1.5

-1.0

Sources: Refinitiv, Capital Economics

Long-Term Forecast Summary

Table 4: Key Forecasts – End-Period

Actual

Forecasts

2018

2019

2020

2021

2022

2023

2024

2025

Commodity Indices

S&P GSCI Commodity Index

374

436

409

561

480

440

440

435

Bloomberg Commodity Index

321

355

397

502

420

380

380

380

Energy

Crude Oil (Brent) (US$ per barrel)

54

66

52

78

70

65

63

60

Crude Oil (WTI) (US$ per barrel)

45

61

49

75

68

63

61

58

US Natural Gas (US$ per mBtu)

2.9

2.2

2.5

3.7

3.5

3.3

4.1

5.0

Spot Asian LNG (US$ per mBtu)

9.0

5.3

14.3

30.5

16.0

12.0

11.5

11.0

European Natural Gas (€ per MWh)

22.0

12.1

19.1

70.3

40.0

30.0

23.5

17.0

Coal (Rotterdam, US$ per tonne)

87

53

69

138

85

60

45

30

Coal (Newcastle, US$ per tonne)

102

68

81

170

100

75

58

40

Industrial Metals (US$ per tonne)

Alumina

397

275

304

344

300

280

265

250

Aluminium

1,863

1,781

1,974

2,806

2,400

2,000

1,800

1,600

Cobalt

55,000

32,300

31,998

70,193

60,000

70,000

75,200

80,000

Copper

5,949

6,149

7,749

9,741

8,500

7,500

7,000

6,500

Iron Ore

72

92

160

121

70

50

40

30

Lead

2,007

1,914

1,976

2,338

2,000

1,800

1,660

1,500

Nickel

10,605

13,950

16,554

20,881

18,000

16,000

17,000

18,000

Tin

19,520

17,178

20,545

39,373

30,000

26,000

23,200

20,000

US Steel (HRC, Sh. ton)

724

580

1,030

1,553

1,200

800

600

400

European Steel (HRC, € per tonne)

525

439

665

903

700

500

460

400

Chinese Steel (HRC, RMB per tonne)

3,685

3,774

4,539

4,729

4,000

3,500

3,300

3,000

Zinc

2,519

2,280

2,729

3,590

2,800

2,400

2,300

2,200

Precious Metals (US$ per troy ounce)

Gold

1,283

1,517

1,896

1,828

1,600

1,550

1,530

1,500

Silver

15.5

17.8

26.4

23.3

19.0

18.5

18.8

19.0

Platinum

792

963

1,066

963

900

800

760

700

Palladium

1,261

1,942

2,448

1,892

2,000

2,400

2,400

2,400

Agriculturals

Cocoa (US$ per tonne)

2,416

2,540

2,603

2,520

2,400

2,500

2,740

2,950

Arabica coffee (USc per Ib)

102

130

128

226

150

130

118

105

Robusta coffee (US$ per tonne)

1,506

1,354

1,374

2,488

1,800

1,350

1,325

1,300

Corn (USc per bushel)

375

388

484

593

450

450

450

450

Cotton (Cotlook A, USc per Ib)

81

78

85

127

85

86

88

90

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

333

405

873

1,148

600

500

425

350

Natural Rubber (SMR 20, USc per kg)

128

146

148

176

140

130

130

130

Palm Oil (MYR per tonne)

2,004

3,041

3,891

5,159

3,750

2,750

2,625

2,500

Rice (Thai white, US$ per tonne)

440

496

580

442

400

475

480

485

Soybeans (USc per bushel)

883

943

1,315

1,329

1,000

900

938

975

Sugar (No.11, USc per lb)

12.0

13.4

15.5

18.9

15.0

14.0

13.5

13.0

Wheat (USc per bushel)

503

559

641

771

600

500

525

550

Sources: Refinitiv, Bloomberg, CE

Table 5: Key Forecasts – Average Period

Actual

Forecasts

2018

2019

2020

2021

2022

2023

2024

2025

Commodity Indices

S&P GSCI Commodity Index

456

419

345

517

530

460

440

440

Bloomberg Commodity Index

357

341

333

472

465

400

380

380

Energy

Crude Oil (Brent) (US$ per barrel)

72

64

43

71

76

68

64

61

Crude Oil (WTI) (US$ per barrel)

65

57

40

68

74

66

62

59

US Natural Gas (US$ per mBtu)

3.1

2.5

2.1

3.7

3.4

3.4

3.7

4.6

Spot Asian LNG (US$ per mBtu)

9.8

5.6

4.2

18.0

23.8

14.0

11.8

11.3

European Natural Gas (€ per MWh)

22.3

14.6

9.6

47.5

58.8

35.0

26.8

20.3

Coal (Rotterdam, US$ per tonne)

92

62

50

120

118

73

53

38

Coal (Newcastle, US$ per tonne)

107

78

60

136

155

88

66

49

Industrial Metals (US$ per tonne)

Alumina

474

332

270

329

327

290

273

258

Aluminium

2,108

1,794

1,705

2,476

2,700

2,200

1,900

1,700

Cobalt

72,920

33,289

31,422

51,393

65,100

65,000

72,600

77,800

Copper

6,527

6,008

6,183

9,318

9,175

8,000

7,250

6,750

Iron Ore

69

93

108

160

96

60

45

35

Lead

2,239

1,997

1,825

2,200

2,200

1,900

1,730

1,590

Nickel

13,110

13,917

13,804

18,459

20,100

17,000

16,500

17,500

Tin

20,134

18,634

17,147

32,441

36,200

28,000

24,600

21,800

US Steel (HRC, Sh. ton)

826

601

590

1,608

1,380

1,000

700

500

European Steel (HRC, € per tonne)

563

478

471

975

800

600

480

440

Chinese Steel (HRC, RMB per tonne)

4,106

3,740

3,772

5,311

4,370

3,750

3,400

3,190

Zinc

2,920

2,549

2,269

3,006

3,200

2,600

2,350

2,250

Precious Metals (US$ per troy ounce)

Gold

1,269

1,393

1,771

1,799

1,710

1,580

1,540

1,520

Silver

15.7

16.2

20.6

25.1

21.1

18.8

18.6

18.9

Platinum

877

863

883

1,088

930

850

780

740

Palladium

1,028

1,539

2,196

2,394

1,870

2,200

2,400

2,400

Agriculturals

Cocoa (US$ per tonne)

2,307

2,386

2,519

2,493

2,470

2,460

2,620

2,860

Arabica coffee (USc per Ib)

113

101

111

169

198

140

124

111

Robusta coffee (US$ per tonne)

1,692

1,385

1,287

1,768

2,090

1,580

1,340

1,310

Corn (USc per bushel)

368

383

364

582

540

450

450

450

Cotton (Cotlook A, USc per Ib)

91

78

72

101

110

86

87

89

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

462

371

518

882

840

550

460

390

Natural Rubber (SMR 20, USc per kg)

137

141

133

168

164

135

130

130

Palm Oil (MYR per tonne)

2,252

2,173

2,794

4,461

4,600

3,250

2,690

2,560

Rice (Thai white, US$ per tonne)

462

466

545

507

430

440

480

480

Soybeans (USc per bushel)

932

890

954

1,375

1,170

950

920

960

Sugar (No.11, USc per lb)

12.3

12.3

12.9

17.9

17.0

14.5

13.8

13.3

Wheat (USc per bushel)

495

494

550

702

700

550

510

540

Sources: Refinitiv, Bloomberg, CE


Caroline Bain, Chief Commodities Economist, +44 (0)20 7808 4055, caroline.bain@capitaleconomics.com
Kieran Clancy, Commodities Economist, +44 (0)20 3974 7422, kieran.clancy@capitaleconomics.com
Edward Gardner, Commodities Economist, +44 (0)20 3750 1716, edward.gardner@capitaleconomics.com
Luke Nickels, Commodities Economist, +44 (0)20 7808 4075, luke.nickels@capitaleconomics.com
Kieran Tompkins, Assistant Economist, +44 (0)20 3750 0991, kieran.tompkins@capitaleconomics.com
Simon MacAdam, Senior Global Economist, +44 (0)20 7808 4983, simon.macadam@capitaleconomics.com