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Commodities

Agriculturals

Risk of tighter agricultural export restrictions growing

The recent tightening of export restrictions has been limiting the supply of staple agricultural commodities available to global markets and pushing up prices. In light of the ban on wheat exports from India, we’ve raised our forecast for the price of wheat from 800 US cents per bushel to 900 by end-2022.

23 May 2022

Easing of lockdown lifts metals prices, for now…

The prices of many industrial metals (IM) picked up this week on news of an easing of COVID-19 restrictions in China. However, we think weak demand and improved supply in China will send IM prices lower in the coming months, even if high energy prices keep them historically elevated. On the energy front, crude oil prices are currently little changed w/w at around $110 per barrel. We think the likelihood of fewer Russian exports in the coming months will keep prices elevated, although slower demand growth and greater non-Russian supply should nudge prices closer to $100 by year-end. Next week, energy and agriculture prices will continue to be driven by the implications of the war in Ukraine. It will be worth watching out for any payment problems reported by European importers of Russian natural gas, given that it is still not clear whether importers can make payments in a way that satisfies both the European Commission and Russia. On the data front, commodity prices could take direction from May PMI data for the US, Europe and Japan on Tuesday, as they will shed more light on demand.

20 May 2022

Auto sector woes to weigh on natural rubber prices

After a post-pandemic rebound in 2021, we expect growth in global demand for natural rubber (NR) to slow this year in tandem with a downturn in industrial activity, notably in the NR-intensive auto sector. That said, the market will remain in a deficit and higher energy prices will act as a floor under prices.

18 May 2022
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Energy prices no longer appear to be “lifting all boats”

Most commodity prices fell this week amid a general sell-off in risky assets and a stronger US dollar. That said, we think the days of higher energy prices leading to an all-encompassing rally in commodity prices could be over. Natural gas prices rose on news of disrupted supply through a key transit point in Ukraine but, unlike in previous weeks, other commodity prices didn’t follow natural gas upwards. Instead, difficulties gaining unanimous approval from EU member states for an oil embargo weighed on oil prices. And industrial metals prices fell as data released this week highlighted the severe impact of lockdowns on Chinese demand. Commodity prices will continue to take their direction from latest developments in the newsflow, but we can expect a more nuanced story as commodity groups follow different drivers in the coming weeks. Energy and certain agricultural commodity prices will probably track developments in the war and related sanctions. But industrial metals will continue to take direction from the outlook for demand in China. Prices will probably suffer next week as activity data from China are likely to show that economic activity took a big hit in April as efforts to contain the latest virus outbreak intensified.

Demand and supply pull prices in opposing directions

Energy prices continue to be pummelled by upward pressure related to fears of supply shortages and downward pressure from signs of slower economic growth, tighter monetary policy and a stronger US dollar. This week was no exception, although supply fears dominated, and prices rose as the EU proposed a ban on Russian oil imports by end-year. Admittedly, unanimous approval by member states is proving difficult but, even without a co-ordinated response, we expect Europe’s oil imports from Russia to plunge. This will involve a scramble to find alternative suppliers, which is a key reason why we expect prices to remain high this year. What’s more, if the EU bans any EU involvement in the transportation of Russian oil, as was proposed, then this could potentially send prices even higher than we expect. Turning to next week, progress on the EU’s oil embargo plans will remain a key driver of prices, but there may be some scope for demand-related news to take the upper hand. China’s April trade data on Monday are likely to show a further fall in commodity imports given the virus-related downturn in economic activity, which could weigh on prices. By contrast, new infections are falling at the national level which, if it continues, may spark optimism about a recovery in China’s commodities demand and give a lift to prices, particularly industrial metals, later in the week.

Not just Indonesia export ban boosting palm oil prices

We expect Indonesia’s latest ban on palm oil exports to be short-lived, but constrained supply and the high prices of other edible oils, coupled with elevated oil prices, will support the price of palm oil. We’ve revised up our palm oil price forecast to MYR 5,000 per tonne (MYR 4,025 previously) at end-2022.

Prices to stay high for longer

The war in Ukraine and its negative impact on commodities supply has prompted us to revise up our forecasts for the prices of most commodities in 2022. Regardless of the outcome of the war, we think energy prices will remain historically high this year as Western countries, particularly in Europe, reduce imports from Russia. Alternative sources of supply will prove more costly, not least because they will come from further afield with higher transport costs. High energy prices will in turn raise the cost of production of most other commodities and act as a floor under prices. That said, we expect slower growth in global economic activity, particularly in China, to weigh on the prices of industrial metals later this year. We also expect the prices of most agriculturals to fall back from their current highs as supply chains adjust and high prices incentivise planting and exports, but again prices will remain elevated for much of this year.

Russia’s rubles demand poses upside risk to gas prices

Russia’s monopoly exporter of natural gas, Gazprom, suspended gas deliveries to Poland and Bulgaria this week because they refused to pay for Russian gas in rubles. There is some confusion about whether the process by which Russia demands rubles to be paid would breach EU sanctions given that Russia’s central bank, which is a target of EU sanctions, would be involved. This raises the possibility that other European countries will suffer the same fate as Poland and Bulgaria when their next gas payments fall due. We consider this to be a clear upside risk to our near-term European gas price forecasts. Next week, oil prices could also take direction from Europe, with the EU currently working on a sixth round of sanctions, which may involve an outright embargo on Russian oil or at least plans to reduce oil imports from Russia. On the data front, China’s PMI data for April are due out this Saturday. We expect the data to show weaker economic activity than the market expects, which would be negative for most commodity prices, but particularly industrial metals prices.

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