Broad-based recovery leaving energy behind - Capital Economics
Commodities Overview

Broad-based recovery leaving energy behind

Commodities Weekly Wrap
Written by Caroline Bain

The prices of most commodities rose this week, with the exception of energy. In particular, industrial metal prices rose alongside Chinese equities. Elsewhere, the European economic recovery is starting to look remarkably V-shaped, despite localised outbreaks of coronavirus. Yet, high-frequency data in the US suggest coronavirus fears are slowing the economic recovery there. We think that uncertainty surrounding the course of the virus will keep the ongoing recovery in commodity prices in check.

Next week, data from China will be a key driver of prices. Market participants will be closely watching the release of trade and industrial activity data for June, which will give an indication of the strength of China’s economic recovery and, in turn, the underpinnings for the continued recovery in many commodity prices during the month. We think that stronger investment is likely to have fed through to industry, in turn pushing output growth back to near its pre-virus rate.

  • The prices of most commodities rose this week, with the exception of energy. In particular, industrial metal prices rose alongside Chinese equities. Elsewhere, the European economic recovery is starting to look remarkably V-shaped, despite localised outbreaks of coronavirus. Yet, high-frequency data in the US suggest coronavirus fears are slowing the economic recovery there. We think that uncertainty surrounding the course of the virus will keep the ongoing recovery in commodity prices in check.
  • Next week, data from China will be a key driver of prices. Market participants will be closely watching the release of trade and industrial activity data for June, which will give an indication of the strength of China’s economic recovery and, in turn, the underpinnings for the continued recovery in many commodity prices during the month. We think that stronger investment is likely to have fed through to industry, in turn pushing output growth back to near its pre-virus rate.

Chart 1: S&P GSCI by Category (1st Jan. 2020 = 100)
(Latest = 9th Jul.)

Chart 2: Selected Price Moves in the Last Week
(3rd Jul. – 10th Jul.) (%)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics

Energy & Industrial Metals (Page 2)

Precious Metals & Agriculturals (Page 3)

Short-Term Price Charts & Forecasts (Page 4)

Selected Recent Publications (Page 5)

Energy

  • Oil prices fell back this week, reflecting concerns about demand given the re-imposition of virus-related restrictions in parts of the US, Australia and Asia. That said, the latest US data for the week ending 3rd July showed that implied gasoline consumption continued to recover (3). (See here.) What’s more, the IEA revised up its 2020 demand forecast in its latest monthly report. At 92.1m bpd, its forecast is still markedly lower than 2019 consumption of 100.2m bpd, but it is now more in line with our in-house forecast.
  • Elsewhere, the EU published its hydrogen strategy on Wednesday. The ambitious plan has negative implications for medium-term natural gas and coal demand in the region, but we think that there will be little impact on consumption or prices in the near term. That said, EU natural gas prices did fall sharply this week, but that was probably because it is a time of seasonally weak demand and regional stocks are high (4). (See here.) Prices had also surged a week earlier. Regardless, EU gas prices remain in the doldrums.

Chart 3: US Implied Gasoline Demand (Mn. BpD)

Chart 4: Europe Gas in Storage (TWh)

Sources: EIA, Capital Economics

Sources: AGSI, Capital Economics

Industrial Metals

  • The prices of base metals continued to rise this week, as Chinese equities soared to highs not seen since 2018 (5). In addition, an acceleration in Chinese credit growth in June (see our China Data Response) is likely to have supported base metals demand and prices. And whilst we expect credit growth to help drive the recovery in base metals prices, we don’t see either accelerating as rapidly as they did post-GFC. (See here.) Nonetheless, we expect China’s economic output to return to its pre-virus trend by end-2020.
  • Meanwhile, the copper price was particularly strong this week, rising by 5%. The price was probably buoyed by supply concerns, as Chile’s Copper Commission flagged downside risks to output there in the months ahead. The aluminium price also rose this week as Rio Tinto announced that it would close New Zealand’s only aluminium smelter, Tiwai Point. We had already anticipated a full closure this year and, as a result, still expect a substantial surplus in the aluminium market in 2020 (6).

Chart 5: Shanghai Composite & S&P GSCI Industrial Metals Indices

Chart 6: Aluminium Market Balance (Th. Tonnes)

Sources: Refinitiv, Capital Economics

Sources: WBMS, Capital Economics

Precious Metals

  • Having taken a pause since late June, the gold price resumed its upward trend this week. Investment demand for gold remains strong; the same is true for platinum and silver, the prices of which also rose. Data released this week by the World Gold Council showed that holdings of gold-backed ETFs reached a new all-time high in June, having risen by over a fifth year-to-date. And the further climb in the gold price so far in July is consistent with further inflows (7).
  • Investment demand for precious metals such as gold typically has an inverse relationship with ‘real’ yields in the US, which are testing historic lows. Splitting the real yield into its nominal interest rate and inflation breakeven components suggest a pick-up in inflation expectations has driven it lower recently. But despite this rise, the inflation breakeven remains below its pre-virus level (8). Therefore, real yields could fall further (and the gold price rise further) in the near term if inflation expectations continue to rise.

Chart 7: Gold Price & ETF Holdings by Region

Chart 8: US Treasury Yields & Inflation Breakeven

Sources: Refinitiv, WGC, Capital Economics

Sources: Refinitiv, Capital Economics

Agriculturals

  • The price of most agricultural commodities rose this week, primarily on the back of adverse weather. In particular, the price of wheat soared by nearly 10%, as traders shifted towards a net-long futures position (9) amid fears of weaker global supply. Dry, hot weather across Siberia has led to dwindling expectations of a good crop. Nevertheless, global wheat stocks are still at record high levels and we continue to expect the market to shift into a surplus next season, which will weigh on prices.
  • Meanwhile, the price of US lumber also rallied, increasing by just over 10%, in part owing to additional spending on DIY and home-improvement projects. Despite falling sharply as lockdown measures were implemented, the building materials sales component of US retail sales has since rebounded to well above pre-virus levels (10). This, along with our expectation that US home starts will bounce back strongly , means that we expect the price of lumber to rise to $525 per 1,000 board feet by end-2021. (See here.)

Chart 9: Wheat Futures Positions & Price

Chart 10: US Retail Sales Building Materials
& Lumber Price

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics

Short-Term Price Charts & Forecasts

Chart 11: Energy

Chart 12: Industrial Metals (LME, US$ per Tonne)

Chart 13: Precious Metals (US$ per Ounce)

Chart 14: Agriculturals (US Cents per Bushel)

Source: Refinitiv

Key Commodity Price Forecasts

Actual

Forecasts (end-period)

1mth ago

1 wk ago

Latest

2020

2021

10th
Jun.

3rd

Jul.

10th

Jul.*

Q3

Q4

Q1

Q2

Q3

Q4

Energy

Crude Oil (Brent, US$ per barrel)

42

43

42

42

45

47

50

53

55

US Natural Gas (US$ per mBtu)

1.78

1.73

1.74

2.25

2.50

2.75

2.60

2.80

3.00

Coal (Newcastle, US$ per tonne)

53

52

52

58

60

60

57

56

55

Industrial Metals

Copper (US$ per tonne)

5,885

6,024

6,300

6,000

6,200

6,350

6,500

6,650

6,800

Aluminium (US$ per tonne)

1,606

1,583

1,637

1,625

1,650

1,650

1,675

1,675

1,700

Iron Ore (US$ per tonne)

104

101

106

85

80

78

75

73

70

Precious Metals

Gold (US$ per ounce)

1,736

1,775

1,807

1,650

1,600

1,600

1,575

1,550

1,550

Silver (US$ per ounce)

18.25

18.04

18.70

15.50

15.00

15.25

15.50

15.75

16.00

Platinum (US$ per ounce)

833

800

832

750

700

700

675

675

650

Agriculturals

Corn (US cents per bushel)

326

343

351

340

350

360

370

380

390

Soybeans (US cents per bushel)

866

893

897

875

885

900

910

920

925

Wheat (US cents per bushel)

506

490

537

500

475

470

465

460

450

Sources: Refinitiv, Bloomberg, Capital Economics *Iron Ore latest price is 9th Jul. 2020

Selected Recent Publications

Date

Publication

Title

Fri 29th May

Industrial Metals Update

Are China’s smelters starting to struggle?

Commodities Watch

Chinese stimulus not enough to prompt a price rally

Mon 1st Jun.

Commodities Update

Slow rise in China PMIs no antidote for commodities

Tue 2nd

Commodities Chart Book

Prices to pick up as demand slowly revives

Wed 3rd

Energy Update

Newcastle coal prices to remain grounded

Energy Data Response

US Weekly Petroleum Status Report

Industrial Metals Update

Oversupply is far worse than exchange stocks suggest

Metals Chart Book

Recovery in industrial metals has further to run

Thu 4th

Metals Focus

Wounded auto sector could haunt palladium for years

Fri 5th

Commodities Update

Natural rubber to regain some of its bounce by 2021

Energy Update

OPEC+ to extend duration of deeper output cuts

Mon 8th

Commodities Update

China’s commodity imports close to a trough

Energy Update

OPEC+ is obviously worried about demand

Wed 10th

Commodities Update

Palm oil prices to drive higher

Energy Data Response

US Weekly Petroleum Status Report

Precious Metals Update

Fears of inflation unlikely to boost gold price

Thu 11th

Precious Metals Update

The surge in China’s PGM imports is misleading

Tue 16th

Energy Update

Renewables take the shine off European fossil fuels

Wed 17th

Energy Data Response

US Weekly Petroleum Status Report

Thu 18th

OPEC Watch

OPEC Monthly Oil Market Report (June)

Energy Update

Launching our coal switching price indicator

Industrial Metals Update

Turning more positive on base metals

Fri 19th

Industrial Metals Update

A minor star called tin

Mon 22nd

Metals Data Response

Global Aluminium Production (May)

Metals Data Response

Global Steel Production (May)

Energy Update

US gasoline demand will take time to fully recover

Wed 24th

Industrial Metals Update

US-Canada aluminium spat could worsen oversupply

Energy Data Response

US Weekly Petroleum Status Report

Thu 25th

Commodities Update

Revisiting our forecasts …

Energy Update

Taking a look at our oil price forecasts

Metals Data Response

China and India Gold Imports (May)

Mon 29th

Commodities Update

Sugar prices to tread water, amid ample supply

Tue 30th

Industrial Metals Update

Chinese imports add to evidence of stronger demand

Wed 1st Jul.

Commodities Update

Rising China PMIs good news for commodities

Energy Data Response

US Weekly Petroleum Status Report

Thu 2nd

Commodities Chart Book

Strong Chinese recovery is good news

Fri 3rd

Energy Update

Libya will not determine prices

Metals Chart Book

A brighter backdrop ahead for industrial metals

Tue 7th

Energy Chart Book

On the way up …

Wed 8th

Energy Data Response

US Weekly Petroleum Status Report

Industrial Metals Update

Still hard to be positive on lead in the long run

Thu 9th

Commodities Update

Strong demand set to keep lumber prices high

Fri 10th

Metals Watch

Assessing the risks of a ‘second wave’ of supply loss

Energy Update

Five key questions about the EU’s hydrogen strategy

For copies of any of these reports, please call +44 20 7823 5000 or e-mail sales@capitaleconomics.com


Caroline Bain, Chief Commodities Economist, caroline.bain@capitaleconomics.com
James O’Rourke, Commodities Economist, james.orourke@capitaleconomics.com
Samuel Burman, Assistant Commodities Economist, samuel.burman@capitaleconomics.com
Kieran Clancy, Assistant Commodities Economist, kieran.clancy@capitaleconomics.com
Bethany Beckett, Assistant Economist, bethany.beckett@capitaleconomics.com
William Ellis, Research Assistant, william.ellis@capitaleconomics.com