Commodity rally loses steam in 2023, subdued outlook ahead

This article first appeared in Capital, The Edge Malaysia Weekly on December 25, 2023 – December 31, 2023

THE idiom “what goes up, must come down” rings true for commodity prices this year. After being the best performing asset class in 2021 and 2022, the momentum that propelled commodities to record highs showed signs of fizzling out since the start of 2023.

While wider geopolitical risks linked to the Russia-Ukraine war and the Israeli-Palestinian conflict jolted prices this year, prices did not stay high for long.

The bigger disruptor for commodity prices this year appears to be the lacklustre global growth, which has resulted in lower demand. S&P Global Market Intelligence’s global real gross domestic product forecast is to increase 2.5% in 2023 and 2.4% in 2024.

China’s sluggish domestic demand even after opening up following a prolonged period of Covid-19 lockdown caused a drag on the Chinese economy, while domestic issues surrounding the property sector and high youth unemployment added to its woes. The world’s second-largest economy says it is on track to meet its annual growth target of 5% this year and projects a growth of 5% next year.

The rapid rise in interest rates and stronger US dollar also prove to challenge the commodity market.

Grain prices such as wheat, corn and soybean have declined this year as strong output pushed prices down. Year to date (YTD), prices of wheat, corn and soybean have shed 24.5%, 23% and 5.7% respectively.

In the case of wheat, the price of one of the world’s most widely consumed foods has fallen sharply from its peak in May 2022 — the height of the Russia-Ukraine war — as the increase in supply from other key suppliers offered some respite for countries dependent on importing the crop. Russia and Ukraine together account for roughly a quarter of global wheat exports, according to the US Department of Agriculture.

Earlier, there were fears that when the Black Sea Grain Initiative was terminated on July 17 this year, wheat prices would shoot to record highs, given Ukraine’s role as a significant wheat exporter in the world. Wheat prices started moving up in anticipation of the non-renewal of the deal beginning on July 12, from US$6.68 per bushel to increase 19.3% to US$7.97 per bushel on July 25. However, it fell quickly after that, weighed by ample supplies exported from Russia. It is worth noting that wheat prices have softened significantly from its record high of US$10.93 per bushel at the height of the Russia-Ukraine war in May 2022.

In the case of the Israeli-Palestinian conflict — or, as some call it, the Israel-Hamas war — which imploded on Oct 7, Brent crude prices climbed 9.9% from US$84.07 per barrel on Oct 5 to US$92.38 per barrel on Oct 19. Thereafter, Brent crude prices started to decline to settle at US$78.54 per barrel last Wednesday (Dec 20).

Some reason that the nonchalant Brent crude price movement could be because neither Israel nor Gaza are major oil exporters; however, there are others who fear that the escalation of the situation could result in a wider impact on the oil-rich region.

A war in the Middle East where crude oil is abundant may set off alarms and send crude oil prices rising to record levels like in the past. Take Iraq’s invasion of Kuwait in August 1990, for example. It saw 4.3 million barrels per day removed from global markets, resulting in crude oil prices skyrocketing from US$34 to US$77 per barrel during that time.

Interestingly, the Brent crude oil price did not hit its highest level this year on the onset of the Israel-Hamas war, but reached its peak on Sept 28, touching US$97.19 per barrel upon the move by Saudi Arabia and Russia to cut supply. Others opine that the better-than-expected economic conditions in the US helped to boost prices too.

However, Brent crude prices have not held their ground since September. Even with the Organization of the Petroleum Exporting Countries and allies’ (Opec+) concerted efforts to slash production volume for 1Q2024, crude oil prices have continued to decline in recent months.

Do not expect much for commodities in 2024. In ING Global Markets Research’s Commodities Outlook 2024 report on Dec 4, the research firm says it is holding a moderately supportive view on large parts of the commodity complex for 2024.

“Fundamentals for most commodities range from neutral to mildly bullish. In addition, the heightened geopolitical environment will likely persist through 2024. Expectations that the US Federal Reserve will reverse policy tightening and start to cut interest rates next year, along with a weaker US dollar, should also provide some tailwinds to commodities. However, there are clear demand risks, given expectations for softer global growth next year,” it says.

While the general view is that most commodities will be largely unexciting next year, there are pockets of bright spots to be seen.

Gold prices have gained momentum towards the fourth quarter of this year as the precious metal is seen as a safe-haven asset and many have forecast that the Fed will start cutting rates next year.

The precious metal has increased 12.76% YTD to US$2,052 per troy oz on Dec 20. It hit a year-high of US$2,089.70 on Dec 1 and analysts believe that it will continue to climb next year and outshine the rest of metals.

“The Fed cutting cycle and falling US real yields are expected to push gold prices to new nominal highs in the middle of 2024, reaching an average of US$2,175 per troy oz by the fourth quarter,” says JPMorgan Research in its 2024 outlook report dated Dec 13.

The research house also sees silver following gold’s upward trend, saying that the precious metal should average around US$30 per troy oz in the fourth quarter.

“Across all metals, we have the highest conviction on the bullish medium-term forecast for both gold and silver over the course of 2024 and into the first half of 2024, though timing an entry will continue to be critical,” says Gregory Shearer, head of base and precious metals strategy at JPMorgan.

The electric vehicle (EV) market has been more muted this year as high interest rates caused consumers to tighten their purse strings. Reports have also noted that apart from the price point, consumers are concerned over the EV’s range, the lack of charging infrastructure and residual values.

Weak response from consumers also meant that automakers have dialled back their EV expansion plans this year, resulting in an oversupply of lithium carbonate — the key component used in EV batteries — and the subsequent plunge this year.

A supercharged two-year rally, which saw Chinese spot lithium carbonate prices reaching an all-time high of RMB597,500 in November 2022, has gone into reverse this year. The price has shaved off 81% so far this year to RMB97,500 per tonne.

Obvious winners and losers in the commodity market have been highlighted this year. Let’s take a look at how other selected commodities performed and the expectations for next year.

The price of Brent crude is down 7.9% so far this year to US$79.17 per barrel. It did inch up above US$90 in September as cuts by the Opec+ group, in particular Saudi Arabia, helped to lift prices. Furthermore, better-than-expected economic data in the US during that period lifted expectations of more consumption, but the price did not hold steady.

Looking ahead, JPMorgan Research foresees Brent crude prices to remain largely flat in 2024 before edging down further 10% in 2025. The research house has kept its expectations that Brent crude will average at US$83 per barrel in 2024.

It added that there will continue to be economic headwinds, as it sees oil demand rising by 1.6 million barrels per day in 2024, underpinned by robust emerging markets, a resilient US and a weak but stable Europe.

Meanwhile, natural gas has been on a downtrend this year, shedding 35.46% to US$2.57 per million British thermal units (MMBtu) on Dec 20. A milder-than-expected winter, in addition to record production, resulted in the pressure on natural gas this year.

JPMorgan Research foresees the overhang of supply to limit upside risk for gas prices in 2024.

“We believe there are two stories that will dictate the year. The first narrative is one of oversupply and depressed pricing that is likely to linger through the first half of 2024 and, potentially, the entirety of the summer injection season.

“The second is the ability for feed gas demand to not only offset but also outpace regional supply growth,” says the research house.

Iron ore, critical in infrastructure building, has appreciated 15.1% YTD. On Dec 20, it was at US$126.78 per tonne. Prices have managed to stay above the US$100 mark for the most part of this year.

According to ING Research, prices are now trading at 2023 highs, on the back of strong demand and multiyear low inventory levels in China.

“Over the last couple of months, the Chinese government has moved forward with a series of stimulus measures to turn around its ailing economy, which have supported iron ore prices,” says the research house.

Nevertheless, the key concern with China’s economy is the property sector, says ING Research, which accounts for about 40% of demand for iron ore.

One of the latest stimulus plans by Beijing includes raising the budget deficit with the issuance of an additional RMB1 trillion (RM651 billion) of sovereign bonds, notes ING Research, which has boosted sentiment in the iron ore market.

Nevertheless, the uneven pace of China’s economic recovery means that the upside for iron ore’s price would be volatile in the short term.

The global rice market has seen prices surge this year after India banned the export of non-basmati white rice in July in order to prevent shortages in the local supply. India is the world’s biggest rice exporter, accounting for 40% of global rice trade in 2022.

The Asian benchmark for rice, being Thai rice 5%, has increased 24.1% YTD to settle at US$634 per tonne. It peaked on Aug 9, at US$648 per tonne, on concerns that the ban would result in global shortages.

BMI, a Fitch Solutions company, in a commentary dated Nov 30 expects the rice market to remain taut through at least the first six months of 2024 as it does not see India lifting the rice export restrictions ahead of the country’s general election, which is set to take place in April to May 2024.

Meanwhile, it also said that the El Niño weather phenomenon, which is associated with below-average rainfall across Southeast Asia, is likely to persist until May to July 2024, indicating a 35% likelihood of a “historically strong” El Niño developing in November 2023 to January 2024. This would impact crop planting.

This year, prices of grains such as soybean, corn and wheat prices have declined from the previous year. The current spot price of soybean is US$13.19 per bushel, down 5.7% from US$13.99 at the start of the year. Corn and wheat prices are also ending the year lower by 23% and 24.53% respectively.

BMI expects the average price of major grains to continue to trend downwards in 2024, but at a slower pace compared with 2023.

“We forecast that the average annual price of Chicago Board of Trade-listed second-month corn, soybean and wheat futures will decline 9.9% y-o-y, 3.9% y-o-y and 5.7% y-o-y in 2024 respectively, or by 6.5% y-o-y if the three crops are considered on an even-weighted basis,” it says.

Cocoa prices have shot up to record-high levels this year, making it one of the best-performing commodities this year. Cocoa prices on the Intercontinental Exchange in London have nearly doubled this year to close at £3,548 per tonne on Dec 20 as two continuous deficit seasons have resulted in a tighter market. Unusually heavy rainfall has hit the region damaging crops and accelerating the spread of diseases among the cocoa plants this year, causing the premium in prices.

The global cocoa market saw a deficit of 216,000 tonnes in the 2021/22 season, which was followed by a deficit estimated at 116,000 tonnes last season, says ING Research.

The research house foresees another possible deficit in production for the following season, coming in the range of 200,000 to 250,000 tonnes on assumption of a large decrease in output from Ivory Coast — a major cocoa grower.

“A further drawdown in stocks would leave the market increasingly vulnerable, with global stocks at the start of the 2023/24 season estimated at around 1.7 million tonnes, while the stocks-to-grind ratio is at a seven-year low of 34.5%,” it says.

With the El Niño phenomenon happening currently,  BMI expects cocoa prices to likely remain particularly sensitive to its development. The weather pattern, which will result in drier climates in West Africa, would adversely impact production levels.

“The last El Niño event resulted in drought conditions in Ghana and Côte d’Ivoire, resulting in subpar yields and quality, as the cocoa beans required extended periods to mature and were more susceptible to disease,” it says.

As for sugar prices, they have also made gains this year, increasing close to 20% YTD to 21.43 US cents per pound. According to BMI, India — one of the world’s biggest sugar exporters — has experienced a decline in average rainfall levels in the recent monsoon season, which has adversely affected crop planting.

What has added fuel to the fire is the speculation of a potential export ban from India.

“If enacted, it could severely limit the global supply of sugar from India, thereby supporting a rise in global sugar prices. In Brazil, where sugar harvest has become ever-more crucial against a backdrop of reduced supplies from India, El Niño, associated with increased rainfall at Brazilian ports, could trigger further shipping delays, providing upside support to global prices,” says BMI.

JPMorgan Research projects sugar prices to average at 30 US cents per pound in 2024, adding that its price forecasts call for a bullish outlook for sugar through 2024.

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