By Paul Hickin
Crude, fuel demand collapse and set for slow-lane recovery
Industrial metals powering back from initial global demand slump
Gold prices spike to record high amid growing economic uncertainty
London — The COVID-19 pandemic has wreaked chaos across global commodity markets, disrupting trade and supply and demand dynamics and creating major uncertainty over the pace of recovery.
The global growth outlook has been slashed for years as the economy braces for a multi-year recovery and the prospect of long-term changes in consumption.
The S&P GCSI commodity index is down 34% since the start of the year but commodities have experienced widely different impacts from the pandemic and their recovery paths are still on multi-track trajectories. Crude prices crashed to four-decade lows while gold has jumped to all-time highs. Non-ferrous metals and power demand were initially hit hard due to lockdowns but have staged a robust recovery. In the cereals and meat markets, most prices have remained under pressure amid ongoing demand-side uncertainties.
Market watchers see improving macroeconomic and supply-side conditions which will broadly support the recovery commodity prices, albeit at a gradual, uneven pace over the next 12 months.
“As ample liquidity finds its way into the real economy, we think the conditions are set for a solid and synchronized growth recovery across the world,” UBS said in a recent note. “This should pave the way for a pick-up in commodity demand, particularly in the developed world, while Chinese demand for commodities stays buoyant.”
The following is a round-up of the recent market dynamics of the main commodity asset classes covered by the S&P GCSI index.
Global oil demand has been the hardest hit from the pandemic as lockdowns and travel curbs to contain the virus slashed jet fuel, gasoline, and diesel demand.
At the peak of lockdowns in mid-April global oil demand is estimated to have contracted more than 20%, taking over 20 million b/d of consumption off the global market. Demand initially began recovering sharply in late May and June, and, together with swinging OPEC+ output cuts, helped lift prices from four-decade lows in April. More recently, the oil demand recovery has slowed significantly, scuppering hopes of a so-called V-shaped market recovery.
Oil demand is seen down some 8-9 billion b/d over the year with lasting travel curbs and second-wave threats delaying expectations of a full recovery well into 2022. As demand stabilizes, OPEC+ maintains discipline on output cuts and stocks levels drawdown, S&P Global Platts Analytics sees Brent heading towards $50/b by end-2021, with WTI at around $45/b.
Natural gas demand in Europe has largely normalized compared to seasonal averages. Industrial gas demand in Southern Europe has also rebounded, while gas-for-power demand in a number of markets, including Germany, Italy and Spain, was sharply up in July on lower renewables. In the US, industrial gas demand has risen 5% from mid-June lows, while gas-for-power saw record levels of demand in July due to coal retirements. “US natural gas prices are likely to stay subdued in the near term, which should help to tighten fundamentals. To prevent storage capacity limits from being reached by the end of the injection season in late October, lower prices are needed to trigger a rebalancing of the natural gas market,” UBS said in a July 29 note.
Prices have rebounded from March lows, supported by governments’ fiscal stimulus for metals-intensive infrastructure development and a “green recovery” from the pandemic. The automobile and construction sectors, in particular, are seen enjoying the biggest rebound due to recovery policies.
Copper prices, a barometer of global economic health, have gained around 40% since end-March and are back to pre-pandemic levels, on prospects for increased demand for electrification projects worldwide, including for electric vehicles’ charging infrastructure. At the same time, a physical copper deficit looms due to mine curbs during the pandemic and recent lack of new investment in mine capacity. The EVs and construction sectors are also pulling up nickel, aluminum, zinc, and lead.
“With all the support given to economic growth, both monetary and fiscal, we also expect the commodity intensity of the economic recovery to gear up, mainly with regard to metals,” UBS said.
Gold, the classic safe-haven investment in times of macroeconomic uncertainty, has reached all-time price highs above the key $2,000/oz mark on spot markets amid fears over the global impact of new waves of the pandemic and renewed US-China trade tensions.
Analysts forecast further gains for the yellow metal, whose strength is investor-driven. Gold Exchange-Traded Fund volumes have surged, outplaying supply-demand fundamentals. World Gold Council statistics, for example, show H1 world jewelry demand down 46% on-year, with gold production down 6%.
Silver, gold’s partner in the GSCI Precious Metals Index, has also had a stellar year to date, with a price rise of around 35%. It is a substitute for gold in hedging, has new industrial demand applications in batteries and electronics and also faces a short-term reduction in supply.
In line with most key commodities, the global pandemic hit demand, depressing prices at the start of the crisis despite sporadic supply-side disruptions. Rice initially bucked the trend, with prices supported by export restrictions in Vietnam. With the collapse in oil prices, Brazilian ethanol became uncompetitive against sugar on the spot and forward curves, and this swung the sugar mix — the amount of sugar cane diverted to the production of sugar instead of ethanol — back to 46%, according to the latest S&P Global Platts Analytics estimates, up from an all-time low of 34.3% in the 2019/20 season.
Agriculture and livestock prices recovered modestly in July, rising 4%–6% from June, for a second consecutive month as stronger demand for vegetable oils, dairy products and sugar outweighed lower prices in the meat markets amid an overall steady value of cereal prices. Prospects of large 2020 harvests and subdued demand pushed down international rice prices to four-month lows in July but active buying of corn and wheat by China, which is typically self-sufficient, have been supportive of other food crops. UBS said it sees a growing recovery in demand for soft commodities such as coffee, cocoa and sugar, adding that improved service activity should lift demand for animal protein and push up livestock prices.
Despite the price inelastic nature of grains relative to other commodities, US corn prices dropped 20% during the peak of the lockdowns due to lower ethanol consumption, robust global production and stock forecasts. A drop in feed demand and fructose corn syrup as a result of the lockdowns also hit prices.
The critical nature of wheat in terms of global food security was highlighted during the coronavirus pandemic, as major importing countries embarked on a buying spree to increase their national wheat reserves while major exporting countries resorted to export restrictions to avoid a domestic supply shortage during the end of the marketing year.
Wheat prices rallied nearly 15% to seasonal highs towards the end of April as major Black Sea exporting countries introduced export restrictions amid strong destination demand. Following importing countries’ buying spree to increase national stock reserves, a drop in demand for food and feed use on the COVID-19 lockdown, improved 2020-21 production outlook for Russia and Australia in particular, in addition to seasonal harvest pressure saw prices drop 23% between late April and July.