“Global growth is tepid, but commodity prices remain high,” say Carlos Arteta, Philip Kenworthy and Ayhan Kose in a World Bank blog. Energy, food and base metals prices are predicted to stay close to 40% above 2015-2019 levels over the coming year. Why?
For one thing, oil supplies are tight. As of late June, members of the Opec+ cartel were holding back more than six million barrels of oil a day – nearly 7% of global demand. Second, geopolitical shocks are multiplying – much of the current commodity tension dates from the destabilisation of energy and grain markets caused by Russia’s 2022 invasion of Ukraine.
Third, despite trouble in the local property market, demand from China – the world’s largest consumer of metals and energy – has been stronger than expected. Infrastructure investment and expanding factory capacity in electronics and electric vehicles have buoyed the Middle Kingdom’s appetite for raw materials.
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Finally, climate change is proving inflationary, both through disrupted harvests – most recently of cocoa and coffee crops – and because of demand for metals for the energy transition.
Commodity prices shoot up
After surging in 2022, last year was a more tepid one for commodity prices. The S&P GSCI index, which tracks 24 major raw materials, ended 2023 down 12%, but the index has climbed back more than 10% in the first half of 2024.
Copper, the key energy-transition metal, is up 14.5% this year, while gold has gained 13% in dollar terms. Brent crude oil is up 11%, although it has slipped back since a peak in early April. Metals have had an excellent run this year, with gold and copper making new records and silver hitting levels not seen in 13 years, says Ole Hansen of Saxo Bank. The case for holding precious metals remains solid as US rate cuts come into view.
“Energy and grains” could make the running as we enter the third quarter and industrial-metals markets “take a breather” and “consolidate” around their new higher levels. The long-term outlook for copper is encouraging, but another price jump looks “unlikely to emerge in earnest before 2025” when new supply begins to dry up.
The “everything rally” in industrial metals such as copper, aluminium and zinc “will continue to unwind” in the second half of 2024, agree Capital Economics analysts in a note. The market is currently focused on rising demand for green technology, but while that will keep metals prices elevated, it will “not completely offset the drag from the slowdown in China’s property sector”.
Traders may be surprised as a sharp drop off in Chinese construction activity emerges as “the dominant driver” of industrial metals prices later this year. There is still good reason to hold commodities, say Goldman Sachs’ analysts. Over the past 50 years, a 1% rise in US inflation has, on average, led to a real (inflation-adjusted) return of seven percentage points from commodities.
Energy has been the most robust inflation hedge, as prices rise during supply and demand shocks. Gold is particularly useful in scenarios where central banks lose credibility or geopolitical risk rises.
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