“There really is no pretence now that the Fed [hasn’t], in an act of penance for allowing inflation to get out of control, donned a horsehair shirt and is fully prepared to drive the US economy into recession,” says Albert Edwards of Société Générale. The more important question is whether bringing about a recession will dispel fears about inflation. “The outlook for commodities is key, especially with the backdrop of the war in Ukraine. But I still see commodity prices plunging just like in Q4 2008.” Back then, headline inflation dropped from 5% to -2% in just 12 months.
Certainly, recent trends in commodities have been more bearish. The S&P GSCI index of 24 major raw materials is up 31% in 2022, but has fallen back 9% since mid-June on growing fears of a recession. Copper, a key gauge of the global economy’s health, has hit a 16-month low after losing 22% since a peak in early March. “In a downturn, construction slows – copper is used in wiring and plumbing – and other industries make fewer things like electrical equipment, which also uses the metal,” says Lawrence Strauss in Barron’s.
Meanwhile, Chinese benchmark iron-ore prices are down 43% over the past year. China’s “voracious economy usually consumes about half of global industrial metal supply and more than 70% of the world’s iron ore”, says Lex in the Financial Times. About 40% of domestic steel (which is produced from iron ore) goes into the property sector, but Beijing’s crackdown on excessive leverage means that “floor space both sold and newly started is dropping at double-digit rates year on year, [a situation] not seen since the global financial crisis”.
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Aluminium is also trading close to a one-year low, “with zinc and nickel not too far behind”, says Ehsan Khoman of bank MUFG. As well as faltering demand from China, “higher than expected Russian supply is leading to more stocks being deposited on to European exchanges”.
EV metals run out of charge
Not everyone is gloomy. Commodities have yet to peak, say analysts at Goldman Sachs. “Economic growth and end-user demand [are] simply slowing, not falling outright.” Yet some key electric vehicle (EV) metals – cobalt, lithium and nickel – may still be heading for a rough patch. There has been “a surge in investors’ capital into supply investment tied to... long-term EV demand... essentially trading a spot-driven commodity as a forward-looking equity”, say Goldman’s analysts. The result of short-term oversupply is that lithium prices, up more than 400% over the past year, are heading for a “sharp correction” over the next two years, and cobalt and nickel will also weaken. However, long-term structural demand from more electric vehicles should bring a rally after 2024.
“Commodities bulls may soon regret their enthusiasm,” says Gary Shilling on Bloomberg. The very long-term trend is for commodity prices to fall as people find cleverer ways of using resources. “Except for brief rises during wars and the 1970s oil embargoes, inflation-adjusted prices have fallen steadily since the mid-1800s, by a total of 83%... Bet on human ingenuity, not shortage-driven chronic price rises.”
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