Commodities outlook 2023. Climate change, conflict and China’s reopening

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Commodities outlook 2023 Climate change, conflict and China’s reopening

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COMMODITIES OUTLOOK 2023 CLIMATE CHANGE, CONFLICT AND CHINA’S REOPENING

Commodities outlook 2023 EIU expects most commodity prices, especially softs, to recede in 2023 in the face of slowing demand globally, but an only limited increase in supply means that prices will remain high in level terms. Prices of energy commodities, most base metals and several agricultural commodities surged in 2021, and then again after the onset of the war in Ukraine in February 2022. Although commodities prices will not fuel global inflation in 2023 as they did in 2021-22, upside risks to our baseline price forecasts are increasing and largely centre on China, climate change and continued conflict in Ukraine.

War in Ukraine will still affect agricultural commodities markets in 2023 Global supply-chain disruptions stemming from the covid-19 pandemic will subside in 2023. Along with increasing production volumes of agricultural commodities, this will cause a drop of 9% in our food, feedstuffs and beverages index this year. Prices of grains have eased significantly from their recent highs, but their direction in the coming months will continue to be influenced by events in the Black Sea region, in particular by any further extensions of an agreement that allows Ukrainian wheat exports to transit via Black Sea shipping corridors despite the Russian blockade of Ukrainian ports. Black Sea developments will also have an impact on oilseeds and vegetable oil prices, which are set to reach a trough at the end of 2023. The war will also have an indirect impact on coffee, cocoa and tea prices through high fertiliser prices and resulting shortages. Prices for soft commodities to trend downwards but remain high in 2023 EIU weighted price indexes (Q1 2019=100) Grains

Oilseeds*

Q4 2023 v Q4 2019 (% change)

Beverages

250

Grains 0

Oilseeds* 20

Beverages 40

60

80

200 150 100

2019

20

21

22

23

50

Source: EIU.

*Includes vegetable oils

Base metal prices will edge upwards in 2023 Policy-led decisions to boost construction and manufacturing in China—as well as rising demand for Asian production generally, as much of European capacity is shuttered amid the energy crunch there—will keep a floor under base metal prices in 2023, with most ending the year higher than they ended 2022. However, prices will not match the heights achieved in 2022, when raw material supply constraints created during the staggered economic recovery in 2021 were exacerbated by the war. Base metal prices surged in the first half of 2022 as the market scrambled to replace lost supplies of 1

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COMMODITIES OUTLOOK 2023 CLIMATE CHANGE, CONFLICT AND CHINA’S REOPENING

aluminium and nickel from Russia. Slowing global economic growth has already cut demand for base metals; we believe that average prices in 2023 will drop by 11% compared with the average for 2022. After recent sell-offs, prices for hard commodities edge upwards in 2023 EIU weighted price indexes (Q1 2019=100) Fibres

Base metals

Q4 2023 v Q4 2019 (% change)

Natural rubber

Fibres

180

Base metals 10

0

Natural rubber 20 30

40

160 140 120 100 2019

20

21

22

80

23

Source: EIU.

After a dip in December 2022, oil prices will average more than US$85/barrel in 2023 Energy prices have fallen sharply from mid-year highs in the second half of 2022, with average prices for all hydrocarbons (except liquefied natural gas, or LNG) set to register double-digit declines in 2023. However, prices will remain elevated at close to current levels. We expect oil prices to average more than US$85/b in 2023 as OPEC production (including Russia) falls by about 3m barrels/day from its recent peak in late 2022. OPEC unity and commitment to lower production quotas in the face of pressure from Western countries should be watched in 2023. Oil prices will remain elevated in 2023 (US$/barrel) Brent

OPEC basket

West Texas Intermediate

Dubai

Urals

120 100 80 60 40 20 0

Q1

Q2 Q3 2019

Q4

Q1

Q2

20

Q3

Q4

Q1

Q2

21

Q3

Q4

Q1

Q2

22

Q3

Q4

Q1

Q2

23

Q3

Q4

Sources: World Bank; EIU.

2

© The Economist Intelligence Unit Limited 2023

COMMODITIES OUTLOOK 2023 CLIMATE CHANGE, CONFLICT AND CHINA’S REOPENING

We also do not expect a significant easing of European and US natural gas prices from current levels before 2024. Russian gas supplies to the EU will remain cut off, which will have lasting consequences Actual for the European market, despite ongoing efforts to switch to Actual alternative supplies and imports of LNG. Forecast Forecast This will keep prices elevated in 2023. Increased global demand for LNG will boost US natural gas prices and sustain higher LNG contract prices, which will fall only moderately in 2023. Natural gas prices come off historical highs but set to remain elevated (US$/mmbtu) Actual

Forecast

US (Henry Hub)

10

Europe (Title Transfer Facility)

80

8 6 4 2 0 2019

20

21

22

23

Liquified natural gas (LNG, Japan basis)

24

60

18

40

12

20

6

0 2019

20

21

22

23

0 2019

20

21

22

23

Sources: World Bank; EIU.

China’s covid U-turn is a wild card China will continue lifting its zero-covid policies this year, after starting to ease them in December. China’s policy environment now moves from being a major downside risk to our demand and global price forecasts to an upside risk—much will depend on how quickly the country’s economy reopens in 2023 and the severity of covid outbreaks in the first half of the year. Fiscal stimulus, although already incorporated into our baseline forecasts, represents a potential upside for steel and base metals, depending on how much China’s property slump continues to curb construction activity. Cotton is likely to be a prime beneficiary of China’s reopening. Uncertainty surrounding China’s economic outlook had been set to weigh on cotton consumption in the 2022/23 and 2023/24 seasons. An easing of China’s zero-covid policy will lead to the opening up of its ports and logistics networks, which will boost consumption and textile production. Energy is another likely winner. Coal was by far the best-performing commodity in 2021-22, with consumption hitting an all-time high as Europe fired up old coal-fired power plants in the face of rocketing gas prices. Most of China’s industrial production runs on coal power. After the easing of zerocovid measures, CNOOC, one of China’s largest national oil companies, raised its growth forecast for gas imports in 2023 to 7%. This has the potential to fuel gas and LNG prices significantly.

Climate remains the big wild card in 2023 Climate played a major role in commodities in 2022 and will do so again in 2023. Scorching heatwaves in the northern hemisphere hit production of wheat in the US and Europe in 2022, and climate change means that catastrophic weather events are becoming more frequent. These include La Niña, which is stretching into an unprecedented third consecutive year and will be detrimental to maize and soybean production in the first half of 2023, in addition to other crops like sugar and coffee. 3

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COMMODITIES OUTLOOK 2023 CLIMATE CHANGE, CONFLICT AND CHINA’S REOPENING

La Niña shrinks coffee yields in Asian and South American producers

Asia

North America

Cool, wet weather

Pacific Ocean

Colombia Cool, wet weather

Increased trade winds

Vietnam Equator

Indonesia

South America

Australia Pacific Ocean

Brazil Dry, warm weather

Sources: NOAA, EIU.

Wheat, which was heavily affected by war-related supply disruptions in 2022, faces significant climate risks. In the US large swathes of the southern plains remain under drought conditions, and crops are in unusually poor condition heading into winter dormancy. Extremely dry, occasionally frosty weather in Argentina is causing damage across major producing provinces there, but Russia and Australia are on course for a second consecutive year of bumper crops, which, for the moment, is alleviating concerns about production in the western hemisphere. Weather will loom large in energy markets as well. Europe’s heatwave drove up demand last summer, causing gas and electricity prices to spike, especially as winds dropped to levels insufficient to generate enough power to meet Europe’s electricity needs while drought affected hydropower generation in many countries. These dry conditions, together with rising water temperatures, also hit nuclear power generation. In addition, the severity of Europe’s current energy crunch depends largely on how cold temperatures fall over the winter, not just in 2022/23 but in 2023/24 as well; the colder the winter, the more countries will have to draw down stockpiles built up over 2022. Below-normal temperatures will not only raise the spectre of energy rationing, but also put upward pressure on prices over the summer as Europe scrambles to refill reserves—this time without Russian supplies.

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