A commodity round-up | Calamatta Cuschieri

Markets summary

For most commodities, the months ensuing the start of an unprecedented health crisis proved turbulent. Those initially witnessing a decline due to a drop demand as the pandemic triggered a widespread global shutdown of economic activity, generally reversed.

The resumption proposition, aided by substantial stimulus and following a widespread vaccine roll-out, alleviated not only sentiment but also demand. This, giving rise to the notion of a commodity super cycle.

Albeit some commodities have reached multi-year highs and also all-time peaks, some expect certain commodities to head higher.

Oil and Gas

Fuelling inflation worries, amongst the transitory effects following the reopening of economies, were energy prices.

Crude oil, strongly depressed at the peak of the health crisis, has in 2021 recovered strongly. The re-opening of economies, following a decline in infections and coronavirus vaccination programmes being well-underway particularly in the developed market world, boosted hopes for a sustained recovery in economic activity and energy demand.

Building on their eight-weekly gain, Crude futures are hovering at 7-year highs, around $83 a barrel amid expectations that tight supply and strong demand may continue to support prices in the near term.

The Organization of the Petroleum Exporting Countries, Russia and their allies, better known as OPEC+ has been struggling to add crude back to the market, as members such as Angola and Nigeria struggle to raise oil output, due to lack of investment and exploration. Also, oil continues to benefit from the soaring prices of natural gas and coal, the latter trading at record highs. In recent weeks, power generators have switched from expensive gas and coal to oil and diesel as major industrial countries grapple with power shortages. The outlook for the said commodity is seemingly benevolent. Easing of coronavirus restrictions around the world are likely to continue driving the recovery in fuel consumption.

Albeit retreating from the highs witnessed towards the end of September, gas prices have remained elevated and not far from a seven-year high of $6.5 per million British thermal units amid strong demand during the winter heating season and depleted inventory levels, particularly in Europe and Asia. Russia is seemingly keeping a tight grip on Europe’s energy market, now opting against sending more natural gas to the continent, even after Russia’s President Vladimir Putin hinted to boost supplies through majority state-owned multinational energy corporation; Gazprom PJSC.

Russia has in recent days signalled that Europe won’t get extra gas without the controversial Nord Stream 2 pipeline, which bypasses Ukraine and is yet pending regulatory approval by both the European Union and Germany. The Nord Stream 2 pipeline is considered key to boosting supplies.

Industrial metals

The price of Iron Ore, the primary beneficiary from increased spending particularly in infrastructure and construction through stimulus have since May 2021, then having reached an all-time high of $229.50 per tonne, retreated.

China - a key player which quickly emerged from the pandemic and proved to be the fastest to recover economically, thus providing firm support from a demand perspective, slashed steel production as it sought to cool prices in metal markets and decrease pollution from the steel industry. Worsening the scenario was Evergrande Group’s default, the country’s second-largest real estate company. The price of iron ore now revolves below the $120 per tonne levels.

Albeit not as profound, steel prices, benefitting from; strong manufacturing activity bolstered by pent-up demand, strict output curbs at Chinese steel mills, and alleviated coal prices - a key input, also tumbled amid mounting concerns from China’s real estate sector which accounts for a quarter of the country’s steel demand.

The outlook for the said metal and thus price future direction is seemingly positive, with the normalisation proposition aided by a continued vaccination roll-out and further production cuts in China possibly continuing to support prices. A further deterioration in China’s real estate market indeed poses a downside risk, impacting demand.

Copper prices - a barometer of the health of the global economy, continued to rally towards record highs as signs of extremely tight supply outweighed concerns that slowing growth in China will impact demand. Global exchange inventory levels have also shrunk. London Metal Exchange (LME) spot prices have in recent days been trading at over $1,000 premium over 3-month future contracts, the widest spread in 16 years. This, a sign that current supplies are failing to meet demand. To ensure orderly trading, the LME said it would adjust its rules requiring large holders of the said metal to lend it back to the exchange, and institute a limit on backwardation (a scenario were the current price of an underlying asset is higher than prices trading in the futures market). Meanwhile, available stockpiles have shrunk by over 90% over the last couple of months in LME-monitored warehouses, a trend also witnessed in American and Chinese inventories.

It is worth noting that in 2021, the price of the said industrial metal has been boosted by; an improved economic outlook as the global vaccine rollout gathered pace and a substantial economic stimulus - further lifting hopes of a robust recovery, a weakening U.S. dollar, and a shift towards cleaner energy. The metal's integral role in the green-energy transition further fanned expectations that the rally will possibly be long-lived. Countries worldwide are at present rolling out more aggressive climate targets.

The outlook for copper remains positive with soaring demand, depleted stocks, and lingering supply disruptions in Chile - responsible for a quarter of the world’s copper mine production.


Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.