While oil and natural gas remain depressed, gold and industrial metals are seeing a resurgence.
The COVID-19 pandemic has thrown 2020 global commodities markets into disarray. Oil has been the most dramatically affected, at one stage dropping into negative price territory, due to an unprecedented collapse in travel and trade. Industrial metals also fell heavily, though not as dramatically as oil, but have since made strong recoveries. Agricultural commodities have seen declines too, with rubber the most seriously impacted, although again prices have largely recovered. Gold and other precious metals, however, are soaring to new heights as they benefit from their status as safe havens in times of market turmoil.
As of August 20th, the Thomson Reuters/Core Commodity CRB Index of 19 commodity futures prices was down 18.5 percent from the beginning of the year, though off its April low of down 42.6 percent. Most of the commodities that lost heavily at the height of the market panic surrounding COVID-19 have since followed a course that suggests markets are on track for the hoped-for V-shaped recovery, but there remains too much uncertainty to be confident that this will be the case.
To predict price movements over the rest of 2020 will depend largely on developments in the COVID-19 pandemic, which, despite governments’ best efforts, has remained stubbornly unpredictable. Other major causes of market uncertainty will be the outcomes of massively expensive government stimulus packages, widespread recession and potentially large-scale unemployment, as well as China-U.S. trade relations and the November U.S. presidential election.
Downward pressure to remain on oil; LNG recovers but uncertainty remains
The impact of the COVID-19 pandemic was most severe for the crude oil market. The global lockdown caused a big drop in demand for transport fuel, which accounts for two-thirds of worldwide oil demand. The effect on prices was exacerbated by the collapse in March of OPEC+ production talks to deal with the drop in demand and the resulting price war between Russia and Saudi Arabia. A subsequent agreement in April did little to support prices as demand remained uncertain and there were fears that the production cuts may not have been enough.
Crude prices in August were down around a third from those at the beginning of the year, though well off the new lows plumbed in April, when at one stage West Texas Intermediate crude sank as low as minus U.S.$40 a barrel. The path to full recovery remains highly uncertain, however. COVID-19 cases are falling in the United States but the number remains high, and oil demand is likely to stay subdued for the rest of the year as travel restrictions remain. Even when prices do start to pick up, there is an abundance of supply that can be brought out of storage that could push prices down again. A tapering of OPEC production cuts will also restrain any price recovery.
The global lockdown also slashed demand for natural gas and prices tumbled accordingly, exacerbated by new supply coming online in a market that was already faced with a glut. Prices have largely recovered, however, with unusually hot weather in north Asia in August helping to propel Asian LNG prices to their highest levels since January when the COVID-19 virus first hit demand. Uncertainties remain for LNG too, not just around the progress of the COVID-19 pandemic but also with regards to energy policies in China and South Korea, the timing and scale of nuclear restarts in Japan, and volumes of Russian pipeline gas supplied to Europe.
Gold tipped to hit new highs as investors look to safe havens
Although gold was sold off heavily during the March market rout, along with the other precious metals, it has since recovered on safe haven flows to unprecedented levels above U.S.$2,000 an ounce. Silver and platinum, whose price movements are more closely correlated with those of industrial metals, have also recovered, though to a lesser extent. As much of the demand for platinum is for use in catalytic converters, a steep drop in automobile production continues to weigh on demand and prices.
Gold prices have been unaffected by steep declines in jewellery demand, instead being pushed relentlessly higher by investors looking to safe havens amid a still-raging COVID-19 pandemic, a struggling global economy, massive fiscal and monetary stimuli, a weakening U.S. dollar, and continuing geopolitical and trade tensions. Exchange traded funds acquired almost 900 tonnes of gold between January and July, a record high, according to the World Gold Council.[i] Even though gold prices are at record highs, none of the reasons for this look to be changing soon and analysts are widely predicting more gains before the end of this year. Silver is also in demand, up around 50 percent since the start of the year and continuing to trend higher supported by some recovery in industrial consumption.
Copper leading resurgence in base metals
The deadening of demand caused by the global lockdown resulted in substantial drops in most industrial metals prices, particularly copper and zinc, which at the market nadir in March were down a respective 25 percent and 17.5 percent. However, a return to economic growth in China, which accounts for more than half of global metals demand, supported by government stimulus measures around the world and shutdowns of some mines and refineries, has resulted in a full recovery for both these metals to levels higher than they started the year with.
Copper, a barometer of global economic wellbeing, has also gained from increased demand for electrification projects around the world, including for electric vehicle charging points. The electric vehicle and construction sectors are also boosting zinc, nickel, aluminium and lead. Copper prices could continue rising if the spread of COVID-19 in major copper-producing countries Chile and Peru threatens supply, despite a deal having been struck with miners at Antofagasta’s Zaldivar mine in Chile that averted a potential strike.[ii]
Zinc has also returned to above pre-pandemic levels, catching some of the speculative interest from other resurgent commodities such as copper and as mine restarts are delayed by workers in COVID-19-hit South America staying at home. Still, unlike copper, the zinc market remains oversupplied and prices are unlikely to push much higher.[iii]
Aluminium has recovered much of its losses from March to May but has yet to catch up to its price levels from the start of the year. Chinese demand is strong but low raw material prices and the high cost of shutting down smelters has kept stocks high.[iv] Also holding back a full recovery is the recent reinstatement of U.S. tariffs on Canadian aluminium.[v]
Nickel has recovered to just above pre-pandemic levels but remains off the highs seen in the third quarter of 2019. Prices will continue to be dependent on Indonesia’s continued ban on nickel to encourage miners to develop their own smelters and thus be able to export higher-value-added products.[vi] Beyond this, prices will depend to a large extent on COVID-19’s continued impact on Chinese and other economies and on further developments in the electric vehicles industry, where nickel is an important metal in rechargeable batteries.
Iron ore surges on back of Chinese steel production
The main beneficiary of China’s V-shaped recovery has been iron. China buys more than two-thirds of the world’s seaborne iron ore, making iron the most exposed of the major commodities to the Chinese economy and the best-performing so far this year. Iron ore was trading at around a six-year high of U.S.$125 a tonne on Aug. 21, a rise of 48 percent from where it started the year as strong steel production in China boosted demand. The Chinese government also recently said it would increase spending on infrastructure construction to counteract the impact of the COVID-19 pandemic on the economy.
Chinese steel production is likely to keep iron ore prices on an upward trajectory, supported by dwindling inventories at Chinese ports and production outages in Brazil caused by one of the world’s most severe outbreaks of COVID-19 and an extended monsoon season.[vii]
Agricultural commodities recovery underway
The COVID-19 pandemic also hit demand for agricultural commodities. Although the impact was not as great as it was for some other commodities, neither has been the recovery, with wheat, rice, sugar, coffee, cocoa and cotton down as much as 8 percent from the start of the year. Prices could strengthen further if the growing season is impacted by labour shortages caused by restrictions on travel, including across borders. This will be a particular concern in advanced economies that largely rely on migrant workers.
Another potential disruptor would be food-exporting countries securing their own food supplies by restricting exports, such as the restrictions announced by Russia on wheat and Vietnam on rice, or food-importing nations buying in more than usual, such as Egypt and Saudi Arabia with wheat and the Philippines with rice.[viii] Supply chain disruptions are likely to support prices.
Some of the hardest-hit agricultural commodities were those used in biofuels for transport, such as soybeans and corn. Soybeans remain down around 6 percent since the beginning of the year, but corn continued down to a near 11-year low in August on oversupply concerns after favourable summer weather in much of the U.S. Corn Belt and good harvest prospects in Ukraine and France.