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Commodities

Industrial Metals

Pressure from rising Treasury yields likely to resume

This week the prices of most commodities got a boost as investors pared back expectations for rate hikes in the US, following lower than expected inflation data. That said, we still expect a further small rise in the US 10-year Treasury yield by the end of the year, which could put renewed downward pressure on the prices of commodities, and particularly gold, in the coming months. Supply disruption caused by the war in Ukraine seems to be easing, as grain ships have continued to leave Ukrainian ports. Meanwhile, there were renewed efforts to revive the 2015 Iran nuclear deal. While there are still hurdles, if a deal were agreed, we would expect a rapid rise in Iranian oil output, which would weigh on oil prices. Next week, we’ll be paying close attention to the latest activity and spending data from China on Monday. We expect that the data will show that the post-lockdown recovery lost steam in July, alongside a renewed deterioration in the property sector, which could weigh on industrial metals prices next week.

12 August 2022

Rhine troubles add to pressure on German industry

The fall in the Rhine’s water level is a small problem for German industry compared to the gas crisis, or indeed the recent shortage of semiconductors. But if it persists until December it could subtract 0.2ppts from GDP in Q3 and Q4 and add a touch to inflation.

10 August 2022

How much does Taiwan matter?

Taiwan matters far more to the world economy than its 1% share of global GDP would A further escalation in cross-strait tensions that cut Taiwan’s export off from the rest of the world would lead to renewed shortages in the automotive and electronics sectors and put further upward pressure on inflation. In view of the wider interest, we are also sending this Emerging Asia Economics Update to clients of our Global Economics Service.  

8 August 2022
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China’s copper imports are the only bright spot

Commodity import volumes remained lacklustre in July, consistent with subdued activity in heavy industry and construction. We think import growth should tick up in the coming months in response to higher infrastructure spending and a modest pick-up in activity. But renewed lockdowns pose a downside risk. Oil and the Gulf Drop-In (9th Aug): What’s the outlook for oil prices and what does that mean for Gulf economic outperformance? Join economists from our Commodities and Emerging Markets teams for this 20-minute briefing. Register now.

Oil prices fall, but supply risks remain

In a week of relative financial market calm, there was a pause in the large, sentiment-driven swings that have characterised most commodity prices in recent weeks. Instead, prices seemed to take direction from more fundamental drivers. That said, the largest moves were to the downside. Fears about softer demand have weighed particularly heavily on oil prices. But, we would not place too much emphasis on one week of price moves. Volatility in commodity prices has been incredibly high in recent months, and given the scale of supply risks that remain, we suspect there is scope for oil prices to recover some ground. Next week, we’re expecting trade data from China to show that weakness in the construction sector kept imports depressed in July, which will probably weigh on industrial metals prices. However, we expect metals prices to receive some support from a pick-up in Chinese economic activity in the coming quarters. Indeed, despite the deteriorating market backdrop, we suspect that the sharpest falls in industrial metals and agricultural commodities are now behind us.

Prices rally, but room for further gains is limited

The prices of most commodities across energy, metals and agriculturals rose this week. The common driver was investors dialling back their expectations of the aggressiveness of US monetary policy tightening, after data showed GDP contracted for a second consecutive quarter in Q2. However, we think investors may have gotten a little ahead of themselves and we forecast higher US interest rates than what the futures market implies. As a result, we think some of this expectation-related boost to prices will fade. Industrial metal prices also climbed on news that the People’s Bank of China will inject more money into China’s banking system to support lending to property developers. However, it’s not clear to what extent banks are willing to take on more exposure to the troubled property sector. Elsewhere, European natural gas prices surged again owing to Russia further restricting exports to Europe. We revised up our forecasts for non-US gas and coal prices this week to account for the tighter supply picture. Next week, OPEC+ meets on Wednesday to decide on oil production policy in September and possibly future months. News outlets report that the group will consider keeping output unchanged in September, although a “modest increase” will reportedly be discussed. Indeed, we suspect OPEC+ will agree to a looser production policy sooner or later, perhaps by even scrapping quotas. Meanwhile, we released new medium-term price forecasts in our quarterly Outlook publication yesterday.

Prices to find a floor

While non-energy commodities prices may fall a little further, we think the big move down in those prices is now behind us. Admittedly, the demand outlook has undeniably deteriorated in recent months, but many of the supply risks that prompted prices to soar earlier in the year are still with us. Moreover, our forecast of persistently high energy prices means that the cost of production of most other commodities will remain elevated for much of this year and into 2023.

Durable Goods (Jun.)

The jump in durable goods orders in June mainly reflected a surge in defence aircraft orders. Private equipment investment growth still looks to have slowed in the second quarter, although the latest trade and inventories data suggest overall GDP growth could come in stronger than we had expected.

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