In a recent Global Macro Themes webinar in partnership between GlobalData and TS Lombard, in a session titled ‘Commodities: The Three Mega Themes that Matter’, a series of panellists looked into the global commodity market, the forces moving it, and what is likely to shape it in the next decade.
During the webinar, the panellists looked at how the property crisis in China could spill over into the commodities market – namely due to its impact on construction materials. They also assessed the knock-on effect of the Russian invasion of Ukraine on commodities, and how the global transition to net zero might affect mineral markets.
The property crisis in China and the impact on construction materials
For a number of years, China was a rational bull market when it came to property, explained Rory Green, chief Asia economist at TS Lombard. This started in the 1990s, when the country moved from being a state-controlled housing sector to a private one, and then continued in the 2000s during a wave of urbanisation as migrant workers travelled east to take part in China’s export-orientated manufacturing boom, he explained.
“But that rational market has ended,” said Green. “Since 2010, particularly from 2015, it has been speculative demand that has been driving property purchases in China, largely credit-fuelled purchases by buyers who already own homes, and that has been the driving factor.”
Chinese property developers are now highly leveraged, with “debt hidden all over their balance sheets”, according to Andrew Lawrence, Asia property analyst at TS Lombard. He said the implications of the downturn in the Chinese property market are going to affect commodities directly.
“We are going to see a deflationary export boom in the sense that the supply chain into developers is large and significant, and it does not have the type of demand domestically that it is seeing now,” added Lawrence.
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As a result, he is expecting furniture and sanitaryware exports from China to grow, “particularly undercutting European producers”.
Green added that he is expecting a contraction of around 30% in the property market, pushing China into a structural slowdown. “Growth is going to be much slower than it was pre-Covid, and this has enormous implications for China,” he said. Globally, Green added, it will affect the demand for traditional commodities such as cement and iron, and construction materials in general.
The impact of the Russia-Ukraine war on commodities
Rob Simmons, the director of rubber at consultancy LMC Agri, explained during the webinar that as a result of the war the big price hikes in agricultural commodities were in wheat, corn and maize and oilseed (sunflower oil). However, as those markets reopened when Russia allowed shipments from Ukraine, prices started to come back to levels below those seen at the start of 2022, “but still higher than what they were at the beginning of 2021”.
Simmons highlighted that this downturn in prices does have an exception in petrochemical prices, which are still high.
According to Konstantinos Venetis, a senior economist at TS Lombard, when macro and microeconomic trends align there is a significant impact on the markets, so 2021 saw very high commodity prices, with a tight supply-demand returning after the Covid-19 pandemic and policymakers sponsoring a huge amount of stimulus to support that demand.
This came to a halt just after Russia’s invasion of Ukraine in February 2022, when prices rose and policymakers were forced to act.
The Federal Reserve led efforts to respond by tightening its policies, which gave a strong upside to US rates and the dollar, said Venetis. This led to the yuan depreciating, he added, which was bad for commodities, and metal prices went down and oil prices went up. However, Venetis added that there has now been a return to the levels seen before the start of the invasion of Ukraine.
The question is what happens next, and the commodities market is undecided, according to Venetis. Prices have been moving only slightly since mid-2022, and what happens now depends very much on what the Fed does, he added.
Venetis’s view is that commodity prices will occupy a middle ground because supply is constrained and demand is slow, but they will remain strong in absolute terms, even when factoring in a mild recession in the markets.
The impact on commodities of the global transition to net zero
Speaking at the webinar, Grace Fan, global policy research for disruptive themes at TS Lombard, undertook the task of highlighting the challenges within raw materials for the global transition to net zero, especially when it comes to the energy transition.
Fan explained that in the US, President Joe Biden’s Inflation Reduction Act, which constitutes the first major climate legislation in the country, is “a really important step of many more to come”.
In the case of Europe, efforts have been obscured by the energy crisis caused by Russia’s invasion of Ukraine, but Fan added that “Putin’s war is unquestionably going to speed up the energy transition”.
Targets are being accelerated, explained Fan, pointing at the RePowerEU scheme, which aimed to push renewables to be 40% of the energy market by 2030 but has now been increased to a more ambitious 45%. Some have cast doubt on whether the EU will hit that revised target, but Fan said she believes the 45% mark will be hit by the late 2020s.
In the case of China, Fan explained that there is mixed progress. “The coal power pipeline continues to grow much faster than anyone wants, but at the same time China remains a renewables powerhouse, and deployment of solar and wind also continues at a breakneck pace,” she said.
At the same time, Fan added that mainstream forecasters such as the International Energy Agency, which has recently released its 2022 Energy Outlook, state that fossil fuels will peak this decade, a claim disputed by Opec. Fan believes that by 2027 the peak will be clear for all to see.
For mineral commodities, Fan explained that to hit net-zero emission targets globally, the energy transition requires six times the number of mineral inputs than there is today, “and regular electric vehicles (EVs) – again, depending on technology – today require six times more minerals than fossil fuel-only cars”.
This is a huge challenge, said Fan, but she pointed out that there is a belief that “technology will help bring cost curves down”, although this will very much be determined by where and when oil prices peak.
At the moment, China is the world’s dominant powerhouse for minerals, with 75% of the EV battery supply chain and 80% of the polysilicon and solar supply chain, explained Fan.
“The US is trying to change this by reshoring battery supply chains, [but] how successful it will [be] really depends on mining permit delays and other bottlenecks,” said Fan.
At the same time, Canada, Australia, Latin America, Africa and Indonesia will all be “really important in terms of tracking both the catalysts and the choke points of the energy transition ahead”, concluded Fan.