Geopolitics, Weather, and Economic Forces Drive Mixed Commodity Performance
As we move through 2024, the global commodities market continues to experience significant volatility, driven by a complex interplay of economic, geopolitical, and environmental factors.
Energy Markets: A Mixed Picture
The energy sector exhibited divergent trends in 2024. Crude oil markets faced high volatility in the first half of the year, with prices reaching a six-month high in April before easing significantly. This reversal was primarily driven by concerns about tepid global economic growth and the prospect of delayed monetary easing in major economies, which could further dampen consumer and industrial demand. The surge in electric vehicle sales, particularly in Asia Pacific, Western Europe, and North America, also reduced oil consumption forecasts.
Natural gas prices, on the other hand, have trended downward. The European benchmark fell to nearly half its level from a year ago in Q1 2024, as sluggish industrial activity and favourable weather weighed on demand. Abundant production and inventories, coupled with the growing adoption of renewables and efficiency gains, are expected to keep natural gas prices in check throughout the year.
However, geopolitical tensions in the Middle East remain a key factor to watch. Any escalation could affect oil and gas production and exports in the region, potentially bringing renewed volatility to energy markets.
Metals: Rebounding with an Uncertain Outlook
Industrial metals rebounded in Q2 2024 after a tough Q1. Aluminum’s performance was mixed; it declined 4.8% in June but ended the first half almost 6% higher. (It has since lost ground in July). A stable US economy and signs of recovery in China in the second quarter supported prices. The reduced operational capacity of Chinese smelters also contributed to price recovery, especially in aluminum markets. Copper prices, which gained almost 20% in the first half of the year, are expected to trade higher on average in 2024 due to supply volatility and rising speculative demand. Potential supply shortages, forecast to occur in 2025, are already being priced in as production cuts threaten supply. The financial problems of First Quantum Minerals, threatening supply from one of the world’s largest copper mines in Zambia, have sparked a bidding war between US and Chinese companies.
Gold prices surged in Q2 2024, driven by rising geopolitical uncertainty and central bank purchases. Gold rallied 15.8% for the year and recorded all-time highs, breaking through $2,400. According to the World Gold Council, central banks added 229 tonnes of gold to their reserves throughout 2023, with demand growth expected to extend into 2024 as countries like China, Poland, and India further increase their gold reserves. Silver also had a bumper first half of 2024, gaining 33% year-to-date.
However, the outlook for industrial metals remains uncertain. Slower anticipated interest rate cuts in the largest economies and weaker manufacturing sector growth could limit price increases. Further weakness in China’s residential housing sector into 2025 will also likely cap global demand for iron and steel.
Agricultural Commodities: Supply Improvements Ease Prices
Prices of major crops continued to slide in Q1 2024, with corn, wheat, and soybeans seeing the most significant year-on-year declines. Soybeans were hardest hit, declining almost 15% year-to-date, while wheat prices fell nearly 9%. Robust production from the US, Argentina, and China is projected to push global corn output to a record in the 2023-2024 season, significantly easing prices. Soybean prices are also forecast to decline in 2024 and 2025 due to higher plantings in the US and Brazil. Easing fertilizer costs have supported farmers and helped to increase agrifood output.
An anticipated shift from El Niño to La Niña is projected to alleviate pressures on some commodities, including rice, sugar, and cocoa. The US National Weather Service reported a 69% chance that La Niña will develop in July-September 2024, potentially supporting a bumper rice harvest in India and boosting global supply to record levels.
However, extreme weather remains a critical risk, as evidenced by recent floods in Brazil’s Rio Grande do Sul, which disrupted soybean and corn harvests. Additionally, poor weather partly related to El Niño pushed cocoa and Robusta coffee prices to record highs in 2024.
EV Metals: Riding the Green Wave
The growth of the electric vehicle market continues to drive demand for critical metals used in EV production. Lithium, cobalt, nickel, graphite, and rare earth elements have all seen increased interest as battery production expands and supply chain developments unfold. However, these markets face their own challenges, including ethical concerns in cobalt mining, supply constraints for nickel, and geopolitical risks affecting rare earth elements.
Political Influences on Commodity Markets
Political factors continue to play a significant role in shaping commodity markets. Trade wars and tariffs have impacted various commodities, including soybeans and aluminum, as evidenced in the ongoing US-China trade tensions. Sanctions and geopolitical tensions, particularly those involving Iran and Russia, have influenced crude oil and natural gas markets.
Resource nationalism, such as Indonesia’s export bans and the Democratic Republic of Congo’s mining policies, has affected nickel and cobalt supplies. Environmental and regulatory policies, especially those related to climate change in the EU, US, and China, are shaping the future of metals crucial for EVs and renewable energy infrastructure.
Future Outlook: Diverging Scenarios
Looking ahead, the commodity market faces two potential scenarios. A strong economic scenario would see increased demand for industrial metals and energy commodities and continued investment in EV and renewable energy infrastructure. However, in a recession scenario, commodity demand could decrease, leading to price declines and potentially impacting investment in new mining and energy projects.
Capital Economics predicts that commodity strength, particularly in metals like gold and copper, will reverse course through the second half of 2024 into 2025. Even with falling interest rates and improving GDP growth worldwide, commodity demand is expected to face challenges from factors such as the growing global energy commodity supply and a potential slowdown in Chinese economic activity, particularly in the construction sector.
Conclusion
As we navigate through 2024 and beyond, the global commodity market remains in a state of flux. While some commodities have seen price easing due to improved supply conditions and softer demand, others face ongoing volatility driven by geopolitical tensions, extreme weather events, and shifting economic landscapes.
Garnet O. Powell, MBA, CFA is the President & CEO of Allvista Investment Management Inc., a firm with a dedicated team of investment professionals that manage investment portfolios on behalf of individuals, corporations, and trusts to help them reach their investment goals. He has more than 25 years of experience in the financial markets and investing. He is also the Editor-in-Chief of the Canadian Wealth Advisors Network (CWAN) magazine. He can be reached at gpowell@allvista.ca