The recent surge in commodities prices, driven by strong demand and supply disruptions, may not last long, according to some analysts.
The global industrial cycle, which measures the health of the manufacturing sector, may have reached a peak in January, after hitting record lows in 2023, Macquarie Group said in a report. This could signal a slowdown in commodities demand, especially for base metals, which are used in construction, infrastructure, and electronics.
The Macquarie report cited the purchasing managers’ index (PMI) data, which tracks the activity of purchasing managers in factories, as an indicator of the industrial cycle. The PMI data showed that new global manufacturing orders declined in January, while inventories rose, suggesting a weaker demand outlook.
The report also noted that the commodities boom was partly fueled by speculative buying, which could reverse quickly if market sentiment changes. The report warned that “the near-term view on commodities is rosier than reality”.
Energy Transition and Geopolitics
However, not all commodities are expected to follow the same trend. Some commodities, such as oil, natural gas, uranium, and cobalt, may benefit from the ongoing energy transition, which aims to reduce greenhouse gas emissions and shift to cleaner sources of energy.
The energy transition is expected to increase the demand for these commodities, as they are used in renewable energy technologies, such as wind turbines, solar panels, batteries, and nuclear reactors. The energy transition is also expected to create new challenges and opportunities for the commodities markets, as the geopolitical landscape changes.
For example, the US and China, the world’s two largest economies and energy consumers, are competing for influence and resources in regions such as Africa, Latin America, and the Middle East, where many of the key commodities are produced. The US and China are also investing heavily in their domestic production and innovation, to reduce their dependence on imports and enhance their energy security.
The geopolitical tensions and conflicts could affect the supply and prices of commodities, as well as the trade and investment flows between countries. The commodities markets will have to adapt to the changing dynamics and risks, as well as the opportunities, of the energy transition.
Weather and Inflation
Another factor that could influence the commodities markets in 2024 is the weather. The El Niño phenomenon, which is a periodic warming of the Pacific Ocean that affects the global climate, was particularly strong in 2023, causing droughts, floods, fires and storms in various parts of the world. These extreme weather events hurt the production and transportation of commodities, especially agricultural commodities, such as grains, coffee, sugar and cocoa.
The El Niño is expected to continue in 2024, although with a lower intensity, according to the World Meteorological Organization. The weather patterns could still affect the commodities markets, as they could disrupt the supply and demand balance, create volatility and uncertainty, and affect the quality and quantity of the crops.
The weather could also have an indirect effect on the commodities markets, through its impact on inflation. The rising food prices, due to the lower supply and higher demand, could contribute to the inflationary pressures, which have been increasing since 2023, as the global economy recovered from the pandemic-induced recession.
Inflation could affect the commodities markets in two ways. On one hand, it could increase the demand for commodities, as some investors and consumers may see them as a hedge against inflation and currency devaluation. On the other hand, it could prompt the central banks to tighten their monetary policies, by raising interest rates and reducing their stimulus measures, which could dampen the economic growth and the commodities demand.
Despite the challenges and uncertainties, the commodities markets may also find some reasons to be optimistic in 2024. Global economic growth is expected to remain robust, supported by vaccination campaigns, fiscal stimulus, consumer spending, and trade recovery. The global GDP is projected to grow by 4.1% in 2024, according to the International Monetary Fund.
Source: Mining.comÂ
