A roller-coaster ride. Commodity prices rode a roller-coaster in recent months thanks to slowing global growth, tighter financial conditions and trade-policy uncertainty. But they’ve risen modestly in 2019 as the US Federal Reserve turned dovish, China stimulated its economy, trade tensions eased and the oil producers constrained supply.

Prices could recover despite slower global growth. Years of low investment in metals, following the earlier ‘super-cycle’, means supply is tight. Oil producers want about USD70 a barrel to break-even but nimble US shale producers can increase supply as prices climb. Global growth has weakened and trade tensions still threaten demand but we expect world commodity prices to recover last year’s falls then rise in 2020.

Stimulus supports China growth. Chinese demand is important for most commodities and its growth prospects are quite positive. Beijing has pulled forward infrastructure projects, particularly subway systems, loosened monetary policy and cut taxes: that should lift growth later in 2019. Meanwhile China’s environmental policy is constraining domestic production of lower-grade materials, particularly coal and iron ore.

Shale oil and OPEC in tug-o-war. Oil rode the roller coaster most aggressively, Brent peaking at USD85 a barrel in October 2018 but falling to USD50 by December. Global demand is uncertain, but US shale firms, OPEC producers and Iran supplied more than expected. With OPEC countries’ production now falling and some growth concerns fading, prices have partly recovered despite strong US supply.

Mining investment should rise. Last year’s fall in metals prices was checked by limited spare capacity, following weak mining investment. A modest pick-up in investment should see prices rising this year.

Environmental policy plays bigger role. Commodity markets are increasingly affected by environmental policies. China’s new environmental controls and global antipathy to investing in coal mines is constraining supply while demand rises strongly for liquefied natural gas and electric vehicles.

Battery commodities are a long game. Environmental policies are driving demand for electric vehicles and thus battery-related commodities. Strong battery demand has supported the prices of high-grade nickel but lithium prices are below their highs and cobalt prices have fallen sharply because China has built large stockpiles.

India will be a bigger player. HSBC forecasts India will remain the fastest-growing large economy, but that growth is oriented to services rather than manufacturing so a strong rise in energy demand is more assured than for metals.

Drought and tariffs drive agricultural markets. Some agricultural commodity markets have been heavily affected by changed trade policies and erratic weather, with droughts hitting global grain production. However, for most grains, high stocks will limit price rises.

Gold depends on the dollar. While gold could benefit from high financial-market volatility, trade and geopolitical risk, a firm dollar may limit gains.

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