At the end of the global commodities 'super-cycle' in 2016, markets were heavily oversupplied and prices were at 12-year lows. Since then, commodity prices have risen 65 per cent, as improved world growth has supported demand while supply has been constrained by low investment plus Chinese environmental and other reforms.
There is now little spare capacity across a range of commodities, including oil and most metals, but global growth of 3.0 per cent this year and 2.8 per cent in 2019 should support commodity demand, despite the US-China trade tensions. After rises averaging 14 per cent in 2017 we expect global commodity prices to increase by around another 23 per cent this year and 6 per cent in each of 2019 and 2020.
The squeezed supply partly reflects reduced investment. Without investment in conventional capacity, many oil fields will see decreasing yields, while mining companies are focusing on cost control and boosting profits rather than investment.
So far, trade-policy tensions seem to have had little substantial negative effect on commodity prices. Some base metal prices have fallen, particularly copper, reflecting growth concerns and some agricultural prices, including US soybeans and pork, have declined because of retaliatory tariffs in some destination markets. But oil markets have tightened because of US sanctions on Iran.
China's domestic growth outlook remains key, given that it is the largest customer for many commodities. Slower growth in onshore construction, particularly infrastructure, has weighed on metals prices. However, Beijing will likely respond to rising trade tensions by boosting infrastructure investment. The Belt-and-Road Initiative can also support commodity demand.
On the supply side, China's reform agenda continues to constrain supply of some materials. Coal prices have been driven higher, as the country favours higher-grade imports over low-grade onshore production. A large premium between high-grade and low-grade iron-ore prices has opened up, reflecting China's preference for the better quality material.
China's environment and reform agenda, is removing supply and driving increased demand for cleaner energy. That has boosted Chinese demand for liquefied natural gas and is supporting a price 'super-cycle' for battery-related commodities.
The supply factors that drove oil prices lower this summer, including a large boost from Saudi Arabia, should prove temporary. More sustained supply constraints could follow the lack of investment in capacity in recent years by non-OPEC producers combined with field closures and sanctions on Iran.
The prices of the battery-related commodities – including lithium and cobalt – remain high, reflecting a short-term boost to the supply of lithium and reduced cobalt stocks. Given the strong outlook for battery demand over coming decades and higher mine investment, the super-cycle could have further to run.
After a long period of low grain prices, driven by global excess supply, dry conditions and changing trade policies are shaking up many agricultural markets.
Drought in eastern Australia has pushed up wheat prices while US soybean and sorghum prices have been buffeted by rising Chinese tariffs. Barley prices have also risen sharply and meat products, such as pork and chicken, are being affected by changing tariffs, while droughts are leading to higher cattle slaughter rates.
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