Commodity prices are very high, particularly prices of fossil fuels and food, but this largely reflects shortfalls in supply, not strong demand. After reaching alltime highs in March 2022, global commodity prices have only edged slightly lower.
Supply is being constrained by the impact of the Russia-Ukraine war, the energy transition, the Covid-19 pandemic and climate change — most of which are likely to be sustained disruptions.
This is a stark contrast to the early 2000s commodities boom, which was a quintessential “super-cycle”. Back then, China’s strong demand for commodities outstripped global capacity, forced prices sharply higher and motivated a large, multi-year ramp-up in global resources sector investment. This supported global growth and drove economic booms in many emerging economies across Asia, the Middle East, Latin America and Africa. Supply eventually arrived, after a decade, and the super-cycle downswing ensued.
Impact on commodity prices
This time is different. Given the supply squeeze, the impact of high commodity prices on global growth is net-negative. Of course, the effect on individual economies varies, depending on whether they are commodity importers or exporters.
At one end of the spectrum, HSBC’s European economists forecast an energy shortage-driven recession in Europe and the UK. High commodity prices are weighing on real household incomes and businesses’ profit margins. Many emerging economies that are large food and energy importers are also being tightly squeezed.
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At the other end of the spectrum, high prices support national incomes for large energy exporters, such as Saudi Arabia, Indonesia and Australia.
Another difference from the earlier “super-cycle” is that the current high commodity prices are unlikely to drive a broad-based upswing in resources-sector capital expenditure. In particular, the energy transition and geopolitics constrain large-scale coal and oil investment, materials that together account for 36% of globally traded commodities.
Of course, sustained high prices of fossil fuels are, in some ways, helpful for driving the energy transition. High fossil fuel prices have lowered the relative cost of renewables, supporting both policy and investment. However, capital expansion in renewables, much of it in wind and solar energy production, is largely outside the commodity basket.
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A ramp-up in investment in liquefied natural gas (LNG) capacity is coming, although not until 2024 and beyond. Some battery-related commodities are in a “super-cycle”, like lithium. However, although investment in capacity to produce lithium has grown rapidly, it is off a very low base, and is still a small share of globally traded commodities. Burgeoning investment in hydrogen is a clear positive. But at this stage, trade in it is tiny, at around 0.1% of the value of globally traded LNG.
This could hardly be called a broad-based resources investment upswing, as we saw earlier in the century. Demand for copper, aluminium and nickel is supported by the energy transition but also faces China’s property sector challenges and the global downturn.
China’s “dynamic zero Covid-19” strategy has weighed on economic activity and is a clear downside risk to global growth. Falling property prices and sales, accelerating declines in property investment, and the recent mortgage boycott exacerbated concerns. Providing some offset, particularly for metal prices, China’s infrastructure investment is ramping up.
Copper is integral in solar and wind installations, but, at this stage, only around 3% of global copper consumption is for renewable energy production.
High food prices
Agricultural markets are also being squeezed. Food prices have been at very high levels, reflecting disruptions from the Ukraine war and the impact of inclement weather. Although they have fallen recently, grain prices are still very high, having risen sharply since 2020 on input cost pressures and pandemic-related disruptions. Meat prices have continued to rise on the back of supply constraints, particularly African Swine Fever in the pork market and avian flu in the poultry market.
There are clear upside risks to agricultural prices in the near term, largely from the supply side.
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Higher energy costs, which support fertiliser prices, and a global labour shortage also underpin the supply-side challenges. High fertiliser prices are likely to have a sustained impact on agricultural yields, as less has been applied to crops recently. For the first time this century, the world looks set to experience a third consecutive year of a La Niña weather event, posing a risk to crops and yields through drought and floods.
Overall, we expect global commodity prices to fall a bit from their current high levels, but this is largely a result of the global slowdown, which is itself in part due to the squeeze. We see them staying well above their historical averages even in 2023 and 2024, on supply constraints. Unlike the “super-cycle” we saw earlier this century, the “super-squeeze” is a much more downbeat economic story.
Paul Bloxham is chief economist for Australia, New Zealand and Global Commodities, HSBC
