As we pass the midpoint of 2023, it is worth looking back at the first half of the year and how the commodity prices have changed due to several factors, chief among them being events such as:
- A peak in inflation.
- Hawkish interest rate hikes by central banks.
- The Russian-Ukrainian armed conflict.
- China’s recovery from Covid-related measures.
- Recession concerns and supply chain issues.
Experts’ forecasts suggest that global growth will slow from 2.8% in 2022 to 2.4% in 2023. At the beginning of the year, certain market players had a stark bearish stance and were ringing alarm bells during Q1. Their view was not unfounded either, the US home sales figures were constantly declining, and employment rates were not promising. The Fed’s interest rate hikes were expected to curb inflation and drift the economy over the recession zone simultaneously. Nevertheless, things have been going better than expected in the US economy. The new highs of several indices have especially been confirmed for good after the US debt ceiling deal was struck in late May.
The World Bank predicts that commodity prices will remain broadly unchanged for the remainder of this year; however, the prices are still expected to stay above the pre-pandemic levels. There is the upward uncertainty that hints prices could go back up because a number of factors that caused the shockingly high prices of commodities in 2022 are still very much present. The Russian-Ukrainian crisis further increases global tensions, shortage of energy sources and metal supply, and China’s Covid recovery, among others, are some of the factors that pose a serious price increase risk. However, uninspiring growth in the global economy points to a further decline in price.
In this post, we will quickly go over some of the popular commodities and the factors that contributed to the fluctuation in their prices.
Gold
According to the Mid-Year Outlook 2023 report by the World Gold Council (WGC) released on July 6, 2023, Gold is expected to retain its strong position amidst its 5.4% increase in price in H1 2023 and the wave of rangebound bond yields and drop in the dollar rate. One potential caveat here is an increase in the Fed rate. “Gold should experience stronger investment demand if economic conditions deteriorate. Conversely, a soft landing or much tighter monetary policy could result in disinvestment,” the Mid-year Outlook 2023 said.
Gold had a power run all the way up to $2.081 in early May, which was followed by a sharp decline. All in all, Gold was able to outshine all other major assets except EM equities. Many investors saw a positive return on their investment in the precious metal as it helped caution the wind of volatility for the entire H1. Many investors could scale through the mini-banking turmoil during spring thanks to Gold. Moreover as you may recall, several major incidents shook the whole banking system, some of which include:
- Credit Suisse became insolvent and was later acquired by UBS in a $3.3B deal;
- The Silicon Valley Bank (SVB) had a bank run and eventually collapsed, which was the biggest US Bank failure since 2008;
- First Republic Bank was seized and sold to JPMorgan. The bank’s assets included about $173B in loans and $30B in securities.
Looking back at Gold’s performance throughout the year’s first half, one can only attribute its ROI to certain factors. Some of those factors include event risk hedging, steady demand for Gold by the central bank, and the stability of the US dollar and interest rates.
Crude Oil
In early March 2023, the price of oil went down sharply as China issued more lockdowns, raising fresh concerns about a potential dwindling demand in the world’s biggest crude importer. The price shot up again in the same period when CERAWeek delegates Chevron’s Mike Wirth and Gundvor’s Torbjorn Tornqvist warned of a supply shortage.
In the next half of the year, the oil prices will highly depend on Saudi Arabia’s pledge to cut production by a further 1 million barrels per day (bpd) starting from July to counter macroeconomic headwinds.
Further price changes depend on how fast China can recover from its pandemic struggles, as its efforts cast a shadow on the global outlook of oil demand. Beijing’s “pent-up” consumption is expected to hit a high after H1 2023, followed by a downward projection of just 400,000 barrels per day by 2028.
Russia’s invasion of Ukraine has undoubtedly been another major price decider for crude oil, with the nation’s output still “clouded” amid sanctions on their seaborne crude and oil products exports. The withdrawal of Western companies responsible for production from the region has also contributed to plummeting oil prices.
Steel
The end of H2 2022 saw low steel prices, but steelmakers were optimistic for an upward change come the turn of the year. Their optimism didn’t stop the price decline that continued into March 2023. By a margin of $50-70 per tonne, rolled steel prices plummeted amid a decrease in demand, unfavorable macroeconomic factors and negative market sentiment as uncertainty surrounds the Chinese market, the largest steel producer by far.
It’s no surprise to see European manufacturers react to the low demand by reducing production by considerable margins, all from January to March 2023.
Several factors impacted the low steel prices, chief among them being global geopolitical uncertainty and persistent hikes of interest rates by central banks. China’s recovery projection for its construction sector didn’t go as planned, as the expected peak period of March-April lived short of expectations. A heavy rainy season looms large over PRC, reducing the need for steel and its by-products. The fire incident at ArcelorMittal facilities in the EU also posed a risk of a downward turn in price and a prudent purchase habit from consumers in expectation of a further price reduction.
Uranium
The uranium industry has gained momentum recently, and it continues to build on that as more and more sectors and nations are embracing nuclear energy as an alternative energy source. This surge in demand for a new energy source gives it a well-structured base for the future. As Justin Huhn, founder and publisher of Uranium Insider, pointed out, it’s been a challenging start to 2023 for uranium stocks despite the rallying cry for an alternative energy source amid a supply shortage from Russia.
In an interview with INN, Justin Huhn said, “The equities are very cheap relative to the metal.” He said he sees an “incredible contrarian opportunity” in uranium stocks at the current levels. “The miners are very cheap, and it’s turned into almost like we’ve got a reset,” the uranium expert reiterated. It’s believed it’s still positioned well in the foreseeable market movement. Scarcity played a role in driving the price up, and it will continue to do so as the commodity gain traction in the market.
The surge in uranium prices is a testament to the fact that renewable energy plants were insufficient to address the energy shortage in Europe and the green-energy movement in the latest years. Particularly in Germany, shutting down nuclear plants and incentivizing renewable energy resources have not only failed to keep up with the energy demand but also cast a shadow on green-energy alternatives in the public eye.
Natural Gas
LNG trade swooped in to come to European’s rescue following the disruption of supply from Russia as gas prices dwindled in H2 of 2022 following its peak in August. Lower demand meant prices followed the same pattern at the turn of the new year, even after China’s reopening. The Henry Hub Natural Gas Spot Price currently averaged a price of 2.68 on July 8, 2023, a significant downturn from 6.09 one year ago, a much-needed relief to the European markets and also undermined one of the biggest bargaining chips held by Russia.
2023 opened with a much colder winter that skyrocketed the demand for natural gas to heat homes hence a slight upturn in price. Also, the global economy saw a boost as the year went on, culminating in a much higher demand for natural gas. However, the Texas Freeport LNG export terminal fire incident meant a shock supply disruption coupled with the geopolitical tension surrounding the events in Russia. No doubt, uncertainty surrounds the output that comes from Moscow, further rendering prices volatile.
One other risk factor is when the European and Asian spot prices intersect if demand in Europe steadily increases while that of Asians remains at a sluggish pace.
Corn
Drought, low demand, and weather continue to impact US corn significantly. Corn’s supply-demand trajectory is also shaped by low export, sluggish DDGs production due to cold weather, and plummeting ethanol margins. This trajectory is indeed in line with the rest of the grain prices. UN reported that the world food price index fell in June to its lowest level in over two years.
Additionally, the strong position of the US dollar also renders US corn unattractive to buyers, and analysts are of the opinion such a trend is likely to continue well into the year.
The previous year’s drought has put a strong strain on the supply of corn as US corn distribution met many shortages. Global corn supply has a similar pattern as it strictly follows the tight projections made for H1 2023, signaling more changes in corn prices. As highlighted above, the weather was one of the major factors that decided corn prices in H1 2023. Planting was delayed, and several plantations incurred crop damage and losses due to wet springs. High local precipitation in the US also led to reduced corn basis. This, in turn, led to concerns about the corn crop, which put downward pressure on prices.
Milk
Milk Cost of Production Estimates has always been a major indicator of the direction of milk prices, and its annual estimates differ by production size and operation state. The 2021 USDA report, Agricultural Resource Management Survey (ARMS) data from milk producers, and updates derived from annual price changes determine milk cost of production. According to the USDA, the average farm price of milk in the United States fell by -30.85% in H1 2023, compared to H1 2022 – the largest decline since H1 2009.
Surplus milk production, uncertainty in demand, and slow economic outlook are some factors that affected the milk price in H1 2023. High-cost feed will continue to be a concern for production, but because of more cows early in the year, they could make up for the feed cost with increased milk production. This meant there was no abrupt upward pressure on price. However, projections for the rate at which milk is produced significantly reduce in the latter stage of the year as fewer cows are available for production.
The United States dairy export for 2022 hit a record-breaking figure, leading to a surplus supply in the first half of 2023. This put downward pressure on prices. Demand for milk has also been weak in recent years due to the rise of plant-based alternatives, further driving prices down.
Cocoa
The International Exchange in London on June 30 reported that the cocoa had hit a record high price that stood for 46 years as factories scrambled to acquire the limited supply of cocoa available in the market. The high of June 30 closely follows that of April 2023, which reached a six-year record as the market experienced demand after demand. At a high of $3,357 (as listed on the London and New York commodities market), a 40% increase from last October, Cocoa is set for more upward price projections in the coming months.
Following concern over the shortage of cocoa beans and the unreliability of supply from producing nations, ICCO released a couple of factors that contributed to the price surge. Russia’s invasion of Ukraine meant dwindling Moscow’s potash export and high fertilizer cost, resulting in lower crop yield. The year-after-year low global supply of cocoa is now showing a compounding effect as price spikes up even further. Although the geopolitical crisis in Ukraine may have triggered a price increase, the weather conditions in West Africa are contributing to further spikes. ICCO mentioned that “the abundant rains that were recorded in Côte d’Ivoire’s main cocoa-growing regions raised concerns over a possible delay of the country’s mid-crop.”
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