Swann Commodity Market Update, November 2022

Settling down for a long economic winter

A slow return to economic normality is bringing some comfort to governments and central banks. However, the economic situation remains weak, and consumers are still in for a depressed period. Indicators are not positive, but hint that a steadier, albeit subdued situation can be expected in 2023, if nothing too untoward occurs.

Multi-year recessions are a feature in several countries’ economic forecasts. Forecasters see up to 24 months of lower economic growth, rising unemployment and a devaluing construction market, all of which will heap difficulties on consumers already feeling the high-cost pressures. However, the need to bring down inflation is paradoxically forcing central banks to raise interest rates and depress demand further.

Despite the immediate-term weakness of the global economy, with the right lens, the economic situation can be seen to be improving in the longer-term. Peak inflation expectations have been reduced, and key commodity prices are easing.

Consumer sentiment may be weak and weakening, and businesses are likely to feel the pain of lower consumer spending, but by implementing clear policies to stabilise financial markets, future growth can be built on a stable platform.

Commodity prices dipping as market sentiment worsens

A welcome relief has seen energy commodity joining the majority of commodity prices as they continue to fall over the last month. Even OPEC+ members agreeing to cut output last month was not sufficient to support crude oil prices. Energy commodities may still be high in comparison to the previous year but they are now only twice last year’s price, Many commodities are where they were this time last year or even falling.

Earlier this month the metals participants descended on London for the annual London Metals Exchange (LME) Week – a series of seminars, meetings and social gatherings around London’s West End.

The mood in 2021 was subdued, with few in-person gatherings, low attendance and depressed metal demand due to Covid-19-related restrictions.

This year things were rosier, though a shadow of the ‘jamboree’ of previous years. Concerns about the underlying strength of markets and the future of industries, especially in Europe, overshadowed views of brighter days that the energy transition could bring. 

Particular mention was made of the impact of energy prices on European metal works.

A presentation by Wood Mackenzie detailed how the spot prices of power for zinc smelters had increase four-fold since 2020, on a capacity-weighted basis. Steel mills have been under similar pressures, and blast furnaces across Europe have been idled.

Eurometaux, Europe’s non-ferrous metals association, highlighted the issue, “Fifty percent of the EU’s aluminium and zinc capacity has already been forced offline due to the power crisis.”.

With high costs and weakening demand for many metals, idling capacity makes commercial sense – the threat is it will not be restarted.

Consumer depressed

Inflation woes have not dissipated. Despite the falling prices for commodities, other prices, whether on the forecourt or in the supermarket aisles, have held up. This has sustained the depression in consumer confidence.

October’s reading may show an improvement on September, as consumers hear lower inflation forecasts and, for Britons, the reversal of the disastrous “mini-budget”. But the underlying market weakness persists. Companies’ are already reporting lower earnings, as consumers spend less. With months of weakening consumption ahead, earnings are under threat and unemployment and insolvencies likely. 

In all, inflation levels have stepped down over the last month on high interest rate hikes, but still remain close to recent highs. The difficult balancing act will be to dampen inflation to more sustainable levels, without overshooting too much or hurting demand so much that recessions are extended.

Energy prices ‘off the boil‘

The unseasonably warm weather has been a welcome development in pulling energy prices down. Weather is notoriously difficult to predict, but forecasts are pointing to a warmer-than-average winter overall. Together, with the success Europe has made in filling gas inventories, this bodes well that power-outages can be avoided.

The EU had mandated that storage should be at 80% full. It has actually reached 95%, as both LNG imports have stepped up and demand has been managed down voluntarily. With some 30 LNG tankers waiting off European ports available to discharge their cargoes, supply for this winter looks much more assured.

The question, therefore, has shifted to the coming years. The EU is looking to the United States for more LNG, with the two agreeing to work together to support Europe’s energy security and to reduce its energy dependency on Russia.

Additional regassification infrastructure is being built to remove some of the bottlenecks in the current infrastructure, and more storage is planned. Short-term costs that will build a resilient energy system, not reliant on Russian gas flows.

Outlook stable but subdued

The gloomy picture of economic growth persists. Indicators like inflation may be better than they were last month, but the fundamental situation is little changed and with fading hope of a recovery.

Depressed consumer confidence is a worrying threat to all companies. If anxious consumers continue to rein in their spending, then businesses already weakened by the pandemic years and high energy costs will fail. The ensuing lift in employment will add further downward pressure on the economic recovery. Headwinds are clear, real and damaging.

Only once inflation has been brought down, can the difficult job of lifting demand commence. Governments will have their work cut out if they are to balance the fiscal challenges ahead.

No wonder recessions are now expected to last into 2024.

---