HSBC sees rising downside risks for commodities

Analysis of Commodity Market Risks

HSBC analysts caution about increasing downside risks for commodities, despite prices remaining elevated over the last 18 months.

Current Prices: As of August 2024, commodity prices were reported to be 44% higher than the pre-pandemic average in nominal terms. However, adjusted for inflation, they align closer to the 20-year historical average.
Supply-Side Factors: The primary driver behind this resilience is the supply-side “super-squeeze,” identified by HSBC as a crucial factor since 2022.

Global Growth: The forecast for global economic growth has been lowered to 2.6% for 2024 and 2025, a slight decline from 2.7% in 2023. This deceleration is expected to impact commodity demand.
Manufacturing Slowdown: A sluggish global manufacturing sector, worsened by China’s ongoing property sector crisis, particularly impacts metals prices.
China’s Property Sector: As a major consumer of metals, China’s housing contraction poses a significant risk, with construction metrics showing continued contraction despite stimulus efforts.
Metals Performance: Metals tied to energy transition (like copper and aluminum) have fared better than traditional infrastructure metals (like iron ore), which face dire demand challenges.

Bear Phase: HSBC’s Commodity Cycle Selector indicates commodities have entered a Bear phase since mid-July 2024, signaling potential further downward pressures across various commodities, including oil and copper.
Geopolitical Risks: Geopolitical factors, including the Russia-Ukraine conflict and disruptions in the Red Sea, persist, affecting supply-side constraints.
Energy Sector: OPEC+ production cuts and high US crude production may lead to surplus by 2025, yet, ongoing tensions keep oil prices high for now.
Transition to Renewables: The global shift to renewable energy is increasing demand for metals essential for technologies such as electric vehicles and battery storage.
Supply Chain Issues: Geopolitical challenges could hinder the supply of these critical materials.

Grain Prices: Weather conditions have contributed to price declines in grains like wheat and maize, particularly in the US.
Finer Foods: Conversely, products like cocoa, coffee, and olive oil have seen price surges due to adverse weather and supply interruptions in key regions.
Food Price Outlook: Global food prices may continue to experience volatility amid climate change impacts, geopolitical trade tensions, and changes in trade policy, notably India’s rice export restrictions.

Gold Prices: Gold has reached record highs above $2,500 per ounce, driven by safe haven demand due to economic uncertainty and anticipated central bank rate cuts.
Future Expectations: Gold’s status as an inflation hedge suggests it may continue to rise, depending on the global economic landscape.