Investing.com — Analysts at HSBC flagged growing downside risks for commodities, despite prices remaining at elevated levels for most of the previous 18 months.
While supply-side constraints have primarily driven commodity prices, slowing global demand and geopolitical uncertainties pose new challenges.
“Although global commodity prices are well below the record highs reached in mid-2022, they remain high,” HSBC analysts said.
As of August 2024, prices were still 44% above their pre-pandemic average in nominal terms. However, when adjusted for inflation, these prices are closer to the twenty-year historical average.
The main reason for this resilience is the supply-side ‘super-squeeze’, which HSBC has identified as a key driver since 2022.
Global economic growth is slowing, and this is expected to weigh on demand for raw materials. HSBC predicts global growth of 2.6% in both 2024 and 2025, up from 2.7% in 2023.
Slow global production, exacerbated by the ongoing real estate crisis in China, is a major headwind for metal prices.
China’s housing sector, a major consumer of metals such as iron ore and copper, remains a key downside risk, with construction rates still contracting despite government stimulus.
The Chinese real estate contraction is particularly worrying for industrial metals.
While metals related to the energy transition, such as and , have outperformed, metals that rely more on traditional infrastructure, such as iron ore, face significant demand challenges.
HSBC’s proprietary Commodity Cycle Selector (COCCLES), which uses machine learning to analyze commodity price movements, indicates that commodities entered a bear phase in mid-July 2024.
This model suggests that further downward pressure can be expected for a range of commodities, including oil and copper, although some commodities such as recent price increases due to geopolitical concerns.
While demand-side factors weigh on commodities, supply-side constraints continue to provide support. Geopolitical risks, including the conflict between Russia and Ukraine, disruptions in the Red Sea and high shipping costs, remain high.
These supply-side disruptions, combined with the impacts of climate change, such as extreme weather events affecting agricultural production, are driving continued volatility in global commodity markets.
In the energy sector, HSBC’s oil and gas team predicts that OPEC+ production cuts, along with record high U.S. crude production, could lead to a market glut by 2025. For the time being, however, geopolitical tensions are keeping oil prices relatively high.
The ongoing global energy transition is driving demand for metals such as copper, lithium and hydrogen, which are essential for sustainable energy technologies, electric vehicles and battery storage systems.
However, HSBC warns that supply chain issues and geopolitical challenges could hinder the smooth flow of these critical materials.
Weather remains the main driver in agricultural markets. Prices for grains such as wheat and corn have fallen due to favorable weather conditions, especially in the United States.
In contrast, ‘finer foods’ such as cocoa, coffee and olive oil have seen significant price increases due to adverse weather conditions and supply disruptions in key production regions.
HSBC notes that global food prices may remain volatile, with risks arising from climate change, geopolitical tensions affecting trade routes and shifts in trade policy, especially in the wake of India’s rice export restrictions.
Precious metals, especially gold, have soared to record highs above $2,500 an ounce. “The rally has been fueled by strong buying of safe havens and hedge funds, prompted by expectations of rate cuts by the Fed and other central banks, and by increasing economic and geopolitical uncertainty,” the analysts said.
Gold’s role as a hedge against inflation and economic uncertainty is expected to remain strong, with further upside potential depending on the global macroeconomic and political environment.
