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Commodities mid-year 2024 outlook

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

 

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: soojin.kim@ae.mufg.jp

 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Global commodities

As the second half of the year commences, we contextualise our perspectives for the commodities complex. With global economic growth cooling (not collapsing), we believe the leg lower on commodities since mid-May is only temporary. To put this into perspective, we are at the end of an economic cycle and months away before some form of “landing”. From a cross-asset perspective, commodities have historically proven to be the best asset class to own during the late cycle phase for four reasons:

1. Late in the business cycle, demand tends to outpace supply (i.e. the output gap is positive), which puts upward pressure on inflation, and thus commodities, as real assets, tends to offer wealth preservation when losses in central bank credibility erodes the value of nominal assets.
2. Falling inventories tends to boost spot commodity prices (relative to long-dated prices), driving a positive spot price return.
3. A low level of inventories drives a positive roll return as the commodity curve is backwardated (i.e. buying today in the spot market is more expensive than buying for future delivery).
4. The exhaustion of spare capacity can generate an additional boost to spot returns by raising long-dated prices.

Beyond this, as we draw closer to Fed cuts, investor appetite for the commodities complex is set to rebound. Indeed, commodities have outperformed every asset class in the 12 months post-Fed cuts when the landing has been “soft”. The current data is increasingly reminiscent of the 1995 (soft landing) cycle, in our view – when the Fed cut only 75bps amid a mid-cycle adjustment, with the decision to lower rates not being triggered by a recession or higher unemployment. Examining commodity sub-groups, as with the start of the 2024, gold remains our most bullish call on a trifecta of Fed cuts, supportive central bank demand and bullion’s role as the geopolitical hedge of last resort. Energy’s late cycle tight cyclicality stands favourably, whilst the pullback in base metals offers good entry given late cycle driven scarcity.

Energy

Oil is trading near two month highs, bringing a test of USD90/b for Brent into view with fundamentals in firm deficit (demand above supply), courtesy of solid summer (transportation) demand, steady-as-it-goes OPEC+ production cuts and a revival of geopolitical supply-side risks. Meanwhile, a US federal court has blocked the Biden administration’s pause on approving new facilities that export LNG, dealing another legal setback to the climate agenda at the behest of conservative and corporate challengers.

Base metals

There are tentative signs that copper is finding a price floor, with the +10% pullback since mid-May seemingly suffice to change sentiment in China, with visible Chinese cathode inventory draws continue, alongside macro support hopes from China’s Third Plenum policy meeting later this month as well as looming Fed rate cuts. More broadly, we continue to expect copper to remain supportive (copper is our most bullish long-term structural conviction), as the market remains in a structural deficit on the back of an improvement in global manufacturing activity, rapid decarbonisation and a constrained mine supply environment.

Precious metals

Gold is drifting in a narrow range in recent trading sessions, with traders in a wait-and-see mode for the release of the US nonfarm payrolls report (5 July), that may provide fresh clues on the timing of the widely expected pivot to easing by the Fed (note, lower borrowing costs are supportive for non-interest bearing bullion). We maintain our 2024 commodities outlook call that gold is our most favourite trade this year on a trifecta of (eventual) Fed cuts, (still) supportive central bank demand and bullion’s role as the geopolitical hedge of last resort.

Bulk commodities

Iron ore – the most China centric industrial commodity – is near one month highs as investors are weighing the outlook for demand, and whether China will take further steps to revive confidence in the steel-intensive property sector at the Third Plenum policy meeting later this month

Agriculture

Soybean prices are rallying amid speculation that China may boost imports of the commodity as a result of a trade spat with Indonesia – according to reports, Indonesia is preparing to impose tariffs and use other means to protect its textile industry from Chinese imports.

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.