Commodity market performance so far this year points to an economic recession for U.S. Most commodity prices have moved lower till date, and the biggest decline is in coal, natural gas and nickel, suggesting inflation has reached its peak and recession may not be too far behind. The commodity market trend leans towards an economic downturn impacting many sectors including industrial metal.
Coal and natural gas have led losses in the year’s first half, but cattle and gold have bucked the commodities downtrend.
Commodity market trends
“The general decline in commodities from the March 2022 peak suggests expectations of slowing U.S. and global growth, and actual slowing growth has pressured commodity prices,” said Roland Morris, commodity strategist for VanEck’s active Natural Resources Equity Strategy. He also added that we may have seen the peak in U.S. year-over-year CPI inflation of 9% a year ago.
This decline in commodity prices will impact the US market and is indicating that the country may have “entered, or will soon enter, an economic recession. “The arrival of the most anticipated recession in history could be this summer” said Roland Morris.
Though the peak in commodity prices has not yet been reached, said Morris. “When recession finally arrives, commodity prices could bottom and resume a longer term bull market, reaching several new highs over the next 5 to 10 years.”
Market performance as of June 13, the S&P GSCI, a benchmark for investments in the commodity markets, traded 12% lower year to date, with nearly 6% of those losses seen in the second quarter so far. There has been declines in energy and metal sectors.
Commodities have clearly “priced in a hard landing” for the economy, said Geetesh Bhardwaj, director of research at SummerHaven Investment Management.
The commodity price downturn is not based on commodity fundamentals, he said. Fundamentals for most commodities are tight, with “storage across the spectrum” at multi year lows. “Many commodities have not recovered from the supply shock of war in Europe, which continues to develop in unexpected ways, such as the destruction of the Kakhovka dam in Ukraine impacting 2023 to 2024 agricultural output, Bhardwaj said.
Effect on energy sector
This decline in natural gas and coal prices is a statement “on the political overreactions to Ukraine and Russia, as well as manipulation by governments,” said Will McDonough, chief executive officer at Energy and Minerals Group (EMG) Advisors.
“A warmer than normal winter in the U.S. northeast dulled heating demand for natural gas, while limited liquefied natural-gas export terminals and pipeline capacity have constrained exports of the fuel”, said VanEck’s Morris.
As of June 13, U.S. natural gas prices fell 48%. Newcastle coal has lost 64% for the period. The S&P GSCI Energy subindex has lost nearly 17% this year.
Traders have pivoted to “green energy investments,” and that’s repositioned capital from previous allocations to dirtier coal and [natural] gas,” said EMG’s McDonough.
Increase in the soft commodities
There has been an increase in the prices for the “soft” commodities, such as cocoa and sugar, as well as cattle, bucking the overall downtrend for the sector.
The biggest commodity gainers is feeder cattle with futures prices up nearly 31% till date. Sugar and cocoa futures have increased by more than 20%.
The rise in sugar, cocoa and cattle prices is a “simple supply shortage story, which will improve over time,” said Morris.
Industrial metals performance
There has been a consistent decline in the industrial metals sector barring gold. “Industrial metals will experience persistent supply challenges as we transition to more renewable energy sources, which require lots of copper, nickel, and other minerals,” said Morris.
After a rally last year sparked by concerns over supplies of nickel from Russia, which is among the world’s largest producers of the metal, nickel has seen its London Metal Exchange cash prices lose more than 30%.
According to Summerhaven’s Bhardwa, “Electric vehicles, renewable energy and grid enhancements will create new levels of metals demand, he said, while supply will have a delayed response due to “well known structural frictions.”
That will lead to a “multiyear supply demand imbalance” that may benefit metals investors, said Bhardwaj.
Meanwhile, gold is always going to be an “inflation hedge” in times like these, said EMG’s McDonough. Futures prices for the metal trade more than 7% higher year to date.
Iron ore, especially high grade iron ore, is “more and more in demand in [an] all energy transition and should continue to rise,” said McDonough. The same goes for steel as the U.S. “aims to nationalize and limit sources of steel from China.”
Overall, he said huge demand and volatile supply for the core commodities are likely to drive a “green energy future.”
Recession peeking through
A fall in commodity prices does stoke fear of global recession. Drop in prices of industrial metals and energy has brought the spectre of recession much closer, and it’s not long after inflationary fears dominated the picture.
