Introduction

Commodities are essential raw materials and goods that form the backbone of the global economy.

They are grouped into several categories but today I’m going to focus on these four: energy commodities, base metals, precious metals, and agricultural commodities.

These commodities are traded in global markets, affecting economies, businesses, and individuals worldwide.

Before the COVID-19 lockdowns in March/April 2020, their importance and rankings by dollars traded each year were significant and based on NLC estimates probably weighed in at around $7.3 trillion, globally.

During COVID, this fell by around 35% to ~$4.7 trillion.

Following COVID and certain countries coming out of lockdown, some ground was gained with volumes estimated to have increased somewhere into the mid-$6 trillions.

Since then, several factors including Russia’s invasion of Ukraine, China’s peaked/faltering economy, a strong US Dollar, OPEC’ production cuts, and a faltering Black Sea Grain Initiative - have destabilised our ability to predict demand/supply relativities and the precise value of commodities traded for this year remains opaque.

We will know more early next year.

In the meantime, let's delve into each group and see how their importance to the global economy has evolved, pre and post-COVID, and we’ll then consider the impact of Russia, separately.

Energy Commodities

Energy commodities encompass resources used to generate power and transportation fuel. Pre-COVID, the most traded energy commodities were crude oil, natural gas, and coal, in that order.

Crude oil, being the most dominant influenced the global energy market heavily. Major suppliers included Saudi Arabia, the United States, Russia, and Iraq.

Post-pandemic, the energy sector has undergone several transformations.

COVID’s impact on global travel and economic activity led to a sharp decrease in demand for energy, resulting in plummeting prices. Renewable energy sources gained prominence as countries sought to reduce reliance on fossil fuels. Additionally, geopolitical tensions and trade wars led to uncertainties in the supply chain.

Strategic Importance: As countries aimed to bolster energy security and reduce carbon emissions, renewable energy sources such as wind, solar, and hydroelectric power have become strategically important in post-COVID times, but we’re not there yet in terms of supply, and that’s why fossil fuels (oil, gasoline, petrol, diesel, coal) still have a major role to play.

Base Metals

Base metals are a group of commodities used extensively in manufacturing processes and infrastructure development.

This category includes metals like copper, aluminium, nickel, zinc, tin, and lead.

Before COVID-19, copper held a dominant position among industrial metals, primarily due to its widespread applications in electrical wiring, construction, and electronics.

Major suppliers were Chile, Peru, China, and the United States and to an extent Australia.

COVID-19's impact on these metals was profound.

As economic activities slowed down during lockdowns, the demand for industrial metals decreased significantly. Manufacturing industries, construction projects, and automotive sectors experienced disruptions, leading to a drop in consumption.

However, as economies started recovering, the demand for industrial metals rebounded, driven by infrastructure projects and the growth of the electric vehicle (EV) industry. Electric vehicles, in particular, require substantial amounts of copper and other industrial metals for their production.

Supply challenges also emerged during the pandemic. Mine closures, workforce restrictions, and transportation disruptions affected the supply chain for industrial metals. Moreover, geopolitical tensions and trade uncertainties influenced the distribution of these metals across regions. Most of all China stayed closed for an extended period of time and its economy has not recovered, despite having been fully open since January of this year.

In short, China has peaked until fiscal stimulus is once again aimed at real estate and construction (if it is).

Strategic Importance: Industrial metals have gained strategic importance due to their critical role in the transition to green technologies and infrastructure development. The shift towards renewable energy sources and electric vehicles has heightened the significance of securing a stable supply of these metals.

However, while the world’s factory remains in a negative growth trajectory, demand for copper and nickel is likely to stay cool, but for usual cyclical spikes.

Precious Metals

Precious metals include gold, silver, platinum, and palladium, valued for their rarity and industrial applications.

Before COVID-19, gold stood as the most traded precious metal, acting as a safe-haven asset during economic uncertainties. Major suppliers were China, Australia, Russia, and the United States.

During and after the pandemic, precious metals experienced fluctuations in prices due to investor reactions and changes in industrial demand.

The economic slowdown led to reduced jewellery demand, while supply chain disruptions impacted mining activities.

During the pandemic in August 2020, gold hit an all-time-high of US$2,067.15/oz, it subsequently rolled over and more recently it’s started to retest the US$2,000/oz levels.

Many commentators expect Gold to collapse to perhaps as little as US$1,800/oz as we journey through this ‘higher rates for longer’ agenda of the U.S. Fed, but once on the other side, gold and silver are likely to shine.

Strategic Importance: COVID, trade wars and geopolitical tensions brought about a surge in demand for safe-haven assets like gold, emphasizing its strategic importance as a store of value during times of global uncertainties (and accelerating its prominence over bitcoin during the pandemic period when real yields fell, making gold an attractive investment).

Agricultural Commodities

Agricultural commodities comprise products like wheat, corn, soybeans, and coffee. These and rice are vital staples for food security and various industries.

Pre-COVID, the United States, Brazil, China, and Argentina were major exporters of agricultural goods.

COVID-19 significantly disrupted the agricultural supply chain, affecting production, transportation, and distribution.

Lockdown measures and labor shortages hampered farming activities, leading to food supply concerns in certain regions.

Strategic Importance: The pandemic underscored the significance of a stable and diversified agricultural supply chain.

Countries are now reevaluating their food security strategies to reduce dependence on a limited number of exporters and geo-politically risky/unsecure supply chains.

Security of commodities post-Putin

So far, we’ve considered pandemic effects. Now let’s consider the impact of Russia’s invasion of Ukraine.

Russia's invasion of Ukraine had notable repercussions on commodity flows, natural gas and fertiliser prices which effect many industries.

It also effected the price of food commodities, and in general the impacts of the war in Europe had accelerated the commodity supply-chain related impacts of COVID-19.

Let’s consider this double whammy in a little more detail.

The crisis impacted the supply of energy commodities significantly, as Russia is a major supplier of oil and gas to Europe.

Sanctions and counter-sanctions during the geopolitical tensions disrupted trade and led to a shift in supply routes.

India bought Russian oil for resale, and Australia and other transport-disadvantaged countries sold natural gas to Germany, for the first time.

On top of that, the price of natural gas continued upwards, expanding around 7x since before the pandemic. In turn, that increased the price of fertiliser, further pushing up food production costs and compounding the issues with reduced supply following Ukraine’s shuttering.

The invasion also impacted precious metals. Russia is one of the largest producers of palladium and a significant gold exporter.

The geopolitical uncertainties surrounding the invasion further boosted the demand for precious metals as safe-haven assets.

Some industrial metals, such as nickel saw fluctuations in supply and price due to Russia's role as a major producer. Trade disruptions and export restrictions further influenced the dynamics of industrial metal markets.

It has also had a continuing effect on food commodities, particularly grain and wheat. Ukraine is one of the world's major exporters of grain, and disruptions caused by the conflict had a ripple effect on global food markets, not just for China, Egypt and Spain who are major buyers of Ukrainian grains.

This was partially mitigated with the signing of the Black Sea Grain Initiative. The initiative has ensured the safe passage of almost 33 million tons of crop exports via the Black Sea since it was signed in July 2022 and has helped smoot out spikes in world food-commodity prices.

More recently, Russia declined to extend the pact and the uncertainty surrounding Ukraine's grain exports plus the potential for ongoing supply disruptions will likely lead to increased price volatility in global grain markets for many years.

World average prices

In short, COVID basically doubled world average prices for these primary commodities, and the impact of Russia invading Ukraine tripled them (if you include fertilisers).

The exception of course is Natural Gas which increased more than 7x from pre-COVID to its peak (pushing up fertiliser prices) as a result of Russian sanctions.

Natural gas then crashed as a result of demand/supply recalibration, geo-political alliancing and a strong USD fuelled by high interest rates and limited USD swap lines (making all commodities purchased outside the U.S. more expensive).

Energy, grains and food had probably increased by a smaller 50% by December 2022 although they had increased by as much as 100% by May 2022, before falling.

But on average, global Fertiliser prices have remained significantly higher than they were pre-pandemic. This plus the growing food shortages means that food security is possibly even more challenged today, than hard commodities.

You can keep track of what’s happened with base metal prices during and after COVID and Putin by following NextLevel Corporate’s metals roundup. It’s published every month after the RBA reports, and the latest edition is available here.

Covid + Russia = unprecedented times

COVID-19 changed things for commodities.

Demand for energy and precious metals dropped, affecting prices and supply.

Renewable energy became more important, but it's expensive to build so we still rely on fossil fuels.

The pandemic disrupted food supply, making us rethink how and from whom we get our food.

Precious metals like gold became valuable during the crisis because people wanted something safe during uncertain times.

Base metals used in making things like electronics and cars were also affected by the pandemic, and trade wars with China and calls for onshoring/reshoring of these industrial metals set off multiple races to develop out-of-China supply chains.

Russia's invasion of Ukraine caused further disruptions in commodities and raised global food and mineral security concerns.

This highlighted the interconnectedness of the global manufacturing, chemicals, energy and food system and the importance of stable and diverse supply chains.

Since then, governments have been focused on supply chain security.

But the key challenge in regaining/winning satisfactory security of supply is that decades of underinvestment (with no supply-side response to speak of) has set a very high bar to achieve quickly - and with a still high USD, way more expensive to do in a contracted geo-politically driven timeframe.

This goes for critical minerals where China/Russia and other geo-politically unaligned sovereigns have certain supply strangleholds.

This includes semiconductor additives, germanium and gallium, and a host of base and speciality metals now on the EU’s recently enacted Critical Raw Materials Act list of endangered rocks and minerals, and certain types/qualities of energy commodities.

Energy is another example - with the main problem being that the significant capital investment required for expanding renewable energy technologies and infrastructure, as well as stretched government deficits worldwide, have slowed down large-scale funding initiatives to boost renewable energy supply.

As a result, and despite the emphasis on transitioning to cleaner sources of energy, there remains a substantial demand for fossil fuels and China/Russia-originated intermediates, where available.

In addition, OPEC's production cuts have further tightened the supply of oil, which will likely drive higher demand and prices for fossil fuels over the next decade.

Conclusion

Pre-COVID and Russia we were looking at a demand-driven commodities super cycle about to happen with the commodities covered above weighing in at around $7 trillion.

A boost would have taken us well over $8 trillion, but instead, COVID took us to $4.5 trillion.

Post-COVID and Russia, we’re probably somewhere in the $6 trillion range.

Today, we’re now looking at a supply constrained race for critical green transition minerals and food security in a high inflation/strong US dollar world that looks to be heading for recession (or at least, rolling contractions).

And in this new world there are several Sovereigns including the U.S., which are facing serious issues in financing their debt bubbles and deficit spending - so to unleash enough Government paper to fund it all will, you guessed it, require higher yields. Oops.

To a large extent, high inflation/interest rates, a strong USD and geo-politics have stopped the ‘commodities super-cycle that was supposed to be’ dead in its tracks.

Looked at another way, the next mineral commodity super cycle is going to be dependent on macro levers and China:

First, we need to see an end to the interest rates tightening/inflation cycle, followed by a business cycle reset that allows a new growth cycle (investment cycle) to start, and in turn that will probably require a northern hemisphere recession/contraction accompanied by a weaker USD (which is positive for commodity prices). Then at least Governments can finance their past, present and future spending, at low rates of interest.
Second, China has peaked. And for it to regrow its demand cojones will require Party stimulus and a cleansing of the shadow banking system (i.e., let them fail). Recent stimulus for BEVs and the 15-basis point cut in the medium-term lending facility is not sufficiently construction/real estate stimulative and does not amount to much. There’s more pain to come. That means less demand for large scale construction. But it can change in an instant if President Xi wants it to, or if there’s a Deng style takeover.

In terms of food? Well, food is energy (including its inputs like fertiliser) and that means the answer to energy and food security lies in accessible technology that brings down the cost of energy, increases food production/yields, and optimises water use (the next big issue that no one’s talking about) and transport/logistics.

See you in the market.

Mike

PS: “Pre-COVID-19 vs. Today” will return next Wednesday.

Pre-COVID-19 vs. Today, Part 3: Commodities