Research analysts said that commodity prices in the global market are expected to slow next year, but because macroeconomics and low inventories are expected to provide support, their average prices may be higher than the levels of the past five years.
Fitch Solutions National Risk and Industry Research (FSCRIR) stated: “We expect commodity prices to fall from current levels in 2022, and forecast that most commodity prices will fall on average year-on-year, as we see improved supply and demand Growth will slow down.".
"Entering 2022, we expect that the disruptions we see in the supply chain will improve, and the balances of several commodities will not look as tight as in 2021. This should mean that prices will change from the current situation. Slightly lower," said the person in charge Warren Patterson. Commodities, ING Think-The economic and financial research department of the Dutch multinational banking company ING.
Fitch Solutions and ING Think stated that commodity prices are expected to remain above the long-term average, especially in the past few years.
Fitch Solutions stated that its composite commodity price index-the annual average weighted index of major commodities such as energy, metals and agriculture-may fall by 7.9% in nominal terms next year. Compared with 2020, this year is expected to achieve an amazing growth of 43.8%.
Commodities are likely to become the best performing asset class by the end of 2021. The S&P GSCI Index is a major investable commodity index that has so far risen 36.10% to 2,690.56.
The head of ING Think's commodity strategy said: "After Covid, supply chain disruption, government policies and unfavorable weather, demand recovery has all led to a tightening of the market this year, which has pushed up prices."
Fitch Solutions stated that among 27 major commodities, including crude oil, thermal coal, base metals, rare metals, precious metals and agriculture, the average price of 19 of them may be lower than this year.
"The most notable thing is that we see a sharp drop in the average prices of ferrous metals (iron ore, steel), natural gas NBP, thermal coal and oil crops (palm oil and soybeans); and we expect Asian LNG and Henry Port in the United States. The average prices of, tin, lithium, milk and cocoa have risen. The average price of Brent crude oil next year will be basically the same,” the research institute said.
ING Think said that several macroeconomic unfavorable factors will limit the upside of the commodity complex. One is that the central bank will tighten monetary policy in 2022. The second is that the U.S. dollar may strengthen next year, and the third is concerns about China's real estate market.
"If we see a further slowdown in the industry, it may put downward pressure on the complex, especially metals. However, there is less risk of this happening," Patterson said.
Fitch Solutions stated that the macroeconomic background will continue to support demand for commodities next year, which will keep prices high compared to the 2017-2021 average. “Our country risk team predicts that the global economy will grow by 4.1% in 2022, which is much higher than the average from 2015 to 2019,” it said.
FSCRIR stated that although the growth of developed markets will be higher than usual, the growth rate of global economic activity will be lower than the 5.5% estimated this year.
This will bring downward pressure on commodity demand, especially when the Chinese economy faces many risks, especially in the real estate sector.
Fitch’s solution predicts that China’s economy will slow down, and Beijing’s real GDP is expected to grow by 5.4% next year and 7.8% this year. On the other hand, it stated that monetary policy will continue to tighten and spread to developed markets throughout 2022. Most banks will start to end their quantitative easing program early next year, and the US will raise interest rates by 25 basis points.
Strong prices this year will stimulate production next year, especially in agriculture. Fitch Solutions stated that although the labor market will remain tight as wages in many markets rise, improved access to vaccines will help ease travel restrictions, thereby increasing the availability of immigrant labor.
"We expect agricultural product prices to fall next year, but they will still be higher than the long-term average. As the weather affects crops, the wheat market trades to multi-year highs... Assuming normal weather in 2022, wheat ending stocks should rise slightly," ING Think's Pa Terson said.
However, as the weather risks of La Niña in Brazil increase, there is uncertainty about sugar and coffee entering the next season. The coffee market has been devastated by drought and frost. "How much this will affect the next season's crops will depend on the rainfall in the rainy season. Given this uncertainty, coffee prices may remain high until the market has a better understanding of Brazil's next season's production," he Say.
In terms of metals, Fitch Solutions said that China’s slowing economic growth, tightening monetary policy and difficulties in the real estate industry may push metals down next year. As the market balance of most metals is tight and inventories are at historically low levels, prices will be higher than before Covid.
ING Think agrees with this view and stated that due to increasing investment in metal-intensive green projects, the sentiment surrounding the medium-term demand outlook is constructive-Fitch Solutions supports this view. Patterson said the research team is optimistic about aluminum because it is heading for a structural deficit and there is no quick solution.
FSCRIR predicts that its industrial metals index will fall by 10.8% next year after it is expected to rise by 44.1% this year. It said that iron ore and steel prices may fall, while tin prices may rise on average. Copper, nickel and aluminum may fall less than ferrous metals.
Both research institutions said that strong supplies from countries other than the Organization of the Petroleum Exporting Countries (OPEC) and the relaxation of OPEC production cuts may limit crude oil prices.
They also saw the tightening of monetary policy and the strengthening of the U.S. dollar put downward pressure on precious metals, especially gold.
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