Commodity forecasts are absurd, but China is key as Ukraine fades: Russell

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LAUNCESTON — The folly and futility of forecasting commodity prices was rammed home this year, with Russia’s invasion of Ukraine upending markets and rendering all prior expectations largely irrelevant.

Nonetheless, analysts are drawn like moths to a flame at this time of the year, churning out new forecasts in the all too often vain hope that their soothsaying will prove on the money this time around.

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Rather than criticize this orgy of self-flagellation, it’s a great exercise in taking stock and identifying trends that may persist or evaporate in the year ahead.

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The first thing to note about 2022 was that while commodity prices were shocked by Russia’s Feb. 24 attack on Ukraine, many are ending the year little changed or weaker than where they concluded 2021.

The notable exceptions are thermal coal and spot liquefied natural gas, and it’s instructive that those are the commodities most impacted by the loss of Russian pipeline gas and coal shipments to Europe.

Asian spot LNG is up 12.4% so far in 2022, while 5,500 kilocalorie per kg Australian thermal coal has surged 35.5%, according to assessments by commodity price reporting agency Argus.

The question for 2023 is whether the impact of the war in Ukraine fades as producers supply more coal and LNG, or whether these markets will remain tight and at elevated prices.

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If the conflict in Ukraine becomes a protracted stalemate with neither side able to make decisive gains or compromises in potential talks, it’s likely that the market impact gradually fades away as participants adapt to the loss of supply, or the re-direction to Asian buyers, of Russia’s crude oil, products, coal and LNG.

This dynamic is probably already on display in crude oil, the world’s most important commodity, with Brent futures poised to end the year little changed from the last trading day of 2021.

Brent closed at $80.10 a barrel on Monday, up $2.32 from the last trading day of 2021.

However, this modest change comes after an incredibly volatile year, which saw prices spike to an intraday high of $139.13 a barrel on March 7 in the initial fallout from the Russian invasion of Ukraine, before dropping as low as $75.11 early in December as global recession fears stoked demand fears.

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If the Ukraine dynamic does fade from global commodity markets, the likely driver for crude is going to be fears of a global economic slowdown, with a generous side-helping of will China’s demand recover as the world’s biggest oil importer loosens its strict COVID-19 measures.

On the supply side, there is always the risk of more output cuts from the OPEC+ group, although a global recession may cause some strains within the alliance, especially if Russia does struggle to find new buyers for its crude and products in the wake of the Group of Seven price cap and the European Union ban on imports.

The global economy seems destined for a soft 2023 as central banks continue their mission to tighten monetary policy to combat inflation, but whether it tips into a full-blown recession is still uncertain.

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CHINA REOPENS

While China’s re-opening is probably more of a certainty, whether it will rapidly increase crude imports is less assured, given China tends to use stockpiles if it deems import prices to have risen too far, too fast.

In effect, oil exporters have a choice, they can export more volume to China as long as the price remains reasonable, or they can manipulate supply to boost prices, but sell lower volumes as a result.

China looms large for the metals complex, given its outsize share of the global total of seaborne iron ore, copper and the so-called new energy metals such as lithium and increasingly nickel.

In contrast to LNG and coal, metals have largely struggled in 2022, notwithstanding the bump from the conflict in Ukraine.

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Spot 62% iron ore is down 8.7%, Shanghai steel rebar is 3.1% lower, London-traded copper has shed 14.8%, and aluminum is 15.4% lower.

The exception is lithium, with battery-grade lithium hydroxide up 132% so far this year as demand from vehicle and battery makers surge.

While 2022 has largely been a story of the necessity of fossil fuels such as coal and natural gas, it’s likely that the surging prices and supply issues accelerates the drive to renewable energies such as wind and solar, firmed by battery storage.

In theory this creates an ongoing bullish market for copper, lithium, nickel and even steel and iron ore, but the risk for 2023 is that a global economic slowdown trumps the longer-term positives. (Editing by Stephen Coates)