What to watch for in commodities in 2020

by BLOOMBERG/ pic by BLOOMBERG

LONDON • It’s time for some 2020 foresight in raw materials. After commodities posted a 10% advance last year, how will crude to coffee fare in the months to come? The first “What to Watch” of the new year presents an overview of what to expect and it’s a mixed, complex picture that emerges. The list covers oil, gold, copper, iron ore, pork and more.

The year’s first full week of trading will be dominated by the Mideast crisis after the American assassination of one of the Iran’s most powerful generals. Crude and gold surged yesterday after US President Donald Trump said he was prepared to strike Iran “in a disproportionate manner” if it hits any US target. RBC Capital Markets has warned of “a retaliatory spiral”.

Challenging Times

The complex number-crunching and informed guesswork used to generate year-to-come predictions in the global oil market have been thrown into disarray by the sharp escalation of tensions between Washington and Tehran. Prior to the US killing of Iranian General Qassem Soleimani, investors were focused on whether continued efforts by OPEC and its allies to curb production would be sufficient to counter a global glut supported by rising US shale supply and new output from outside the cartel, including fields in Guyana.

With that in mind, analysts had been forecasting West Texas Intermediate (WTI) at just below US$59 (RM242.14) a barrel; but yesterday, the benchmark rallied above US$70 as the two sides traded ever harsher rhetoric. Further gains will depend on developments this week, including potential risks to crude shipped via the Strait of Hormuz. Tensions between the US and Iran disrupted oil markets last year, but the episodes were short-lived; the current standoff is of far greater magnitude.

Brighter Prospects

Copper struggled to sustain a rally in 2019 as the trade war spurred destocking of inventories by manufacturers. Now, the outlook is turning brighter with the preliminary truce between Washington and Beijing easing demand concerns for the metal used in everything from automobiles to electronics. Potential output cuts by Chinese smelters also point to tighter supply at a time when stockpiles tracked by the London Metal Exchange are at the lowest in nine months.

Goldman Sachs Group Inc, Morgan Stanley, Citigroup Inc and Standard Chartered plc are all bullish on copper as they predict a rebound in global consumption. Citigroup forecasts China’s demand will expand 2.6% this year, underpinned by gains in grid investment. While prices fell last Friday as the Mideast tensions hurt appetite for risk, they remain above US$6,000 a tonne.

Golden Promise

Gold just delivered a stellar year for bulls as the US Federal Reserve (Fed) cut rates, trade tensions hurt growth, central banks beefed up reserves and exchange-traded fund holdings swelled. The haven’s upward march may not be quite done: Goldman Sachs, Citigroup and UBS Group AG have all said they’re looking for US$1,600 an oz, and RBC Capital is positive too. And those calls were made before the Iranian crisis sent bullion tearing higher.

On top of the Middle East tensions, additional underlying positivity toward bullion comes as the Fed signals that rates will almost certainly be on hold right throughout this year, at least until central bank officials have seen a “material reassessment” in their outlook. Among other precious metals, palladium also demands attention as a persistent global deficit looks set to fuel gains far beyond US$2,000 an oz.

All Change!

Climate change and how governments, companies and funds respond will shape investment decisions in 2020 as never before. This year, the amount of new wind and solar power generation capacity will cross the 200GW threshold, boosting the total to about 1,450GW, BloombergNEF says. To put that in perspective, that’s just shy of 20% of global installed capacity.

That shift will see renewables close the gap with natural gas as the biggest potential source of electricity behind coal, though their intermittent nature will leave them lagging behind in terms of actual output. The variability will also increase challenges for grids and traditional utilities to keep all the lights on, while pressuring wholesale power prices on gusty or bright days.

Palm Reading

Palm oil was one of the big winners among commodities in the second half of 2019, and there are signals prices will remain well-supported. The most-used vegetable oil ended the year with a 44% gain, the best showing in a decade, lifted by concerns dry weather and haze will curb supplies from top growers Indonesia and Malaysia, as well as prospects for strong biofuel demand.

The latest Bloomberg survey showed prices may average RM2,400 a tonne this quarter, compared to RM2,248 over all of 2019. Participants flagged Indonesia as a key factor, with South-East Asia’s top economy boosting palm’s share in its biofuel blend to 30% from 20%. Still, questions remain on export markets, especially the European Union’s limit on palm oil use.