Prices for most commodities have moved lower year to date, with coal, natural gas and nickel among the big decliners, suggesting inflation has reached its peak and recession may not be too far behind.
“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, adding that we may have seen the peak in U.S. year-over-year CPI inflation of 9% a year ago.
““When recession finally arrives, commodity prices could bottom and resume a longer-term bull market, reaching several new highs over the next five to 10 years.””
— Roland Morris, VanEck
The commodity price declines also suggest that the U.S. has “entered, or will soon enter, an economic recession,” he said. “The arrival of the most anticipated recession in history could be this summer.”
Commodities prices, however, likely haven’t peaked, said Morris. “When recession finally arrives, commodity prices could bottom and resume a longer-term bull market, reaching several new highs over the next five to 10 years.”
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. The sectors posting big declines include energy and metals.
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, as 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.
In the energy sector, declines for natural-gas and coal prices
are 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.
had jumped to a nearly 14-year high in June of last year, the same month that Russia reduced gas supplies through the Nord Stream pipeline to European Union countries.
Newcastle coal prices more than doubled in 2022, due in part to worries about potential disruptions to energy supplies tied to the Russia-Ukraine war.
However, 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.
Year to date as of June 13, U.S. natural-gas prices fell 48%. Newcastle coal has lost 64% for the period, pulling back after last year’s rally as the market’s attention moved away from the European energy crisis and marked a return to efforts toward clean energy. 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.
For now, Morris believes U.S. natural-gas prices should remain in the $2 to $3 per million British thermal units range unless the nation experiences a very hot summer. However, as more U.S. LNG export facilities come online, U.S. natural-gas prices may rise, he said.
Crops and cattle climb
However, weather-related events have led prices for the so-called “soft” commodities, such as cocoa and sugar, as well as cattle to rise this year, bucking the overall downtrend for the sector.
The rise in sugar, cocoa and cattle prices is a “simple supply shortage story, which will improve over time,” said Morris.
He said food inflation has “remained sticky” also because of transportation costs related to rising labor cost, as well as not enough truck drivers, and grocery store or restaurant workers.
“Most near-term agricultural supply shortages will self correct, but we do expect persistent supply shortages across most sectors,” said Morris.
Industrial metals have also been among the decliners in the commodities sector this year, but gold, as a precious metal, is one of the few commodities trading higher since the end of 2022.
“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%.
Looking ahead, however, Summerhaven’s Bhardwaj expressed excitement over the metals space, “as global demand is expected to grow for 10-plus years” with capital expenditures and supply growth “muted” over the prior decade.
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 “multi-year supply-demand imbalance” that may benefit metals investors, said Bhardwaj.
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.”
With more than $4 trillion committed globally to developing an environmentally friendly green economy and Fortune 500 companies embracing that in a non-partisan way, “you have only rising demand for those metals — lithium, nickel, and copper, and when you peel back the sources from where we get those, and realize that [more than] 50% of global processing of those metals is in China, you get a nervous environment of what the cost to acquire those metals should mature to be,” he said.
EMG “doesn’t expect this to be horrible for oil and gas…but an “energy allocation in 2023 isn’t diversified unless it has lithium, nickel, and copper in it,” and is exposed to the real growth of that market, said McDonough.