What to watch in commodities in 2023

Article tags CommodityEconomyGlobalCountry Analysis

EIU expects commodity prices to recede in 2023 in the face of slowing demand globally, but an only limited increase in supply means that prices will remain high in level terms. Although commodities prices will not fuel global inflation in 2023 as they did in 2021-22, upside risks to our baseline price forecasts are increasing and largely centre on China, climate change and continued conflict in Ukraine.

War in Ukraine will still affect agricultural commodities markets in 2023

Global supply-chain disruptions stemming from the covid-19 pandemic will subside in 2023. Along with increasing production volumes of agricultural commodities, this will cause a drop of 8.6% in our food, feedstuffs and beverages index next year. However, prices of agricultural commodities will continue to be influenced by events in the Black Sea region, specifically any extended agreements allowing Ukraine to export wheat. The war will also have an indirect impact on other agricultural commodities due to high fertiliser prices resulting in shortages.

Base metal prices will remain volatile in 2023

We expect our average industrial raw materials price index to fall in 2023 as raw material supply constraints created during the staggered economic recovery in 2021—and then exacerbated by the war—continue to ease. While a slowing global economic growth in 2023 will cut demand for base metals, boosted construction and manufacturing in China, increased demand for production in Asia and Europe held at its capacity, a floor under base metal prices will be kept.

After a dip in December 2022, oil prices will average above US$80/barrel in 2023

Energy prices have fallen sharply from mid-year highs in the second half of 2022. However, prices will remain elevated at close to current levels. We expect oil prices to average about US$85/b in 2023 as OPEC production (including Russia) falls by about 3m barrels/day from its recent peak in late 2022. OPEC unity and commitment to lower production quotas in the face of pressure from Western countries should be watched in 2023.

We also do not expect a significant easing of European and US natural gas prices from current levels before 2024. Russian gas supplies to the EU will remain cut off, keeping prices elevated in 2023. As a result, increased global demand for LNG will boost US natural gas prices and sustain higher LNG contract prices, which will fall only moderately in 2023.

China’s covid U-turn is a wild card

China’s zero-covid policy now moves from being a major downside risk to our demand and global price forecasts to an upside risk—much will depend on how quickly China opens up its economy in 2023. Depending on how much China’s property slump continues to curb construction activity, fiscal stimulus could represent an upside for steel and base metals.

China’s economic outlook had been set to weigh on cotton consumption, as its prime beneficiary. An easing of China’s zero-covid policy will lead to the opening up of its ports and logistics networks, which will boost consumption and textile production. 

Most of China’s industrial production runs on coal power. Another likely winner as coal was the best-performing commodity in 2021-22 as Europe switched back to the commodity as a result of rocketing gas prices. The easing of zero-covid measures led CNOOC, one of China’s largest national oil companies, to raise its growth forecast for gas imports in 2023 to 7%.

Climate remains the big wild card in 2023

Climate played a major role in commodities in 2022 and will probably do so again in 2023. Scorching heatwaves hit production of wheat in the northern hemisphere and the  increase of extreme weather will be detrimental for crop production in the first half of 2023. 

Wheat, which was heavily affected by war-related supply disruptions in 2022, faces significant climate risks. Unparalleled weather across the Americas is causing damage across major producing provinces. However, both Russia and Australia are on course for a second consecutive year of bumper crops, alleviating some concerns about production.

Weather will loom large in energy markets as well. Europe’s heatwave drove up demand last summer, causing gas and electricity prices to spike. The severity of Europe’s current energy crunch also depends largely on how cold temperatures drop over the winter, not just in 2022/23 but in 2023/24 as well. Below-normal temperatures will not only raise the spectre of energy rationing, but also put upward pressure on prices over the summer as Europe scrambles to refill reserves—this time without any Russian supplies.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights, analysis and data for nearly 200 countries and 25 commodities, helping organisations identify prospective opportunities and potential risks.

Tue, 27th Dec 2022 Article tags CommodityEconomyGlobalCountry Analysis