After 2021's intoxicating price surge, commodities could feel hangover in 2022

Most pundits expect upward trajectory to ease up next year as demand-supply gaps 'normalise' but there are contrarians too

Dec 08, 2021

BY MOST bullish expectations, commodities from oil and coal to iron ore, copper and aluminium outshone this year as economic activity burst back to life and output seemed never enough. But while that may have laid the blocks for the widely-expected commodity super-cycle, most pundits expect the upward trajectory to ease up next year as demand-supply gaps "normalise".

"Our expectation is that most of the commodities complex should see prices easing from current levels. Supply and demand balances for a number of commodities are expected to loosen, and so fundamentally this should take some pressure off prices," said ING's head of commodities strategy Warren Patterson.

"In addition, the expectation that central banks will tighten policy over 2022, along with the view of a stronger US dollar, should provide some headwinds to the commodities complex," he added.

Signs that 2022 could prove to be less outstanding for the commodities complex appear to be a widely-shared view, although there are contrarians too.

In an outlook report, TD Securities is projecting crude oil, copper, and aluminium to moderate from cyclical highs but "gold and silver should have a relatively better year, but most of the positive news should materialise in the early months".

After a traumatic period in 2020 that saw oil prices crash to historic lows as the pandemic decimated energy demand, crude staged a remarkable rebound and broke past the US$80 a barrel mark in October this year, led by the revival in economic activity across the world as curbs to fight the pandemic eased and borders re-opened.

A big part of the rally was also led by the Organisation of the Petroleum Exporting Countries' (Opec) output cuts as the oil cartel took a cautious approach and held back on releasing more barrels into markets.

Last week, the cartel and its allies (Opec+) surprised the market, sticking to the grouping's decision to gradually raise output; traders were expecting the petro nations to pause that plan after several nations, led by the United States, decided to release oil reserves to combat climbing gas prices.

According to Patterson, ING has forecast that Brent, the global crude benchmark, will average US$76 a barrel over 2022 owing to expectations of strong non-Opec supply growth, along with Opec+ continuing to ease supply cuts.

Above all, this has been a "blockbuster year" for energy markets.

"Base metals such as nickel, copper and aluminium have benefited from the green energy transition as demand for batteries and electric vehicles increase," said Baldev Bhinder, managing director of Blackstone & Gold, a Singapore-based law firm specialising in energy and commodities. "But what has been unexpected has been the revival of conventional energy commodities with the price of coal, oil and gas taking most nations by surprise."

An unprecedented global power crunch, led by surging demand in China - the world's top commodities exporter - amid a cold snap and harsh winter in Europe have triggered a shortage of natural gas and coal. As a result, natural gas prices in Europe have quadrupled while US prices have doubled this year. The energy crisis has particularly seen the price of aluminium, one of the most energy-intensive commodities, skyrocket as a result of output cuts by producers owing to rising cost pressures.

Most pundits expect these weather anomalies and supply stresses including logistical bottlenecks to subside next year.

"On balance, we expect many of these forces will reverse course by H2 2022 and more confidently into 2023 - especially for energy and agriculture," said Citi Research.

On the other hand, Vontobel Asset Management's commodities head Michel Salden expects structural supply pressures to persist given global underinvestments in energy infrastructure.

He is bullish on energy commodities, citing factors such as a "post-Covid cyclical recovery", low interest rates and continued demand for fossil fuels over the next 2 decades until renewables gain enough market share to "satisfy the growing world population's thirst for energy".

Salden is projecting crude prices to head towards US$100 a barrel by the end of 2022. "Only new Covid waves or an unlikely lift of Iranian sanctions by the US and the EU (European Union), which would add 1.6 million barrels per day to global oil markets, could keep oil from reaching the US$100 mark," he noted.

Strains in China's property sector could spoil the party for metals. Among other things, it could hurt steel demand and keep iron ore prices under pressure. Said James Trafford, analyst and portfolio manager at Fidelity International: "Many base metals now seem quite late cycle, with several obvious downside risks mounting - most notably the slowdown in Chinese property, which is such a critical demand driver for likes of iron ore, copper, and steel."

He added: "The million-dollar question is the speed and quantum of the deceleration. Many of the data points on land sales, pre-sales and construction activity look foreboding and signal a weak 2022. It will be critical to see if this has a follow-through impact into property completions."

Tightening monetary policy and a slowdown in the world's economic powerhouses US and China could also "keep base metals demand under wraps", said TD Securities.

Vontobel's Salden is more sanguine and expects China's property sector weakness to fade next year, exports to remain strong and credit stimulus to resume which will keep growth at "modest but good levels".

Also, most emerging economies - the biggest consumers of commodities - have still not returned to pre-Covid growth levels due to slow vaccination rollouts, he pointed out.

With the Omicron variant keeping the world on edge, the emergence of a new wave of outbreaks could put the brakes on demand for many commodities. Yet Blackstone & Gold's Bhinder said oil and copper would continue to perform well in 2022. "This is because these 2 commodities operate in markets where restricted supplies cannot keep up with increasing demands," he noted.

While most commodities outperformed, gold - a safe-haven asset - appeared to have a mixed and volatile showing in 2021. It moved into a high of just under US$1,960 per oz in the early days of 2021, down to a low of US$1,677 per oz in late-summer and back to a high of nearly US$1,875 per oz in mid-November, before falling back to below the US$1,800s in recent days, TD pointed out. Interestingly, the precious metal deemed a hedge for inflation has not shone significantly in the face of spiking prices, possibly led by the notion that inflation may be transitionary.

TD expects political risks associated with the pending US mid-term elections, US fiscal drag, fairly steadfast central bank gold purchases, and a significantly slower pace of US and global recovery to "rekindle" investors' interest in gold and has projected that prices could lift into the US$1,875 per oz territory in the first half of 2022.