What we’re seeing in commodity markets right now is a wearing-off of the initial price surge and market euphoria that accompanied Russia’s invasion of Ukraine, which saw prices spike to more than decade highs. Now, we are seeing markets consolidate and a focus on where markets will head next – bearing in mid the longer-term impacts of the Ukraine war.
What I mean by this is that markets are trying to calculate firstly the potential impact of any demand destruction caused by recent commodity price spikes, secondly they are factoring in pre-existing inflation worries, and thirdly they are dealing with broader economic uncertainty – particularly as it relates to China’s economy and the negative signals that it is sending.
What we know is that investors are more concerned about the outlook for global growth than at any time since the GFC in 2008, and they have ramped up their cash holdings to a two-year high.
Commodities of course have been on a two-year growth trajectory, and we mustn’t lose sight of this fact. The Bloomberg Commodity Index puts the recent retracement into its proper perspective, reflecting the healthy factors that have been driving commodity prices. The demand supply-picture for the energy and industrial metals sectors remains positive, and this was the case prior to Russia’s invasion, and it remains the case now. However, markets are re-evaluating themselves and there have naturally been some profits taken from the sector.
What we are likely to see is ongoing volatility, intermixed with both positive and negative factors. On the positive side, we will continue to see commodities as an inflation hedge, but conversely economists will also be doing the numbers on the negative growth impacts of the Ukraine war. There is also the China story, which doesn’t look too flash at present. When you have the world’s largest commodity buyer with question marks over its near-term economic health, markets will naturally be cautious.
A really good indicator in my view of what’s been happening in commodity markets, can be seen in palladium. Now, it’s not the most talked about of commodities, but it is interesting because it is viewed as both a precious and industrial metal, so captures the market dynamics that have been impacting both sectors. A price graphic would show the steadily improving price based on enhanced fundamentals, then the Ukraine-related price spike, and then a retracement.
Palladiumis representative of many other commodities in terms of its price behaviour because of overall market fundamentals, but also the wildcard aspects of potential Russian supply cuts and market uncertainty.
The other commodity that I think is worth focusing on is uranium. After a lot of false starts and false dawns over the past decade, it looks like uranium’s latest price moves could be the real deal. Energy security is the driving force – with Japan indicating that it is looking at reactivating plants shuttered since Fukushima, France committing to six new plants over the next decade, and Germany suggesting a delayed closing of its plants. At the same time, we have Sprott adding to its spot market purchases and the White House considering sanctioning Russia’s state-owned nuclear company.
Rosatom is a delicate target because it accounts for more than 35% of global uranium enrichment. Russia accounted for 16.5% of the uranium imported into the US in 2020. Uranium I think could be an outperformer, because for several modern industrialised economies like Japan,Germany and France – it will be a relatively easy go-to means of ensuring energy security, and reducing exposure to elevated fossil fuel prices, while still maintaining green credentials.