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The past week has yet again been all about the US Federal Reserve and China, with commodity and financial markets trying to second-guess what actions they might take next – and could there be a brighter outlook for commodities as a result.
Iron ore is basically an option on China’s construction industry, and we’ve seen prices recover solidly by 26% since they hit a three-year low of $79 a tonne on October 31. Markets have taken some heart from China’s efforts to stimulate its economy and ease some of the strict covid-19 containment measures that have hamstrung growth this year. In addition to optimism that steel-intensive sectors such as construction and infrastructure will accelerate next year, there are some other bullish factors for iron ore and steel.
Iron ore inventories at Chinese ports fell last week, and are almost 10% below the level that prevailed at this time last year. It’s also worth noting that inventories usually build heading into the northern winter, as steel mills accumulate stock to boost production in the new year, when construction activity picks up. Steel rebar inventories are also declining, and the current level of rebar inventories is also low for this time of year, being 23% below the 4.85 million tonnes in the same week last year.
The depleted inventory levels suggest that China, which buys about 70% of global seaborne iron ore, has scope to lift imports in the coming months, which could transfer into price gains heading towards the end of 2022 and into 2023.
There’s a juggling act going on with respect to the world’s major oil producers, as they grapple with supply-side restraints on the one hand that are helping to provide support for crude oil prices, and on the other demand headwinds that could weaken prices. Against this backdrop, OPEC+ is trying to work our what to do in terms of oil production levels. Beginning in early December, the oil market will face a series of looming problems that some members of OPEC+ see as a potential opportunity to pump more oil and others view as a reason to stay the course with their production cuts.
As we head towards the northern hemisphere winter there is the potential for a price shock like we saw 12 months ago. At the same time US shale producers have not boosted output as much as some might have expected, given strong oil prices. Accordingly, some OPEC+ delegates including Saudi Arabia have been discussing whether to reconsider the production cut engineered last month of 2 million barrels a day. The discussions are still early, and OPEC+ could decide to do nothing at its Dec. 4 meeting or even cut more.
Last week, OPEC cut its 2022 and 2023 global oil demand growth forecasts citing ongoing inflation, interest rate rises, sovereign debt levels and supply chain difficulties. And we’ve also seen the re-emergence of Covid in China, which could further dampen demand.
One would therefore expect OPEC+ to err on the side of caution and stick to its recently implemented production cuts, which could stabilise prices around the $90 a barrel mark.
We’ve seen recent copper price movements driven by more by investor optimism than underlying reality. Copper prices had recently reached five-month highs on China covid optimism, but the return of restrictions has once again focused attention on the potential for demand weakness. We saw prices rally sharply during the first half of November, but concerns over Chinese demand are resurfacing at a time when a global supply squeeze driven by historically low inventories is showing signs of easing. The spread between the spot and 3-month futures contracts on the LME has swung to a discount, signalling immediate supplies are sufficient. Another headwind for copper has been the US Fed backtracking on comments that the pace of interest rate hikes could be eased.
At a time when market sentiment for gold appears finally to be turning, it’s interesting to note that prospects in the silver market are also on the improve. The latest data from the Silver Institute suggests that global demand is expected to rise 16% this year to 1.21 billion ounces, creating the biggest deficit in decades. This estimate is based on the likelihood that silver demand in jewellery and silverware, and retail investor demand for bars and coins, are all forecast to reach record levels. Solar panels account for around 10% of silver demand. Demand in India almost doubled during 2022 as buyers took advantage of low prices to replenish stockpiles drawn down during 2020 and 2021. The Silver Institute predicts a deficit of 194 million ounces this year, up from 48 million ounces in 2021.
Silver tends to follow gold in terms of market price performance, both on the upside and the downside, and it also offers investors greater leverage to underlying shifts in market sentiment with respect to precious metals. Speculators often typically take profits on gold during a period of price appreciation and feed them into silver.