Commodities: Prices broadly stable in December
January 17, 2018
Energy | Economic fundamentals and geopolitical risks send oil prices to multi-year high in December
Oil prices continued to lead developments in the energy commodity group on the back of solid economic fundamentals and renewed geopolitical tensions in the Middle East. Participants in the oil-cap deal led by OPEC and Russia continue to deliver, with conformity levels remaining well above 100%. Moreover, the global economy remains strong, propelling demand for the black gold. In recent weeks, oil prices benefited from increasing political turmoil in Iran and concerns that U.S. President Donald Trump will implement new sanctions against the Persian country.
Coking coal also contributed to December’s energy price boost amid tight global supply. Moreover, restrictions in Chinese mills to lower pollution are driving demand for coking coal from elsewhere, notably from Australia. Uranium prices are slowly turning the corner as major producers have announced major supply cutbacks, and nuclear reactor demand is set to increase in the coming years. Energy prices rose 3.3% month-on-month in December (November: +7.5% mom).
Energy prices are expected to experience a slight correction toward the end of the year. Higher production coal expansions in countries including Australia, Mongolia, Mozambique and the United States is expected to move thermal coal and coking coal markets closer to balance. Moreover, analysts are skeptical that the oil deal will be sustained throughout 2018, and shale-oil producers are quickly ramping up production amid higher prices, adding downward pressure on oil prices. As a result, analysts surveyed by FocusEconomics expect energy commodities prices to decline 2.0% year-on-year in Q4 2018 before expanding 2.0% in Q4 2019.
Base Metals | Prices start to consolidate in December following a sharp rally in 2017
Prices for base metals declined for the first time in seven months in December, falling 0.4% month-on-month (November: +0.3% mom). Base metal prices have recovered sharply in the past two years following nearly five years of losses. Stronger-than-expected growth in China, the world’s primary consumer of base metals, coupled with healthy growth in advanced economies, propelled the rise in 2017. Moreover, most base metals prices were further buoyed by stricter environmental regulations in China.
In December, alumina prices experienced a sharp reversal due to high inventories resulting from weaker demand from smelters. Prices for aluminium and aluminium alloy also declined in the same month. Conversely, prices for iron ore soared on the back of lower inventories in China due to the winter crackdown on steel production.
Base metal prices are expected to decrease slightly by the end of this year, following two years of sizeable gains. The reversal in base metal prices will stem from weaker growth in China, particularly in investment and the housing sector. Analysts see base metal prices falling 3.0% in Q4 2018 from the same quarter in 2017. Base metal prices should pick up again in 2018 following this year’s consolidation, rising 6.0% year-on-year in Q4 2019.
Precious Metals | Developments in the U.S. send prices down in December
Although prices for precious metals declined on average in December, this mostly reflected an across-the-board fall at the outset of the month. In the second half of December, however, prices for most precious metals recovered strongly. Prices declined 1.1% on a month-on-month basis in December, contrasting November’s 0.4% rise.
Gold and silver prices receded at the start of December on expectations that the Federal Reserve would increase interest rates again on 13 December and the effects of a strengthening U.S. dollar. That said, in the second half of the month, prices for the two commodities rallied on the back of a weaker greenback, poor economic data in the United States and general instability across the globe. Conversely, in recent weeks, palladium prices traded at levels last seen over a decade ago. Robust car sales in China and higher demand for gasoline-powered vehicles in Europe were the main drivers behind palladium’s significant price increases.
The unwinding of ultra-loose monetary policy programs in key economies including the Euro area and the United States will exert downward pressure on gold this year. Moreover, the rally in palladium prices will come to an end this year due to increased supply and more stable demand. Conversely, platinum prices will increase markedly this year due to a persistent deficit in supply. Analysts polled for this month’s survey see precious metal prices for Q4 2018 falling a mild 0.4% from the same quarter in 2017. The panel sees a broad recovery in 2019, with precious metal prices increasing 5.9% year-on-year in Q4 2019.
Strong global supply sends agriculture prices down in December
Agriculture prices ended 2017 on a weak note, mainly due to ample global supply for many commodities, driving agriculture prices to decline 0.9% on a month-on-month basis in December (November: +2.2% mom). Six out of the nine agriculture commodities tracked by FocusEconomics recorded price falls in December, with the largest declines in the prices of cocoa, oats and sugar. Conversely, prices for cotton and wool continued to outperform other agriculture commodities due to solid demand, particularly from China, and limited supply. Moreover, resilient ethanol production is propelling demand for corn.
Greater demand for food, feed and industrial usages are expected to boost agriculture prices this year. Our panel of analysts forecast a 12.7% annual increase in Q4 2018, more than reversing the 0.9% decline in Q4 2017. Next year, agriculture prices are seen expanding 4.2% year-on-year in Q4 2019.
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