Commodity Prices Key Themes For 2022

Fitch Solutions / Commodities / Global / Thu 09 Dec, 2021

Commodity Prices Key Themes For 2022
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Key View

  • Following on a year of strong performance in 2021, we present our key views for global commodities in 2022.
  • We expect commodity prices to ease in 2022 from current levels and forecast most commodity prices to average lower on a y-o-y basis, as we see supply improving while demand growth will ease. However, we expect commodities to remain elevated compared with historical levels, amidst a still-supportive macroeconomic backdrop and low stocks.
  • Out of the 27 key commodities included in the analysis, we see 19 of them (or 70%) averaging lower on a year-on-year basis. Most notably, we see ferrous metals (iron ore, steel), natural gas NBP, thermal coal, and oil crops (palm oil and soybean) averaging sharply lower; while we expect Asia LNG, US Henry Hub, tin, lithium, milk and cocoa averaging higher. Brent will mostly average flat next year.

Commodity Prices To Ease In 2022 After Stellar Performance In 2021

Fitch Solutions Commodity Price Indices (% chg y-o-y)

Note: Equal weighted indices based on our annual average price forecasts. Source: Fitch Solutions

Energy, Base And Battery Metals Have Outperformed In 2021

Select Commodities - YTD Performance (% chg from Jan 2 to Dec 9 2021)

Source: Bloomberg

1. Commodity Prices To Ease In 2022

We expect commodity prices to ease in 2022 from current levels and forecast most commodity prices to average lower on a y-o-y basis, as we see supply improving while demand growth will ease. However, we expect commodities to remain elevated compared with historical levels, amidst a still-supportive macroeconomic backdrop and low stocks.

We project our proprietary Aggregate Commodity Price Index (an equal-weighted index of annual averages of the main commodities we forecast across energy, metals and agriculture) to decrease by 7.9% y-o-y in 2022 in nominal terms, following the impressive 43.8% y-o-y growth expected in 2021. Out of the 27 key commodities included in the table below, we see 19 of them (or 70%) averaging lower on a year-on-year basis. Most notably, we see ferrous metals (iron ore, steel), natural gas NBP, thermal coal, and oil crops (palm oil and soybean) averaging sharply lower; while we expect Asia LNG, US Henry Hub, tin, lithium, milk and cocoa averaging higher. Brent will mostly average flat next year.

Most Commodities Will Average Lower In 2022

Fitch Solutions Commodities Price Forecasts, 2022 (% chg YoY)

Note: Annual average forecasts. Source: Fitch Solutions

Despite Falls In 2022, Prices Should Remain High By Historical Levels

Fitch Solutions Commodities Price Forecasts, 2022 vs Average Prices Over 2017-2021 (% chg YoY)

Note: comparing annual average prices. Source: Fitch Solutions

The macroeconomic backdrop will remain supportive for commodities demand next year, which will keep prices elevated as compared with 2017-2021 averages. Our Country Risk team forecasts that the global economy will grow by 4.1% in 2022, well above the 3.1% average recorded between 2015 and 2019. DMs in particular will record stronger-than-usual growth. However, the pace of growth in global economic activity marks a slowdown from the 5.5% we estimate for 2021, which will put some downward pressure on demand for commodities. In particular, the Chinese economy is facing a number of downside risks, most importantly related to its real estate sector’s financial difficulties. We forecast a slowdown in China, where we expect real GDP growth to ease from 7.8% in 2021 to 5.4% in 2022 due to less favourable base effects; Beijing’s zero-Covid strategy, which will continue to curb consumption growth; a regulatory crackdown across multiple sectors of the economy and ongoing stress in the property sector.

Meanwhile, our Country Risk team expects the monetary policy tightening, which has started in EMs in 2021 with increases in interest rates in many markets, to continue and spread to DMs throughout 2022. Most DM central banks will start ending their quantitative easing (QE) programmes in early 2022, and we forecast one 25 basis point interest rate hike in the US. A more hawkish US Fed will bolster the US dollar in the coming months, which is another headwind for commodities going into 2022.

Supply wise, we expect strong prices in 2021 to incentivise production in 2022, in particular in agriculture. Although the labour market will remain tight with rising salaries across many markets, we also expect improving vaccine access to help loosen travel restrictions, and therefore migrant labour availability. This will also allow lower Covid-19-related operational disruptions.

We highlight a number of risks looming over commodities in 2022, including downside risks to global economic growth, continued supply risks from Covid-related disruptions, uncertainty surrounding Covid-19 variants’ severity, and a number of geopolitical risks, most notable the US-China relationship and the Russia-Ukraine tensions.

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From our Country Risk coverage: Fitch Solutions Global Macro Key Themes For 2022, November 2021; and December 2021: Cross Currents Testing Economic Normalisation, December 2021

Commodities Have Rallied From A Low Base In 2021, Further Gains Will Be Limited To Select Sectors

Bloomberg Commodities Index & US Dollar Index

Source: Bloomberg, Fitch Solutions

2. Energy Prices Set To Decline, But Risks Loom Large

Crude Oil - The outlook for oil prices is highly uncertain next year, with our USD72/bbl annual average forecast laden with risks both to the upside and the down. In 2021, supply curtailments by OPEC+ coupled with a healthy rebound in demand drove prices sharply higher, with Brent gaining around 70% from peak to trough. In 2022, market conditions look generally more challenging, with consumption growth softening while production is poised to surge. However, high level uncertainties persist on both the demand and supply sides. Our production outlook is strongly bullish, reflecting the unwinding of the OPEC+ production cut deal, the recovery of the US shale sector and, to a lesser degree, the return of sanctioned barrels from Iran. The risks to this forecast are skewed squarely to the downside. OPEC+ policy direction is still under review; US shale prospects remain clouded by a volatile price environment and ongoing caution among publicly-listed producers; and US-Iranian nuclear negotiations are facing renewed headwinds under President Raisi. While lower production could support prices, potentially weaker demand threatens to send them lower. The emergence of the Omicron variant is of particular concern, threatening the recoveries in the aviation sector and the Asia region in particular. Moreover, the macroeconomic backdrop looks increasingly precarious, due to the potential for new lockdowns, persistent inflationary pressures and more hawkish monetary policies. As such, while our current forecast is bearish from spot price levels, there is scope for significant price moves in either direction.

Market Balance Set To Reverse

Global - Annual Average Change In Crude, Condensate & NGL Production & Refined Products Consumption, '000b/d

f = Fitch Solutions forecast. Source: National sources, JODI, OPEC, US Energy Information Administration, Fitch Solutions

Natural Gas & LNG - NBP prices look set to remain elevated heading into 2022 due to lacklustre imports and European gas inventories falling to the lowest level in 10 years. Looking at the whole of 2022, we forecast UK NBP prices to average 88p/therm across the year, compared to 105p/therm in 2021. In the short-term, risks are tilted to the upside, as a prolonged, colder than average winter would send prices skyrocketing in the earlier months. Looking towards mid-2022, we expect prices to cool as seasonal demand eases, combined with downside pressure from the anticipated regulatory approval of the Nord Stream 2 pipeline in Q122. US Henry Hub (HH) prices have slipped 25% to 3.7USD/mmBTU in the last month due to mild weather and an uptick in gas supply. We are bullish-neutral from spot for 2022, and forecast prices at the hub to average 4.2USD/mmBTU for the full year. Winter volatility will drive short-term prices high heading into H122, before ceding to downside pressures in the second half of the year as gas production growth outpaces exports.

The outlook is broadly similar for spot LNG prices across Asia, with seasonal demand set to keep the market tight over the winter months, but with prices expected to retreat from current unsustainable levels once temperatures begin to turn and the energy crunch abates. However, we expect prices to remain above their pre-pandemic averages. The demand-side fundamentals appear positive as many of Asia’s major LNG markets are poised to see delayed recoveries from the pandemic, which were hampered in 2021 by the gradual pace of vaccinations and 'zero tolerance' approaches to Covid-19 cases. Accelerating decarbonisation efforts across the region should also help to keep LNG prices elevated, with many markets in the region still keeping faith in natural gas as a cleaner and more stable bridge fuel before a fuller transition to renewable energy sources down the line.

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Short-Term Prices To Remain Elevated, But Ease Post-Winter

Europe - Natural Gas In Storage, TWh (LHC) & Japan-Korea Marker (JKM) Spot vs Futures, USD/mmBTU (RHC)

* data correct as of December 8, 2021. Source: AGSI, Bloomberg, Fitch Solutions

3. Industrial Metals To Weaken In 2022 Compared To 2021, But Remain Historically Elevated

Looking at metals, we expect slowing economic growth, a tightening monetary policy and China's property sector woes to push metal prices lower in 2022. However, we see prices still averaging at elevated levels, higher than pre-Covid-19 levels, as the market balance for most metals remain extremely tight and stocks are exchanges historically low. We forecast our Industrial Metals index (equal weight index based on the ferrous and base metals that we forecast, in nominal terms) to decrease by 10.8% in 2022, following the expected 44.1% rise in 2021.

Metal demand - Despite slowing growth, we still forecast global metal demand to remain strong in 2022. The energy shortages recorded in the second half of 2021 led to a drop in Chinese metals demand. We therefore see some of the demand being pushed back into 2022, as the outlook for autos manufacturing, machinery and appliances, and consumer electronics sectors remains positive. We note however that slowing credit growth and the slow down in the property sector in China will still put a cap on overall metal demand in 2022. In light of these trends, we expect the largest y-o-y annual average price declines among metals to occur for iron ore and steel, although we note that we are neutral towards iron ore from spot levels, given the scale of the collapse in prices recorded over recent months. We expect tin to average higher in 2022, while the declines for copper, nickel and aluminium could be lesser than for ferrous metals on an annual average perspective.

While Chinese authorities will remain focused on deleveraging, they will still look to manage the rout in the property sector and contain elevated risks of further financial difficulties among developers by providing some support to the sector, as shown in early December with the announcement that curbs on lending to the property sector will be partially relaxed and the cut to the reserve requirement ratio. Meanwhile, investment in infrastructure in 2022 is expected to remain relatively stable, although we see rising reluctance from Beijing’s to allow meaningful increases in local government spending at a time when infrastructure needs is dwindling. Our Country Risk team expects monetary policy to remain accomodative in China.

Meanwhile, metal demand from the Green Transition will grow as renewables capacity rise and battery and EV manufacturing boom, but this sector still accounts for a small portion of overall demand.

Production - We forecast ore and metal production to remain strong and in some cases accelerate in 2022, as Covid-19-linked operational disruption will likely ease with the progress of vaccinations in EMs, enabling mines to remain open.

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4. Gold: Strengthening Dollar And Recovering Bond Yields To Pressure Prices In 2022

We are also negative on gold from spot levels and see prices averaging lower in 2022, as the US dollar strengthens and bond yields continue to recover. We see prices averaging USD1,700/oz in 2022 with continued bouts of volatility, compared to our forecast of USD1,800/oz for 2021. We note that while conflicting factors continue to affect the safe haven asset, bearish momentum is slowly building and will cap gold price strength going forward. On the one hand, gold is being supported by still-elevated inflation, rising geopolitical tensions and lingering uncertainties related to Covid-19 and the recent emergence of the new Omicron variant. On the other hand, the US Federal Reserve's tightening of monetary policy, recovering bond yields and strengthening dollar will put a lid on gold prices. Similar to other commodities, while we see prices weakening going forward, we expect gold to remain elevated in the coming years compared to pre-Covid levels.

Global Corn And Soybean Markets To Flip Into Surpluses In 2022, Weigh On Prices

Global - Agricultural Production Balance (mn. tonnes)

f = Fitch Solutions forecast. Source: USDA, Fitch Solutions.

5. Agricultural Commodity Prices To Fall In 2022, Except Cocoa And Milk

We expect that the prices of all agricultural commodities, except cocoa and milk, will fall on a y-o-y annual average basis in 2022, but that they will remain much higher than they were in 2020. On an equal-weighted basis, we forecast that agricultural prices in real terms will fall by 12.2% y-o-y in 2022, after a stunning 26.2% rally that we estimate in 2021.

In general, we think that global agricultural production will increase over the coming year owing to high plantings (incentivised by high prevailing prices for much of 2021) but also because the weather has been more favourable. Unseasonable weather, often associated with the La Niña, depressed harvesting yields in the US, Brazil and other major producers throughout 2020/21. We note that another La Niña is occurring but, as of December 8 2021, this seems to be much weaker than in previous seasons and harvesting yields in most regions are up in y-o-y terms. We also highlight that if fertiliser prices remain elevated throughout 2022 then this would incentivise lower fertiliser application and therefore poses a downside risk to our production forecasts, and correspondingly upside risk to our price forecasts, particularly for fertiliser-intensive crops such as corn. 

Meanwhile, we forecast that global agricultural consumption will rise a touch in 2022 (but not by as much as in 2021) in tandem with the recovery in real incomes amid the ongoing recovery in the hog herd from African Swine Fever (ASF, a hog-killing disease). However, we acknowledge that the risk to our demand forecasts lie to the downside as the spread of diseases, including ASF and Avian influenza (bird flu), could intensify throughout 2022, forcing mass liquidation of livestock and reducing demand for animal feed. In the case of both corn and soybeans, we expect the global market to swing into surpluses from 2021/22.

The exception to out bearish price outlook is milk and cocoa. While we expect the supply of both agriculturals to remain elevated in 2022/23, we think that growth in demand will outpace that of supply and tighten these global markets.

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Most Commodities Will Remain Elevated In 2022 And 2023

Fitch Solutions Commodity Price Forecasts

Source: Fitch Solutions

Commodity Unit Current Price YTD (% Chg) 1 Year (% Chg) 2020 (ave) YTD (ave) 2021f (ave) 2022f (ave) 2022f (% Chg YoY)
Class III Milk USD/cwt 19.80 13.1 17.1 17.08 17.96 17.55 18.10 3.1
Cocoa (London) GBP/tonne 1,682 0.4 -3.6 1,779 1,701 1,750 1,775 1.4
Coffee USc/lb 244 87.6 104.8 113 166 160 150 -6.3
Corn USc/bushel 588 21.7 38.8 369 562 560 500 -10.7
Cotton USc/lb 105 33.6 42.3 64.1 92 90 85 -5.6
Feeder USc/lb 163 17.6 18.8 135 149 - - -
Lean Hogs USc/lb 71 0.8 9.7 60 93 - - -
Live Cattle USc/lb 138 21.8 27.5 105 122 - - -
Palm Oil MYR/tonne 4,882 35.6 45.4 2,700 4,118 4,200 3,400 -19.0
Rough Rice USD/cwt 14.09 11.0 12.7 12.89 13.55 13.40 13.00 -3.0
Soybean USc/bushel 1,272 -3.0 9.3 956 1,366 1,350 1,100 -18.5
Sugar #11 USc/lb 19.82 28.0 37.7 12.87 17.77 17.70 15.50 -12.4
Wheat USc/bushel 791 23.7 35.6 552 702 709 650 -8.3
Coal, Thermal (Newcastle) USD/tonne 153.39 74.8 116.8 60.60 135.31 132.00 95.00 -28.0
Coal, Coking USD/tonne 279.00 128.7 129.0 130.64 204.06 225.00 240.00 6.7
Brent Crude USD/bbl 76.36 47.4 56.3 43.21 70.56 71.00 72.00 1.4
OPEC Basket, Oil USD/bbl 71.41 42.1 47.7 41.47 69.40 67.00 69.00 3.0
WTI Crude USD/bbl 73.03 50.5 60.4 37.20 67.70 68.00 66.00 -2.9
Natural Gas (HH) USD/mnBtu 3.85 51.8 57.8 2.13 3.71 3.90 4.20 7.7
Natural Gas (NBP) USD/mnBtu 34.89 350.0 521.4 3.35 14.65 14.31 12.61 -11.9
Industrial Minerals & Metals                
Aluminium USD/tonne 2,627 32.7 32.0        1,731 2,469 2,450 2,300 -6.1
Cobalt USD/tonne 69,815 116.9 118.2     31,758 50,245 - - -
Copper USD/tonne 9,653 24.3 25.4        6,197 9,272 9,200 8,800 -4.3
Iron Ore (62% CFR, Qingdao) USD/tonne 102 -33.5 -23.0           105 160 155 90 -41.9
Lead USD/tonne 2,284 14.5 8.8        1,837 2,182 2,200 2,150 -2.3
China Lithium Carbonate USD/tonne 33,179 301.0 357.6        6,378 16,198 18,050 21,000 16.3
Nickel USD/tonne 20,230 21.8 23.4     13,860 18,372 17,500 16,540 -5.5
China Domestic Hot Rolled Steel Average* CNY/tonne 4,827 5.5 10.8        3,822 5,373 - - -
Tin USD/tonne 39,236 93.0 104.6     17,110 30,647 30,500 32,500 6.6
Zinc USD/tonne 3,310 20.3 18.2        2,280 2,980 2,900 2,550 -12.1
Precious Metals                  
Gold USD/oz 1,786 -5.9 -2.9 1,772 1,800 1,800 1,700 -5.6
Palladium USD/oz 1,851 -24.6 -20.1 2,176.6 2,430 - - -
Platinum USD/oz 954 -11.3 -6.3 891.4 1,098 - - -
Silver USD/oz 22 -15.2 -9.3 20.7 25 - - -
Last updated: December 9 2021. Note: *We forecast a global average of steel prices; therefore, our forecasts are not included on this line. All metals prices except steel, lithium and iron ore refer to generic third-month contracts. All energy prices refer to generic front-month and all agribusiness refer to second-month contracts unless otherwise stated. na= not available. Source: Bloomberg, Fitch Solutions.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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