Good morning, thank you very much for joining me for this strategic coffee break discussing the 2022 commodities outlook.
I am Bart Melek, the Global Head of Commodity Strategy for TD Securities.
I will be discussing how the changing global consumption patterns, economic growth moderation, and supply trends normalization will knock commodity prices off their highs in 2022.
I will also address how ongoing energy problems in Asia and Europe over the winter OPEC+ discipline will prevent an outright rout in commodity prices. How those developments will serve as a buffer against the weakening of economic growth expectations and pending supply increases.
At the same time, I will highlight the growing risk surrounding considerable Chinese economic underperformance, higher inflation for longer, and the impact of unexpectedly elevated interest rates on commodity prices.
I suspect that potential problems in China, not our base case scenario, and higher interest rates, may well derail commodity prices and cause a rout.
Following a very strong year, commodity markets will likely moderate in 2022. This is mainly driven by the fact that the recovery momentum will likely slow, the pace of economic growth will moderate, and there will be a broad normalization of consumption patterns.
Immediately after the pandemic, or at least at the worst of the pandemic, consumption patterns shifted materially towards durables, and consumption goods that required energy and physical commodity inputs. Mainly because people were locked up in their houses still and couldn't spend on services that normally represent a much bigger proportion of economic activity.
Those higher demand requirements for durables and COVID-related supply side constraints, ranging from logistical issues to shortage of labor and capacity, have caused big price spikes. At the same time very easy monetary policy and fiscal expenditure also contributed to large flows of capital into these sectors, lifting everything from oil to base metals. Plus, on the part of oil production, there were continued constraints by OPEC+ to keep supplies constrained.
As we move in 2022 and the world normalizes, that means we will shift away from an overconsumption of durables, to start increasingly consuming services. That means there will be less intensity on the demand side for commodity use. At the same time, we think a lot of the issues on the supply side, like logistics and labor shortages, will unwind. This should ease up many of the constraints that have lifted prices sky high in oil, copper, and other industrial metals.
Conversely, we think gold continues to do well, mainly because we expect inflation to be quite elevated and we continue to expect significant monetary accommodation for the foreseeable future, which will result in highly negative real rates across much of the yield curve.
At the same time, I'd like to present a bit of a risk to this outlook. Where we think that there is a possibility, not a strong one at this stage, that Chinese growth could be much weaker than expected. At the same time, inflation may remain higher for longer, and that means that interest rates would be potentially much more restrictive or higher. This would be very bad news for commodities. It would likely mean a significant rout, mainly because of the reduction in demand, and the freeing up of resources to make more commodities, like copper and zinc, because of more available electricity.
Conversely, higher interest rates would very likely redirect more capital away from commodities, driving that decline even further. So, while we do think that there is a correction pending because of all the factors I've mentioned, the correction isn't going to be huge because we do see structural change that will keep supply from going back to normal. There will be more supply but not huge increases of supply that would cause a rout. So, it is a somewhat weakening outlook for commodities. But not our rout. And we do see some potential risk of a rout from higher-than-expected inflation and rates and a deteriorating China.
Thank you very much for listening. I'm Bart Melek Global Head of Commodity Strategy at TD Securities, and please know you are always welcome to reach out to discuss anything you would like in detail. Thank you very much. And happy New Year.
