The Ultimate Guide to Commodities Investing: HSBC Analysts Flag Growing Downside Risks
In the world of commodities investing, analysts at HSBC are raising red flags despite prices remaining high over the past 18 months. Supply-side constraints have been driving prices, but now, slowing global demand and geopolitical uncertainties are creating new challenges.
Even though global commodity prices are below the record highs of 2022, they are still elevated, with prices in August 2024 sitting 44% above pre-pandemic levels in nominal terms. However, when adjusted for inflation, prices are closer to the 20-year historical average.
The primary reason for this resilience is the supply-side “super-squeeze” identified by HSBC since 2022. Global economic growth is slowing, with forecasts at 2.6% for both 2024 and 2025, down from 2.7% in 2023. Sluggish global manufacturing, worsened by China’s ongoing property sector crisis, is a major challenge for metals prices.
China’s property sector contraction is especially concerning for industrial metals. While some metals tied to the energy transition have performed well, those reliant on traditional infrastructure, like iron ore, face demand challenges.
HSBC’s Commodity Cycle Selector signals a Bear phase for commodities since mid-July 2024, suggesting further downward pressure, especially on oil and copper. Geopolitical risks and supply-side disruptions, alongside climate change impacts, continue to add volatility to global commodity markets.
In the energy sector, OPEC+ production cuts and record-high US crude production could lead to a market surplus by 2025, but current geopolitical tensions are keeping oil prices high. The global energy transition is increasing demand for metals like copper, lithium, and hydrogen, critical for renewable energy technologies.
Weather remains a key driver in agricultural markets, with grains like wheat and maize seeing price drops due to favorable conditions in the US. On the other hand, “finer foods” like cocoa, coffee, and olive oil are seeing price hikes due to adverse weather and supply disruptions.
HSBC warns of volatile global food prices, influenced by climate change, geopolitical tensions, and trade policy shifts, such as India’s rice export restrictions. Precious metals, especially gold, have hit record highs above $2,500 per ounce, driven by safe haven purchases and economic uncertainty.
Gold’s role as a hedge against inflation and uncertainty is expected to remain strong, with potential for further upside depending on the global economic and political landscape. Stay informed and cautious in the commodities market to navigate these challenges and opportunities effectively.