Transcript
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Speaker: Hello and welcome to Under the Banyan Tree.
Speaker: I'm Fred Newman, Chief Asia Economist, coming to you from Hong Kong.
Speaker: We're hitting a string of hot topics on the show today from climate change to geopolitics and the energy transition.
Speaker: What ties all of those together?
Speaker: The answer is commodities.
Speaker: I'm delighted to welcome our Chief Economist for Global Commodities, Paul Bloxham, back onto the podcast from HSBC Global Research.
Speaker: You're listening to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: So we last discussed commodities on the podcast back in September last year.
Speaker: At the time, we were asking what was keeping prices elevated given the Chinese economic downturn.
Speaker: Since then, commodity prices have actually held up really well and even rallied over the last two or three months about 10%.
Speaker: Let's bring in Paul Bloxham from Sydney for a closer look at why that is.
Speaker: Paul, great to have you back with us.
Speaker: It's great to be here.
Speaker: Paul, you cover commodities and have for many, many years.
Speaker: And, you know, let's take a step back before we delve into details.
Speaker: Just looking at a chart, commodity prices are still extremely high.
Speaker: If you take out sort of the spike around the, you know, Ukraine invasion, we're actually probably around record highs.
Speaker: How do you explain that?
Speaker: Because the global economy isn't overly strong and yet commodity prices are here hovering around record highs.
Speaker: Why is that?
Speaker: So we come at it from a couple of different directions.
Speaker: I guess the first one is to say commodity prices are quite elevated because the supply side of commodities is quite constrained.
Speaker: We've written quite a bit about this over the past couple of years and we've referred to it as a super squeeze, a global super squeeze in the commodity space.
Speaker: We think that there just hasn't been enough supply available to meet the given demand, even though demand, as you say, hasn't been that impressive in the scheme of things.
Speaker: And that's left the prices at more elevated levels.
Speaker: We've been talking about the super squeeze occurring across three key structural dimensions.
Speaker: Geopolitics playing a role in terms of constraining and rearranging supply, climate change, and in particular, of course, the impact that has on agricultural commodity supply and also the energy transition, which means we're shifting the way we produce energy, but it means much, much higher demand for the products that go into trying to make that energy transition, the metals associated with it, but less investment in fossil fuel capacity.
Speaker: just something that also constrains the supply of commodities and maintains those prices at higher levels.
Speaker: That's, in our view, the primary driver of why we're in the position we are.
Speaker: I think one other element we've been adding a bit more recently is to say, look, keep in mind that although nominal commodity prices, i.e.
Speaker: we look at commodity prices typically in US dollar terms, are high, they are high, actually if you compare commodity prices
Speaker: to the rest of the consumer goods.
Speaker: So you look at them in real terms, you compare them to, say, the US CPI, they're actually not that high.
Speaker: They're really close to their average because we have been through in the past couple of years this very big step up in inflation and the price level.
Speaker: And so it's not as high when you look at it in real terms.
Speaker: So I think those are two helpful ways to think about why we are where we are.
Speaker: So you mentioned big structural drivers here.
Speaker: You mentioned climate change.
Speaker: You mentioned geopolitics.
Speaker: You mentioned the energy transition, all affecting commodity prices.
Speaker: But then if you hone in a bit more to recent data, we've actually seen a pretty convincing rally.
Speaker: Since about February, commodity prices are up 10%, 12%.
Speaker: there must be some cyclical signaling here as well.
Speaker: Does that mean the global economy is picking up steam again?
Speaker: Or do you think that more recent rally is divorced from these shorter term cyclical trends that we're seeing?
Speaker: No, I think that's definitely an element of our story too.
Speaker: So you're right that we just described the big picture.
Speaker: But if you get right into the sort of shorter term, we have seen an upswing in commodity prices.
Speaker: There are about
Speaker: as you say, about sort of 10 or 11% off their trough.
Speaker: They're about that much up year to date.
Speaker: And I think part of it, as you say, reflects that the global industrial cycle is starting to lift, showing more positive signs.
Speaker: We wrote a short piece a little while ago, we called it Dr. Copper and the Super Squeeze.
Speaker: And typically, market participants watch the copper price quite closely because copper is such a ubiquitous and highly used industrial commodity that when it goes up,
Speaker: When it goes down, it might be signaling, giving you an early sign as to what's going on in that industrial cycle.
Speaker: So it would be telling us at the moment that we are past the trough in the industrial cycle as well.
Speaker: So that's interesting.
Speaker: We're past the trough in industrial cycles.
Speaker: Of course, a lot going on, and we can unpack that a little bit later.
Speaker: But let me ask you about the role of China here, because China dominates the demand for commodities.
Speaker: And yet the new set of China is not very encouraging in terms of economic growth.
Speaker: And in particular, the housing market, which is a massive, massive user of certain commodities, has been down for two years.
Speaker: Construction is down 60 percent since its peak.
Speaker: So given the slowdown in China, in particular construction, why haven't we not seen commodities react more?
Speaker: Is that really a supply squeeze issue or is something else going on here?
Speaker: Well, I think it's firstly, I mean, it is somewhat surprising.
Speaker: If you sit back and say to yourself, you know, China has weakened the property sector, has been going backwards for quite some time now.
Speaker: And the fact that the commodity prices have held up so well might be somewhat surprising.
Speaker: I think one element of that story is the super squeeze that I've just described on the supply side, but that can't get you all the way.
Speaker: A part of the story is also that although you've got a very weak property sector, property investment in China, you are seeing a reorientation of growth.
Speaker: They're moving growth more towards
Speaker: They're investing in the manufacturing sector, they're ramping up production of things that go into the energy transition, particularly that's not just driven in some ways, it's driven by China and its demand for those products, but it's also driven by the rest of the world.
Speaker: We're making the energy transition across the world.
Speaker: We're making it in the US and Europe, in Japan, the rest of the countries, governments are stepping up and doing more spending.
Speaker: And of course, a lot of those products that go into that get produced in China and then exported to the rest of the world.
Speaker: So that I think is a really, really big part of the story because if you look at the sorts of commodities where you're seeing prices that have lifted, copper is one, nickel is another, aluminium is another.
Speaker: These are products that are partly supply constrained to a degree for the reasons we talked about earlier, but they're also all key parts of what is the energy transition.
Speaker: So I think that energy transition overlay, that story,
Speaker: is affecting China directly is a global story, but it's also a driver of why China's demand for commodities has remained so robust in the face of weakness in the property sector.
Speaker: And I want to come back to the energy transition and climate change in particular.
Speaker: But before we do that, you know, there's another economy that's often talked about in terms of generating demand.
Speaker: India has been on the roll.
Speaker: Growth is very robust there, most populous nation on earth.
Speaker: And a lot of analysts have kind of drawn this parallel with China, saying that, well, at some point,
Speaker: India should deliver an enormous increase in commodity, man, just as China did in its kind of accelerating growth phase.
Speaker: Have we seen evidence of that yet with India stepping in a major way into commodity markets?
Speaker: And would you expect it over a time frame of like, say, the next five years or so?
Speaker: I don't think it's going to be as big a story as China.
Speaker: And I guess there are a few different dimensions.
Speaker: I mean, it's certainly the case that India's growth prospects are looking better and it's building a lot more infrastructure.
Speaker: It's doing things that can be seen as commodity intensive.
Speaker: But it's hard to see that that's going to ramp up in the sort of scale that we saw in terms of China's emergence through the early part of this century.
Speaker: So that's one element.
Speaker: I think the next element is China's pathway to growth.
Speaker: was to become an enormous global manufacturing, the factory of the world.
Speaker: And that's where they've gotten to.
Speaker: And so, you know, that is a highly commodity intensive activity.
Speaker: And it's not that they're the source of demand for the commodities.
Speaker: Actually, the end demand goes to other countries where they sell those manufactured products.
Speaker: It does seem as though India's growth pathway is going to be a different one.
Speaker: It's going to be much, much more services oriented, so likely less commodity intensive.
Speaker: And so,
Speaker: For those two key reasons, and they're not the only ones, but we don't think India is going to be the same sort of scale in terms of sort of driving demand for commodities that China delivered through the first couple of decades of this century.
Speaker: So that's interesting.
Speaker: So the key to the global demand story really means China in many ways in all its aspects, even if China's demand itself is shifting to other sectors.
Speaker: Maybe this is a great place to take a quick break.
Speaker: And when we come back, we want to talk a little bit more with Paul on this idea of the energy transition, its impact on global commodities and also climate change.
Speaker: Well, we're back with Paul here.
Speaker: We just talked about some of the broad drivers of global commodity prices and the fact that China is still one of the key demand areas for commodities.
Speaker: But Paul, you mentioned the energy transition, and I wanted to unpack that a little bit.
Speaker: There are two aspects on this.
Speaker: One is the impact of the energy transition on traditional fuels like oil, coal and gas, for example.
Speaker: And the other one is on new materials.
Speaker: And maybe let's start with the fossil fuel aspect first, because oil prices, when I look at this, still $83 for Brent or so at the time of recording.
Speaker: That's still pretty pricey.
Speaker: I guess some of the other energy prices for fossil fuels, gas, do remain somewhat elevated.
Speaker: We haven't really seen that dip in demand, have we, or the impact on prices?
Speaker: How do you explain that?
Speaker: Well, we still seem to be hitting new daily or quarterly usage rates for oil.
Speaker: We're hitting new highs.
Speaker: We're still not quite
Speaker: at peak oil demand.
Speaker: So that's one feature to keep in mind.
Speaker: But I think, I mean, that will come at some point and it's difficult to predict, but you'd see that that would likely play out.
Speaker: But the big story here is that OPEC has been very, very cohesive.
Speaker: They've managed to keep a lot of oil off the global market at the moment.
Speaker: OPEC has got sort of 5.6 million barrels a day out of
Speaker: about 101 million barrels a day is what we use globally.
Speaker: 5.6 million barrels a day of global supply is being constrained, mostly Saudi supply, by their choice not to put that onto the global market.
Speaker: Actually, this is very sort of timely because we've got another meeting coming up this weekend, of course, of OPEC, and there's a question around whether they'll continue to extend the cuts they've got in place at the moment, and that's likely to happen.
Speaker: Again, that's being reflected in
Speaker: the oil price staying at the levels you're talking about, $83 a barrel.
Speaker: So that's part of the story.
Speaker: I think the gas, I mean, gas is partly also, you've got to keep in mind, what you'd see is a sort of transition fuel where you're shifting from a higher carbon emitting fuel, like say coal, to using gas in the interim while you're making the full energy transition towards renewables.
Speaker: So that's continuing to support demand for gas.
Speaker: And actually there is quite a lot of new construction going on
Speaker: in liquefied natural gas capacity over the coming years that's going to come on stream from Qatar, the US, Canada.
Speaker: And so that's bringing more gas onto the global market.
Speaker: But again, the energy transition, as I think we've talked about on this podcast before, it's a long game, right?
Speaker: It's a multi-decade proposition.
Speaker: It's a long game.
Speaker: And as you say, there's still plenty of demand for oil and gas, unfortunately, for the global environment.
Speaker: But still, if you think about China, China's leading in terms of the
Speaker: adoption of electric vehicles, for example.
Speaker: It's the largest import of oil globally.
Speaker: Do you see any sense that maybe Chinese demand is at the margin slowing because of EV adoption?
Speaker: Or is that still a long way away?
Speaker: I think 30% of cars in China now are electric vehicles.
Speaker: So is that starting to make a dent?
Speaker: I still think that China is growing fast enough.
Speaker: that actually you've still got demand for all of these things continuing to grow at this point.
Speaker: So you get both the transitions to the electric vehicles, which drives the demand in that sense.
Speaker: You might think that as you move to electric vehicles, you reduce your oil demand.
Speaker: But if your economy is continuing to grow, you'll get more oil demand as well.
Speaker: So at the moment, I don't think there's that many signs that that broader transition has happened.
Speaker: But the projections suggest that, you know, that will be what we should look out for.
Speaker: That's coming in terms of that transition.
Speaker: And China is, as you say, doing a lot of,
Speaker: investment in the energy transition, making a lot more electric vehicles.
Speaker: I guess Europe is the leading area where this has been happening, but China is making a lot of progress in that direction too.
Speaker: So it's definitely a turning point we should look out for.
Speaker: So you mentioned China's enormous investment in electric vehicles, for example.
Speaker: That also raises the question of demand for battery metals, be it copper, lithium, for example.
Speaker: Have we seen a big rise in the price of these commodities?
Speaker: I know a few years ago, we all were worried that the world is going to run out of lithium.
Speaker: We wouldn't have enough lithium for these batteries.
Speaker: But how do you see that ramp up in battery capacity
Speaker: construction capacity in China impacting global commodity prices.
Speaker: Is there a real constraint here?
Speaker: So this is the really big story in the metal space.
Speaker: You know, as we talked about before, it's a part, a key reason why copper prices are over 10,000 a ton at the moment and why there are increasing financial players taking long positions in this area as well.
Speaker: So there's buildup of Chinese inventories at the moment, which partly reflects this expectation.
Speaker: There's going to be this really sustained long-term demand for copper.
Speaker: And there isn't actually that much investment going on globally in new copper mine production, despite the strong demand story.
Speaker: So this is, I think, very, very clearly a part of the reason why copper prices are staying elevated.
Speaker: You can draw that out further to nickel prices, which are also high at the moment, again, reflecting a similar story.
Speaker: Aluminium is actually more intensely used in the production of electric vehicles than in normal combustion engine vehicles.
Speaker: It's a lighter material, so it's partly reflecting that story.
Speaker: And then, of course, you get into the other ones.
Speaker: the critical minerals and you named one which is obviously the lithium story.
Speaker: I mean, lithium's got some very unique dynamics because a couple of years ago, there was such an enormous amount of demand for it that the price went up substantially.
Speaker: It went up 800% or 900% and that did motivate a massive upswing in investment and that investment was able to be brought on fairly quickly, unlike some of the other commodities.
Speaker: So through 2023, the story for lithium actually was that we got an oversupply.
Speaker: We got a
Speaker: Lithium prices fell a long way from their highs because we had more supply of the product and we'd had some sort of a slowdown a little bit in Chinese uptake of electric vehicles.
Speaker: We've had a bit of a slowdown in the US as well.
Speaker: So that all combined to get lithium prices to come right back down.
Speaker: They've stabilized recently and I think our view is they're going to sort of stabilize and start to lift again.
Speaker: But the medium term story is we still need a lot more lithium because we're going to use a lot more batteries in the energy transition.
Speaker: Well, I guess the good news here is that we have enough lithium around to actually fuel that energy transition.
Speaker: And I suppose the high prices for copper and other materials ultimately will help to ensure supply as well.
Speaker: But perhaps one last question related to this, which is climate change.
Speaker: And of course, the energy transition is motivated by concerns over climate change.
Speaker: And that's the impact on the agricultural market.
Speaker: You know, just opening newspapers, you see always news about extreme weather patterns coming through.
Speaker: And I'm struck that rice prices, which are very important for us here in Asia, are actually, you know, very elevated multi-year highs, certainly highs since about 2008 about.
Speaker: Is there more we should worry about, about the impact of extreme weather patterns on agricultural prices?
Speaker: And should the Asian population
Speaker: consumer worry about that impacting their pocketbooks.
Speaker: We're keeping a very close eye on this story for good reason and you are seeing actually a pickup in agricultural commodity prices over the past few months as well like we talked about with the other products and a lot of that is more inclement weather than the normal.
Speaker: So for rice, we saw this big rise in rice prices through last year in part because of trade restrictions that were put in place in India
Speaker: and that constrained the global market of rice.
Speaker: Rice prices came down a little bit in the early part of this year, but just in the past little while, since middle of April, they've actually risen again.
Speaker: And they're almost, at least on the Thai white rice price, near a 15 year high.
Speaker: And that's because of weather.
Speaker: We've got weather affecting chocolate and orange juice prices, coffee prices.
Speaker: And I think one, that's related to climate change and more extreme weather events.
Speaker: So to your point, Fred, that we have to watch this very carefully, but the other,
Speaker: sort of bringing it back to where we are at a macro level, we have to think that this collection of things we're talking about, we're seeing prices lift off already quite high levels.
Speaker: It means that inflation, which still hasn't come down quite to where it needs to be in most countries, might prove to be a bit stickier.
Speaker: And that's one of the other themes we've been running that what can we learn about commodities, the demand and the supply dynamics, what can it mean for the broader inflation story?
Speaker: And of course, that means something
Speaker: potentially for interest rates in central banks as well.
Speaker: Paul, thank you very much for joining us.
Speaker: And I guess we'll check in again with you in a few months to see where we are in commodity prices.
Speaker: But it's really remarkable how resilient the sector has been.
Speaker: And you really highlight in your research some of these very fundamental drivers.
Speaker: And we invite anybody who's listening to check out Paul's research.
Speaker: So thank you very much, Paul.
Speaker: Thanks, Fred.
Speaker: Cheers.
Speaker: And that's all we've got time for, ladies and gents.
Speaker: Thanks, as always, for joining us under the banyan tree.
Speaker: Remember, for a global take on this week's top economic stories, check out our sister podcast, The Macro Brief, available wherever you're listening right now.
Speaker: We'll be back again next week.
Speaker: Take care.
Speaker: Until then.
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