Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
Under the Banyan Tree – Commodities: Behind the headlines
742 Plays1 month ago
With geopolitics, the energy transition and changing investor preferences all affecting the price of commodities right now, Fred welcomes Paul Bloxham, Chief Economist for Global Commodities to the podcast.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/srWTwj9
Stay connected and access free to view reports and videos from HSBC Global Investment Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
Recommended
Transcript
Introduction to HSBC Global Viewpoint Podcast
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
Commodity Prices Surge: Focus on Gold
00:00:33
Speaker
Hello and welcome to Under the Banyan Tree. I'm your host, Fred Newman, in Hong Kong. Now, we've probably noticed that gold has been heading record highs lately, but actually commodities are making headlines across the board, and that's what we're focusing on in today's podcast. In fact, pretty much everywhere there's a headline, there's a commodity story, from geopolitics, energy, AI, the China story, and a whole lot more. My guest today is our resident commodities guru, Paul Bloxham, who joins me from Sydney. Let's get the conversation started right here under the Banyan tree.
Factors Driving Record Gold Prices
00:01:14
Speaker
Welcome back to the podcast, Paul. Great to be here. So, Paul, lots of things going on in the global commodity space. We had you on last year a few times, but I want to take stock at the beginning of 2026 because here we have geopolitics. We have slowing demand in some segments for commodities, rising demand in others. We've got the energy transitions and so much going on. But let me start with that trend. shiny metal, gold. Gold just rising to record highs again at the start of the year. What's going on here? What's driving that massive demand?
00:01:51
Speaker
Well, a lot of this, as you say, is related to geoeconomic developments. You know, we've watched what's going on with Venezuela. We're all having a conversation right now about but what might happen with Greenland. These are the sorts of things that are driving investors to look for safe havens and the the sorts of safe havens they used to go towards. They used to move more of their funds towards the US dollar, towards US government bonds and so on. are Just a bit less attractive now. And so investors private sector investors, central banks around the world have been accumulating more gold reserves as well. They've been moving their money into gold. And we've seen gold prices hitting new all-time highs. We had this conversation through last year because they were hitting new new all-time highs back then as well. And we recently hit another one, the the team view that we could get through, you know, 5,000 gold. So it's a bit of a
Rising Prices of Palladium, Silver, and Platinum
00:02:39
Speaker
deja vu. You and I did talk about every three months about record gold prices, but it's now starting to impact other precious metals as well. i mean, we got palladium, I think. We got silver. What's going on in some of these other more niche kind of precious metals?
00:02:54
Speaker
Well, again, it's a very similar story. It's it's that if if gold prices have gone up so much, it makes sense that investors think that the rest of the collection of precious metals should have ah a relatively high price as well. So it's another safe haven flow. If gold starts to get really expensive,
00:03:10
Speaker
some investors start to look towards silver. And so silver prices have been on an absolute tear over the past couple of months. They too have hit all-time highs. As you say, that's not the only place it's shown up. It's shown up in in platinum prices, which have gone up a lot. Again, a safe haven flow, a jewelry demand story. Palladium, partly a precious metal story, partly an energy transition related story because this is a material that goes into catalytic converters in motor vehicles and so on. so So there's another related story there that's driving things up as well. But the precious metals complex has been absolutely booming. So geo-bombing
00:03:45
Speaker
Economic, uncertainty, clearly driving the prices of precious metals, as you explained.
Base Metals Demand and AI Developments
00:03:51
Speaker
But then there is and other other types of commodities. You call them base metals, for example. We think copper, aluminum, for example. That's probably more related to what the energy transition. And they've been doing quite well as well.
00:04:05
Speaker
That's right. So that's another fundamental story that's been supporting demand for commodities and the ones you describe. And that's it's related to the electrification story, ah the ah the electric vehicles, as well as the build out of more energy storage.
00:04:20
Speaker
And that's actually being underpinned by the the AI story, right? As we build out across the world, all these data centers, they use an enormous amount of energy And we're needing to build electrical capacity to support that that AI story that in turn is driving higher demand for all of the raw materials that go into that. And copper is a big one. Copper prices have also hit all-time highs recently because of that demand story, as well as some other supply disruption-related stories. We're seeing a similar sort of demand for electric vehicles and the the electrification story drive
00:04:54
Speaker
demand for nickel, nickel partly goes into batteries, and also you've seen it in supporting aluminium prices, as you say, ah there's more aluminium in the production of these electric vehicles. So what I would call and what you called the base metals have been rising as well.
00:05:09
Speaker
Some of it's a supply related disruption story, but primarily it's being underpinned by this AI electrification, energy transition, structural story that's out there. So it's quite a well supported a demand side story as well. And there's one i think that we we kept talking about for for many, many years because it goes into batteries in particular,
Lithium Market Cycles and EV Industry Impact
00:05:30
Speaker
lithium. um There were a few years ago we talked about shortages. There wasn't enough of this stuff around.
00:05:35
Speaker
um How is the demand for lithium and how are lithium prices doing of late? Because that's, of course, key for for the energy transition, isn't it? Absolutely it is. and And lithium prices have been through enormous cycles over recent years. Because as you describe, as the electric vehicle story really started to take off, there was a realisation there just wasn't enough lithium supply. And so prices went up to very high levels. That motivated a lot of investment.
00:06:00
Speaker
And then in the last cycle, we saw this 800 or 900% rise in prices. I know, extraordinary rise in prices. And then as the supply came on stream, they came right back down. And we've had these very low, actually, in principle, lithium prices up until about the middle of last year. And we've seen now lithium prices more than double since the middle of last year. And I think you know it looks as though you know we've had surplus and we look as though we're getting moving towards more of a deficit in terms of lithium supply. So more upside for that lithium story as well, much like the copper story that I just described. so So we talk a lot about record prices here. mentioned gold, silver, copper, and you mentioned some of the other base ah metals, even lithium are going up.
Sluggish Bulk Commodities Amid China's Slowdown
00:06:43
Speaker
But there other commodities maybe that haven't seen quite as big a rally, and you call them bulk commodities. I think iron ore might be in there that hasn't necessarily performed as well. a spectacularly well, coal, for you example. What's going on in these kind of more, I guess, heavy industrial kind of stuff that that China in particular has been using quite a lot of because of its housing boom in recent decades? Where will we stand on iron ore and and coal, for example?
00:07:12
Speaker
Well, you're absolutely right. So there's this, there's been quite divergence between base metals and what we call bulk commodities. The electrification story is supporting the base metals, but the bulk commodities, they primarily go into the building of housing and infrastructure and all of that, that heavy sort of stuff. And that's been much weaker. I mean, China's domestic story has been weak, fixed asset investment has been falling, property investment has been falling for a number of years now, and even the infrastructure story hasn't been particularly strong, and all of that's weighed on demand for for steel. Now, you produce steel with iron ore and coking coal, and so that's left the prices of those products weaker. They they haven't gone up like we've seen with the base metals. And in fact, if you look into Our forecasts, we think that they're going to remain more subdued. So, yeah, the bulk commodities, the iron ore and the coal story are are on the weaker side. The thermal coal story also, China's been building more capacity to produce its own thermal coal, therefore demanding less from the seaborne market, which is what Australia produces, and that's pushed down seaborne thermal coal coal prices. So you've seen sort of ample supply, weaker demand for those bulk commodities, and so...
00:08:19
Speaker
So their story is not nearly as as exciting, as I said, as the base metals or the property models. bit of divergence there. um you know Geopolitics not affecting it as much. The energy transition not affecting iron ore as much as some of the other base metals.
Stable Oil Prices Despite Tensions
00:08:35
Speaker
um But what about oil? Because oil is actually relatively cheap, actually, if you look around. And that's a bit of surprise, isn't it? i mean, we talk about geopolitical risk. And yet oil prices – haven't really been rising. If anything, they've been falling a little bit. What's what's going on in in oil?
00:08:52
Speaker
So, I mean, the big picture story for oil is that we have ample supply in the broader sort of global story. If you remember, and we told this story told this story through last year and the year before, that through the pandemic, ah the OPEC countries, the OPEC grouping were holding off about 6 million barrels of oil a day, which is about sort of 5 or 6% of global usage of oil. They were holding it off the market to keep the price higher.
00:09:18
Speaker
And they've started over the last 18 months or so to reverse that story, put more of that oil back onto the global market. And so far they've added back about 3 million barrels a day, so quite a lot of supply. In fact, the team thinks they're going to keep adding more supply back in through 2026. And so we've boosted global oil supply. We've got ample oil supply. We're moving into what you'd call a surplus, and that has held down. In fact, it's seen the oil price come down through last year. Now, as you rightly say, there's been, along the way, some volatile moments because you've had these geopolitical developments that have come along. Venezuela, the issues with Iran recently, there was a concern that you know this might constrain oil ah supply from Iran, but also might block the Straits of Hamas, where a lot of oil tends to travel. And so those those they've come along and they've given us small periods where oil prices have risen and there's been risks and concerns.
00:10:09
Speaker
But nothing's really pushed the oil price up a lot. And that's because there is this big amount of oil supply that's come back onto the global market. And that's the story. I mean, we think that oil prices are likely to track broadly sideways this year $65 a barrel, but we also see some downside risk from this sort of large supply of oil. The way you characterize this is that essentially we have enough supply and that then geopolitical risks are not big enough to really drive prices higher because we're well supplied in markets.
00:10:39
Speaker
Do you see any evidence of maybe demand for oil also starting to weaken? We read a lot about electric vehicles coming on stream in China and and you know the world wants move on to solar panels. And is that is that impacting global oil demand yet? are Are we still heading towards higher demand in general? Demand is still positive. It's still growing. I mean, and partly because of the global economy is still growing. I mean, it's held up reasonably well in the scheme of things. And we think it'll continue to do so this year. That's the the research team, as you know, and I know that that's the view we're carrying. And then I guess another part of this, which we talk about a bit is, you know, when does China to get to the point where it's
00:11:15
Speaker
you know using more electric vehicles, for example, and more electrification, and therefore has less demand for for fuel, well, that's still not, we're not there yet. And it's not even in the sort of near-term forecast horizon. Peak oil in China is not there yet. So as yet, that demand story holds up okay. We've got ample supply. And so that's why we think oil prices remain sort of on the weaker side. I think the other big story that's played out over the last little while is Venezuela.
00:11:40
Speaker
And you know the big story that got attention was that Venezuela's got this massive reserve ah technical reserve oil, 300 billion barrels of of reserves that they you know they've got and the largest reserves in the world. But as our oil team has been pointing out fairly emphatically, most of this is uneconomic. The economically recoverable amount of that is much, much lower. I mean, some of the estimates suggest it's as low as like a hundredth of that, like 3 billion barrels. they're The cost of sort of pulling oil out of the ground in Venezuela is very high.
00:12:10
Speaker
Paul, this is, I think, a great, great discussion because it highlights really that some commodities are doing very well for various political reasons, energy transitions. But
Agricultural Product Price Stabilization
00:12:19
Speaker
in others other commodities, actually, there is supply and not as much demand. So we're seeing this divergence a little bit in the commodity space. Maybe it's a great time to take a quick break. And when we come back, we're going to take a quick look at soft commodities.
00:12:43
Speaker
So, Paul, before the break, we talked about some of the industrial stuff. We talked about oil. We talked about gold. ah But we want to turn our attention really soft commodities. And what's been going on in the food space in particular? um You know, remember during a few years ago during COVID-19, we had soaring prices for grains, for example, for other food stuff. And that raised food pressure, food costs really for consumers. Where do we stand now globally on some of those you agricultural commodities? Well, you're right. We had this big disruption. The pandemic was one, but the other thing that happened back in 22, of course, was the Russia-Ukraine war. And that was one of the really big disruptive forces because both Russia and Ukraine are big producers of agricultural commodities. And so those things combined pushed them to very high levels, ah particularly grains prices.
00:13:32
Speaker
And that was the story back then. But the the answer now is that actually a lot of their product is getting into the global market. There's quite good growing conditions around the world, including in Russia, that have actually been putting more of these grain products onto the global market. There's ample supply and the prices have come right back down. So grains prices in general, yeah've they've come back down to quite low levels. the The other story that we were talking about through last year that I think is still playing out, and that is supply disruptions to a collection of different finer food products.
00:14:03
Speaker
So we talked about cocoa, orange juice, olive oil. The prices of these products had all gone up quite substantially because of supply disruptions. They too have started to come down more. They're not right back at the lows. Some of the effects have been persistent. Chocolate prices are still quite high, but they are they are off they they're well off their peaks. So the food price story doesn't look quite as challenging but as it has been in the past. But but in many ways, if I think back in our discussion, we're talking about geoeconomics, we're talking about the energy transition in part. um
00:14:37
Speaker
Isn't there a risk also that you see geoeconomics and climate change, to which I guess the energy transition is a response, Isn't there kind of a structural change in the global economy that ultimately might raise the risk here of renewed spikes
Potential Commodity Price Spikes from Geopolitical and Climate Issues
00:14:52
Speaker
in prices? And I'm asking, because you know in Asia, we're kind of scarred by that rice price shock in 2008, for example. We see very quickly governments reining in shipments of rice, hoarding rice. And so these these things can develop actually within a few months quite quickly.
00:15:09
Speaker
I think that's absolutely right. And I mean, goes to this point that, you know, we just have to be on the lookout for more supply disruptions yeah across the board for all sorts of things. And the pandemic taught us that and the Russia-Ukraine war has added to that risk that we watch out for.
00:15:25
Speaker
As you say, the climate change issue adds to that story too. And we see it quite vividly in commodities, often because for a lot of commodities, there's quite a large concentration of where the key producers are. you know for For cocoa, for example, for chocolate, I mean, it was West Africa. It was just two countries in West Africa that produced the bulk of that product.
00:15:44
Speaker
And so you can go through the list for for for olive oil. It was Spain and Portugal having for very dry conditions. If you have high concentration of ah the particular production of a particular product, and then you get ah a shock, a weather-related shock, a geoeconomic-related shock, um or a pandemic, or a disease-related shock, because that can happen, obviously, not just for humans, but also for animals and so on. We see these stories play out. If there's a concentration risk about where those things are produced, then absolutely. the These are the sorts of shocks that come along and force supply constraints and then prices to rise substantially. And I think that's definitely something we spend a lot of time watching out for. Very difficult to forecast. More a sort of thing you report on and you see how things are traveling. But yes, more frequent shocks from climate change, geoeconomics and even the disease environment are things that we're attuned to.
00:16:33
Speaker
Paul, it looks like it's going to shape up to be another interesting year in
Commodities as Economic and Geopolitical Indicators
00:16:38
Speaker
commodities. Certainly commodities are a bellwether for the global economy and and not just for the economy itself, but also, of course, for geopolitics and everything that's going on. I think we'll need to check in with you again in a few months to see ah where the story is headed. so So thank you very much for your thoughts, Paul.
00:16:56
Speaker
Fantastic. Thanks.
00:16:59
Speaker
And that brings us to the end of today's episode. Folks, a pleasure having you with us as always. And a quick plug for our colleagues outside the region. The Extel Survey for Developed Europe and Emerging EMEA is now open.
00:17:12
Speaker
Please do keep HSBC in mind if you happen to be voting. That's a wrap for this edition of Under the Magnetree. We'll be back again next week.
00:17:45
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.