Transcript
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.
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Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: This is a podcast from HSBC Global Research, available on Apple Podcasts and Spotify.
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Speaker: Hello and a very warm welcome from Hong Kong.
Speaker: I'm Fred Newman, chief Asia economist here at HSBC.
Speaker: Here's a question for you.
Speaker: What do China's property market, the US presidency and the price of a cappuccino all have in common?
Speaker: The answer, they're all tied closely to commodities.
Speaker: And that's our theme on the show today.
Speaker: Joining me from Sydney is our Chief Economist for Global Commodities, Paul Bloxham.
Speaker: From HSBC Global Research, this is Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: A little context on commodities before we begin.
Speaker: Prices have been relatively stable lately, but this is a market that's seen some incredible gains in recent times.
Speaker: In fact, for most of the past two years, the commodity price index has tracked between 35 and 50 percent above the 20-year pre-pandemic average.
Speaker: On that note, it's time to bring in this week's special guest, Paul Bloxham.
Speaker: Paul, great to have you with us.
Speaker: Great to be here.
Speaker: So, Paul, the reason I wanted to speak to you this week is because, of course, commodities have seen big moves over the past year.
Speaker: But also, we've seen quite significant moves in commodity markets in recent weeks, even.
Speaker: Of course, there was the U.S. presidential election.
Speaker: We saw the so-called Trump trade, if that's a term where...
Speaker: Of course, risk assets went up, like equities, for example.
Speaker: A dollar strengthened, something we discussed last week on the podcast.
Speaker: But how did really that U.S. presidential election impact commodity prices, broadly speaking?
Speaker: Well, I think the first thing to say is, I mean, in the lead up to the election, you know, there was quite a bit of uncertainty and considerable uncertainty about the result.
Speaker: And one of the things that happened, of course, is we saw gold prices rise in the lead up to it.
Speaker: Post-election, you know, a big feature for the commodity space overall, at least, has been exactly as you referred to, that the US dollar has strengthened the
Speaker: And so that's put downward pressure, at least in US dollar terms, in the whole range of commodity prices.
Speaker: They haven't come down a lot, but they've come down a little on the back of that story.
Speaker: I think beyond that, and this is the story that we're all looking at, is that it's very difficult to know exactly what the new administration is going to deliver.
Speaker: We know we're looking out for possible tax cuts.
Speaker: We're looking for trade policy changes.
Speaker: We're looking for deregulation onshore.
Speaker: And all of those things potentially have impacts on commodity markets.
Speaker: So it's interesting you mentioned, I mean, there's a lot of things that drive really commodity prices from a Trump perspective, Trump election perspective.
Speaker: But I also wonder whether we're maybe overinterpreting that effect because China is important in this story.
Speaker: China is the biggest consumer of many, many commodities worldwide.
Speaker: And are we kind of overemphasizing a little bit maybe when it comes to commodities, the Trump angle?
Speaker: And is it not important also what happens domestically in consuming countries like China, for example?
Speaker: How much does that drive commodity prices generally?
Speaker: Oh, I think it's super important.
Speaker: I think that's a lot of what we're really looking for is, yes, on the one hand, we can talk through all the things that we think are possibly going to come out of the Trump administration.
Speaker: And we don't really know exactly what the timing of those things is going to be or how big they're going to be.
Speaker: But the primary thing that's actually going to fundamentally impact commodity markets is the policy response we get from other countries in response to the US policy changes.
Speaker: And, of course, the main one in that regard is what does China do?
Speaker: So on that, let's just look at a little bit in the rear view mirror just for a second.
Speaker: We've seen a sharp slowdown in the Chinese economy.
Speaker: I think it's fair to say over the last couple of years, the real estate market kind of deflated, construction declined, which is a very heavy user of many commodities.
Speaker: Would you say that commodity prices have fully reflected that slowdown in China?
Speaker: Or were you surprised by the resilience of commodity prices given how China has slowed down?
Speaker: Because it strikes me that actually commodity prices are still fairly sticky, fairly, fairly robust at fairly elevated levels, historically speaking, even though we've had this sharp slowdown in the Chinese economy.
Speaker: I think that's spot on.
Speaker: I think certainly if you'd said to yourself two or three years ago, China's going to have a really significant slowdown in its property sector, a decline in property investment of the sort of magnitude that we've seen happen since then, you know, what would that mean for metals prices?
Speaker: you would almost certainly have said that metals prices would have come down more.
Speaker: And so I think in that sort of broader sense, yes, that's somewhat surprising how resilient they've been.
Speaker: I think that reflects two things.
Speaker: One of the things that we've talked about quite a lot is that the supply side of the metals markets has actually been fairly constrained.
Speaker: We haven't been in this really big investment boom expecting demand to be strong.
Speaker: In fact, there just hasn't been that much investment going on in the mining sector in general.
Speaker: And so that's kept those markets fairly tight in the scheme of things.
Speaker: And then the other part of it, which obviously you track very closely as well, of course, is that China's pivoted its growth.
Speaker: It's pivoted its growth from
Speaker: What is the property sector story towards other things?
Speaker: And in particular, building manufacturing capacity and obviously then exporting a lot of manufactured goods.
Speaker: It turns out that quite a lot of that is fairly metals intensive type activities as well.
Speaker: And that's provided the other source of demand.
Speaker: But yes, I think in fairness, metals prices have held up pretty well, given the significant slowdown we've seen in growth in China.
Speaker: So what you're hinting at is that there was a change in the composition of growth in China, in particular, away from, say, heavy construction, building apartments, towards things like green energy investments, solar panels, grid build-out, electric vehicles that use –
Speaker: Also commodities, but slightly different commodities.
Speaker: Does that explain, for example, why copper prices have actually held up really well?
Speaker: You've written about Dr. Copper being an indicator for the global economy, but maybe iron ore prices being less well supported.
Speaker: Has there been a divergence that you would expect based on the change in composition of Chinese growth?
Speaker: That's definitely observable.
Speaker: You can see that some of the metals that go into the energy transition, like copper, have held up better than others that are sort of the bulk commodities where they go more into the construction story.
Speaker: But even within that, you can break it down a little bit and say, yes, steel demand has weakened because of the property sector weakening.
Speaker: But it's the rebar that's been weakening because you haven't been building all these big buildings, but flat materials have actually still been in pretty decent demand because you're making a lot of electric vehicles and you're making a lot of products that still require that steel.
Speaker: And then the other overlay on top of that is, well, China's
Speaker: increasingly focused on exports and driving its exports, of course, there's been demand from that side too.
Speaker: They've been exporting more steel, they've been exporting more raw material, raw product, as well as the manufactured goods.
Speaker: And so that seems to have, so far, provided a broad support for the metals prices, even in the face of the downturn.
Speaker: I guess the really big question, and this is where we started this conversation, is what's next?
Speaker: And if
Speaker: it gets harder for China to export because there are changes in global trade policy, US trade policy and so on.
Speaker: What do they then pivot towards to support their growth?
Speaker: And will that turn out to be something that's equally as metals intensive?
Speaker: And it's a bit harder to see that story.
Speaker: But let me challenge you on that a little bit because you could also argue that the external trade headwinds that China may face over the next couple of years, partly because of tariffs, because of trade restrictions that are coming in globally,
Speaker: Would they not also force maybe acceleration or easing domestically of policy where there is more emphasis on actually reviving domestic demand?
Speaker: There's this idea of rebalancing growth towards domestic demand.
Speaker: Might this include much more investment, for example, coming through?
Speaker: And wouldn't that be commodity intensive and paradoxically lead to higher commodity demand on the back of a stimulus?
Speaker: The answer is maybe.
Speaker: I think the story you've just described is what history would tell you.
Speaker: History tells you, and certainly the response to the global financial crisis is the clearest example of this, but history would tell you that as China needs to take more steps to try to support its growth, the more it tends to take those policy measures, the more commodity intensive they often become.
Speaker: And so that tends to be property and infrastructure and so on.
Speaker: And that
Speaker: So it tends to become more commodity intensive.
Speaker: And therefore, that's the way we've looked at it in the past.
Speaker: I guess the challenge this time around potentially is, you know, the source of oversupply is property, where there's still a huge overhang of properties in China.
Speaker: And it's not clear that infrastructure can fill as big a space.
Speaker: But you're right.
Speaker: This is the question to ask.
Speaker: Do they...
Speaker: in response to not being able to export as much potentially, pivot to providing more support for domestic demand.
Speaker: And then what form does that stimulus take?
Speaker: Because if the stimulus takes something that's about construction, then yes, it could be quite commodities intensive.
Speaker: If instead it's sort of targeted more at getting the consumer going,
Speaker: It might not be as commodities intensive.
Speaker: So this is, I think, an open question and one that's quite difficult to answer.
Speaker: But I still think you tilt in the direction of downside to commodities in the outlook rather than necessarily upside at this point.
Speaker: That's an interesting point.
Speaker: Maybe there's some downside risk to commodities if there is not a big stimulus coming through in China.
Speaker: But we also want to talk about individual commodities because, of course, this is broad brush commodities that we've talked about.
Speaker: We want to look at some of the individual commodities right after we come back after a quick break.
Speaker: Well, welcome back.
Speaker: I'm joined here by Paul Bloxham, our global chief economist for commodities.
Speaker: And before the break, Paul, we talked about general commodity trends and, of course, the importance of not just the Trump administration coming in, what that might mean, but in particular also what China's economic growth means for commodities.
Speaker: I wanted to break it down a little bit and talk about energy in particular.
Speaker: China is the largest importer of oil still globally.
Speaker: Oil prices have eased of late despite some elevated geopolitical tension still.
Speaker: Do you think that China's slowdown has contributed to that easing of oil prices?
Speaker: And if there were an acceleration next year in Chinese growth, which might be the case if we get a bigger than expected stimulus,
Speaker: Would that then fan oil prices higher again, or do you think we're going to look at fairly steady oil prices from here on out?
Speaker: So the demand side for oil, I mean, in general, is expected to grow fairly steadily.
Speaker: And China is a part of that story.
Speaker: A part of it, even though China's growth has slowed, obviously, they're still in a point where they're using a bit more oil, even as they grow, it's becoming a bit more intensive.
Speaker: You know, the primary driver of what's pushed the oil price around in recent times has been the supply side more than anything else.
Speaker: And I think it's increasingly becoming clear that the world's got quite a bit of supply of oil.
Speaker: And so that's really seeing the team sort of look at the idea that oil prices are probably more likely to come down a bit from where they are.
Speaker: And as you say, oil prices have come down a little bit recently.
Speaker: So I think it's primarily the freeing up of the supply side, sort of fitting with that theme that we talked about in the first segment, that
Speaker: So, you know, we've had commodity prices in aggregate globally now tracking sideways basically for two years.
Speaker: But if we're to pick a direction one way or the other at the moment, I think the leaning is that the risk is a bit to the downside on commodity prices going into the period ahead.
Speaker: By the way, just a follow-up question on that.
Speaker: I said China is the largest oil importer in the world, but China is also aggressively building out its electric vehicle industry, its adoption of EVs.
Speaker: Is that having any impact on slowing down the demand or even reversing the demand for oil, or is that just too small a part to make a difference yet?
Speaker: I think that's coming, but it's not quite there yet.
Speaker: That pivot is still yet to come.
Speaker: China is still, as we know, growing at pretty decent rates for the size of its economy.
Speaker: So it's still creating more demand for oil, even though it's pivoting towards electric vehicles as well.
Speaker: That inflection point is not quite where we're at yet for China, but it is coming.
Speaker: So energy, of course, interesting to watch.
Speaker: And I guess a geopolitical angle will play into that as well.
Speaker: We'll see what 2025 brings.
Speaker: Unfortunately, in recent years, we've seen a lot of geopolitical risk across the world.
Speaker: I wanted to change tack a little bit and talk about something else.
Speaker: And this is
Speaker: This is probably partly a personal question.
Speaker: That is, I look at coffee prices.
Speaker: They keep on rising.
Speaker: And now that's very, very good for Vietnam, which is a major coffee exporter in Asia.
Speaker: But for people like me who are addicted to the morning joe, that's not necessarily welcome news.
Speaker: Will I have to just fork over more money next year for my coffee cup?
Speaker: How urgent is that drive?
Speaker: And does that reflect a broader increase in soft commodity prices, agricultural prices in Asia and across the world?
Speaker: I don't think there's good news for you, Fred, on that front.
Speaker: I mean, we've seen just in the last couple of weeks more inclement weather in Brazil's impacting the crop there.
Speaker: Arabica prices are up again to very high levels.
Speaker: So coffee prices have been very high.
Speaker: And this is not the only story in the ag space.
Speaker: We've talked about this pretty much all year long, that there are a collection of commodities
Speaker: You know, coffee's one, cocoa's another, orange juice, olive oil.
Speaker: The prices of all of these products have gone up really, really quite sharply.
Speaker: And for all very sort of common, similar reasons in different places, the first point is the weather's having a bigger impact.
Speaker: And I think the other one is geographical concentration in terms of where these things are produced.
Speaker: So you get bad weather in a particular part of the world, and it really takes out a lot of the supply side.
Speaker: And
Speaker: So that's affecting all of those commodities, and they're all at relatively elevated levels.
Speaker: The broader agricultural space, well, we were getting grains prices falling until just a couple of months ago, where they've sort of started to rise a little bit.
Speaker: We'd had pretty good growing conditions for a range of the big grain crops out of North America.
Speaker: On grains, actually, let me just stop you there because we love rice in Asia.
Speaker: We've seen huge spikes in our rice prices last year.
Speaker: Does that, when you say grains prices stabilizing a little bit, does that increase rice?
Speaker: Rice prices have come down a bit.
Speaker: Rice prices have come down a bit.
Speaker: So probably I wouldn't include that in the basket that I'm talking about, mostly rice.
Speaker: We're looking at things like wheat and soybeans and so on, but the rice prices are playing a little bit of a different story and they've come down a bit, so that should settle you down.
Speaker: Your coffee is going to be expensive, but your rice might be a bit easier to get hold of.
Speaker: So you're really saying I should get with my morning coffee, I should really order a congee so that at least the average price of my breakfast wouldn't rise.
Speaker: Yeah, and make sure you don't have any orange juice because that's going to really lift the price a lot at this point in time.
Speaker: And also leave the olive oil out of the orange juice because otherwise it gets really expensive.
Speaker: All to their own, all to their own taste.
Speaker: But yeah, I think the agricultural space is one where, you know, we need to keep a really close eye on the climate developments.
Speaker: They're having a bigger impact and a more regular impact.
Speaker: And we've talked about these as the collection of what we call finer foods, where prices have become more volatile and gone up.
Speaker: Paul, I want to thank you for these insights on commodities.
Speaker: And I'm sure in 2025, we'll check back in with you because it's going to be a very topsy-turvy year, I suspect, with lots of policy changes that impact commodities as well.
Speaker: And so we'll need your expertise to help us through that.
Speaker: So thank you very much, Paul Bloxham.
Speaker: No worries.
Speaker: And that brings us to the end of this edition of Under the Banyan Tree.
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