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The Macro Brief – Fuel, food and fertilisers
588 Plays8 days ago
Paul Bloxham examines how the Middle East conflict is constraining a wide range of commodities, and explains why Australia and New Zealand’s policymakers face a tricky time ahead.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/cKXK66p
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Transcript
Introduction to The Macro Brief Podcast
00:00:00
Speaker
Because I cover commodities and I'm a macroeconomist, I'm probably the least optimistic, I'm the most pessimistic macroeconomist you can talk to right now because I can see all of these things playing out and I can see that they haven't been solved yet and I think this is going to be a big effect for the global economy.
00:00:25
Speaker
Hello, I'm James Pomeroy, Global Economist here at HSBC, and welcome to The Macro Brief, the podcast that looks at the issues driving financial markets.
Middle East Conflict and Global Commodities
00:00:33
Speaker
The Middle East conflict has had a huge effect on global commodity markets, given the critical role that the region plays as a source of supply for many materials.
00:00:40
Speaker
And while the focus has been on oil and gas, exports of metals, fertilisers and helium have also seen significant disruption. Paul Broxham, our chief economist for Global Commodities, Australia and New Zealand, is here in the UK visiting clients.
00:00:53
Speaker
And he's taken some time out of his busy schedule to chat to us about the latest developments in the space. Paul, great to have you here. Really great to be here, James. Fantastic. So of course, lots of things have happened over the course of the last couple of months.
00:01:05
Speaker
We've spoken a lot, know that everyone has spoken a lot about what's been happening in terms of oil and gas and those sorts of things. But what are you watching now in the commodity space to get a sense of what the impact could be on the global economy?
Strait of Hormuz and Economic Impact
00:01:15
Speaker
Yeah, so I think you know the the way I've been framing this is the you know stepping back to the big picture for a start. I mean, the the the big issue was the conflict and the disruptive impact it's had, but it's now really a question about the strait, about the strait of Formaz. When it will reopen, how it will reopen, and will it return to some sort of normality? And that that blockage is now the fundamental constraint. As you say, we're seven and a half weeks into this now. um as we record. And so we've already you know seen a huge disruption that's already happened.
00:01:46
Speaker
And we know that even if it were to reopen soon and it were to go back to some sense of normal, that we're going to get a disruptive effect on on on the global economy. you You ask which commodities are affected. Yes. So oil, obviously, 20% of the world's oil normally tracks on a normal day through the Strait of Format. It's about a similar proportion of global gas, both of them heavily disrupted, but it extends well beyond that. ah so 25% of the world's sulfur comes out of the Middle East, 45% of the world's fertilizer, about 30% of the world's helium, aluminum, about 9% of the world's aluminum. This is a ah really large negative supply shock on the availability of key things that we need to grow our our economy. So we've got ah an uncertainty about when it's going to how it's going to track back to ah some sort of normality.
00:02:28
Speaker
ah We've got a big effect that we know is going to feed through. I think the other thing that I've been pointing out to clients is that you know the effect is going to have some sort of distributed lag. know The full effect's not there yet. We're watching it play out, but you know we're just about to get to the point where a lot of refineries in Asia are starting to run low on feedstock. And so you've seen much sharper price price rises in things like jet fuel and bunker fuel, the sort of refined products that come off the back of of the of the oil, not just the Brent price. So don't just follow the Brent price. You've got to watch these other other prices as well. And that story is still going to play out over the coming weeks. And it's going to depend, of course, on whether the Strait of Hormuz reopens and how and and and and when. And I think then the other thing is if you look at those other commodities, there are also downstream effects from those.
Supply Shock Effects on Global Economy
00:03:15
Speaker
So sulfur, for example, is a big input into the production of fertilizer. It's a big input into the production of semiconductors and processing of metals like copper and nickel. So now you've got this supply constraint on sulfur, which is going to potentially put further upside sort of risk into the price for copper and nickel. And so there's sort of all these those downstream effects. The fertilizer one is one we've spent a lot of time on because fertilizer is heavily constrained. The price of urea has doubled basically on the back of this. A lot of these products, of course, are on their way to Asia. And that constraint on fertilizer means not just that you get an immediate constraint, but if you don't have the fertilizer on the on on the crops now, then down the track,
00:03:57
Speaker
you get a lower see a yield, and then you have more upward pressure on food prices further down the track. I think you know you look at this picture and say, I think I've been saying this to my clients as well, that because I cover commodities and I'm a macroeconomist, I'm probably the least optimistic. I'm the most pessimistic macroeconomist you can talk to right now because I can see all of these things playing out, and I can see that they haven't been solved yet, and I think this is going to be a big effect for the global economy. Less so for the US, more insulated, more so for Asia, so obviously the Gulf region as well to extend to an extent for Europe, and it's a big negative supply shock. It pushes down growth at the same time it as it lifts inflation. There really isn't a positive story. It's a super squeeze as we've been describing rather than sort of a quintessential demand-led super cycle.
00:04:43
Speaker
Yeah, it all sounds pretty negative, doesn't it? And it's something I'm finding as well, speaking to clients at the moment, is you want to try and be positive. And you say, you know, the oil prices dropped, or there's some better news in terms of the negotiations ongoing. but You say actually, no, this stuff is still in enormously short supply. And as you say, Asia is probably the part of the world where we're going to see this most acutely. We're already talking about some shortages of fuel and potentially of some products. What are you sort of getting a sense of about how acute some of those shortages could be in some of these parts of the world?
00:05:09
Speaker
Well, so I think in Asia, you've already seen quite a few policy actions being taken that it give you some indication. So, you know, announcements of more work from home, shorter schooling weeks, constraints, so quantity constraints on use to try to sort of shore up the the the supplies that are there.
00:05:27
Speaker
ah In the industrial space, you've seen China announce just recently that it's going to stop exporting sulfuric acid as of the 1st of May. And so, you know, that's just another sign that they're looking at their own supplies and saying, right, we have to try and ration this in some sort of form. As I said, sulfur is used in the production of fertilizer, so I think there's gonna be more of a focus on that particular use rather than than other uses. So there's just a large collection of effects. And then i think if you look across the Asian economies, you know some some of the smaller ones are the ones that are most exposed. So places like the Philippines are highly exposed and and and Thailand. ah Japan obviously imports a lot of oil from the Middle East as well. And so this is a big part of the focus. And then you've got a story around the food, possible food supply constraints playing out over a longer period of time and that being particularly acute of course for countries that have got the the much much lower income countries as well. So so these are the sort of things that are all a part of a shock that has already arrived. I think that's a lot of the message that the longer the constraints are in place and the longer the strait is closed the more likely damage it's going to do in terms of lowering growth and lifting and and leaving you with higher prices, higher inflation.
00:06:40
Speaker
Exactly. And that's the big challenge, I guess, every central banker in the world is grappling with at the
Central Banks' Response to Inflation and Growth
00:06:45
Speaker
moment. They're sort of trying to weigh up, OK, we're clearly going to get an inflation shock. We're probably going to get a downward hit to growth. Of course, the magnitudes of both of those things are going to vary massively across the world. What's your sort of read sat in Australia about sort of what's happening across the world in terms of this growth inflation mix? And then we can see how that's how how that compares to what we're seeing here in Europe.
00:07:03
Speaker
Yeah, so i mean, i I guess I think about this as a this shock to the global system is ah almost ah almost a pure negative supply shock. Yeah. And so as a central bank, it's a very complicated thing to deal with because inflation goes up and growth is likely to go down. But, you know, your textbook response to a negative supply shock of this sort of form is to is essentially not to do anything, is to sit still. Headline inflation is going to go up, but in the longer term or the medium term, growth is going to slow, and that's going to mean that core inflation ends up being lower. And so if you can bear it, you you you look through it. um I guess the risk is ah with that, that some of that inflation embeds itself in inflation expectations. And so you get... you know people demanding higher wages or businesses able to pass on the cost base and the countries that are most susceptible to that story are the ones that are growing the strongest operating the closest to their own full capacity and have low unemployment rates and if you look across most of the world right now actually most countries have got a bit of spare capacity and so that risk is a little bit a little bit i would say lower than it's been i think the other thing to point out is it's very different to the shock we saw in 2022 mean The 2022 post pandemic surge in inflation was a strong combination. Yes, there was a negative supply shock in the form of the Russia Ukraine war forcing commodity prices higher. But actually the bigger force at work, in my view, at least, was the positive demand shock. We all saved a whole bunch of money through the pandemic for a couple of years. And then when we reopened the economy, we saw this huge surge in demand. And that happened at a time when when interest rates were very low, so they needed to head back towards neutral. So like it's a very different story now. It's pretty close to and a pure negative negative supply shock. And that's kind of how I think, so far, we've seen mosul most central banks reacting in that way. Although the two that I cover, and we'll talk about that in a moment, have been doing stuff that's different. But I mean, is that how you're seeing things too? Exactly. We're thinking about this as, yes, 2022, you obviously had the oil shock and then you had a bit of a food shock and everything that came with it. But you're also already seeing a lot of disruption in shipping, which we haven't seen this time around. Container freight rates that had gone up tenfold that were causing a much higher core inflation story. But you're right. It was that growth story is completely different. You know, we had not only the pent up demand out the pandemic and the savings, we also had unbelievably tight labour markets that meant, you know, if you were a worker facing an inflation squeeze, you could go to your boss and say,
00:09:15
Speaker
I'd quite like a pay rise. And they would almost certainly have to give it to you because they couldn't get enough workers. So you've got this sort of more embedded inflation story that came around because of higher wage setting and everything that comes with it, plus these other supply shocks. But that meant that we didn't see a crash. Now, actually, if you'd said to an economist back pre-pandemic, I'm going to give you a year in a few years time where inflation goes double digit in most economies and central banks raise rates materially like they hadn't done in a long, long time, we all just said that's a definite recession.
00:09:42
Speaker
And most places avoided them. We had a couple of technical recessions here or there, but give or take, actually the world did OK. And I think for me, that's my nervousness this time around is that we probably won't have quite the same inflation shock because you haven't got that growth shock at the same time, but we might actually get more downside risks on growth. And that makes it very, very hard for policymakers. And that's why our sort of global central bank forecasts are a little bit sort of balanced in sense of not much happening. you know Our base case is for no rate hikes from any of the major central banks. But of course, as you alluded to, in your part of the world, very different story where they're facing quite a different starting point.
Australia vs New Zealand: Tackling Inflation
00:10:18
Speaker
So what are the challenges faced both in Australia and New Zealand? Yeah, so I think for both the RBA and the RBNZ, they're probably, I mean, the RBA has already lifted interest rates, right? So they've been the first G10 central bank, aside from Japan, to be in a hiking phase. So for Australia, the story is very different. we start The starting point is very different. We start off prior to this shock that's come along with inflation that's already too high. an economy that was already operating beyond its spare capacity. A lot of that was to do with the fact that productivity growth has proven to be much weaker, I think, than the officials were thinking it would. So we saw a surge in inflation late last year, and the RBA has started to lean into that by lifting rates already twice.
00:10:57
Speaker
So I think for Australia, the the challenge actually is, yes, I think the ah RBA probably will lift rates a bit further yet. um And so there's a hiking phase underway. But the challenge is it's hard to see how Australia, now that there's going to be another step up in inflation, can get inflation back down without having to have a downturn. you know We are probably, Australia is one of the countries where the risk is that it does get into inflation expectations because the labour market's tight, the economy's been operating at with little spare capacity. And so I think the RBA is leaning into it, they lean in a bit further, and the economy goes into a downswing in the second half of this year. We need a downturn to get that inflation down. For New Zealand, and I'll be brief, but I mean the story is simply that the RBNZ has a cash rate well below neutral.
00:11:38
Speaker
So do you want to be well below neutral in the face of another lift in inflation where you're not completely confident confident it will necessarily go back to where you need to be? And so I think they're going to have to start remedying that at some point, and we see them lifting rates in the second half. so I think, yes, the Antipodean central banks are in a bit of a different spot to, as you say, the most of the major central banks around the world at the moment.
00:12:00
Speaker
Wonderful. So lots of interesting stories, lots to watch in the commodity space, lots to watch actually in your part of the world as well, just for an interesting sort of difference compared to these other central banks. And lots of interesting reports you've published ah over the course of the last weeks as well that I would suggest any listeners ah dig out if they can. Paul, thank very much for joining us. It's been a pleasure to have you.
00:12:18
Speaker
Great. Thank you very much.
Accessing More Content and Contact Information
00:12:26
Speaker
A few quick notices before we go. Don't forget that you can keep up to date with all our latest reports, videos and podcasts by downloading our app from Apple's App Store or Google Play. If you'd like to know more about what's happening in Asia, then listen to our sister podcast, Under the Banyan Tree, where hosts Fred Newman and Harold van der Linde put the region's economies and markets into perspective.
00:12:45
Speaker
And if you've got any questions or comments, then you can get in touch with us at askresearch at hsbc.com. So that's all we have time for. This week's podcast was hosted by me, James Pomeroy, and produced by Tom Barton.
00:12:59
Speaker
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