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Under the Banyan Tree - A lot to unpack in global commodities
833 Plays30 days ago
Herald van der Linde and Fred Neumann are joined by our Sydney-based Chief Economist for Global Commodities, Paul Bloxham, to talk China, tariffs, climate change and record highs for gold. Disclaimer: https://www.research.hsbc.com/R/101/jHl7cM9.
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Transcript
Introduction to HSBC Global Viewpoint Podcast Series
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.
Podcast Accessibility and Disclaimers
00:00:24
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This is a podcast from HSBC Global Research, available on Apple Podcasts and Spotify. However you're listening, analyst notifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Meet the Hosts and Guest: Paul Bloxham on Asian Markets
00:00:45
Speaker
Welcome ladies and gentlemen to Under the Banyan Tree, where we put Asian markets and economics in context. My name is Fred Newman, Chief Asia Economist here at HSBC. And I'm Harold van der Linde, Head of Asian Equity Strategy.
00:00:57
Speaker
Good to have you with us. On today's show, we welcome Chief Economist for Global Commodities, Paul Bloxham in Sydney, for a catch up on everything from bags of rice to bars of gold. Is the China slowdown still affecting bull commodities?
00:01:10
Speaker
And what's the global outlook as the US shakes up trade flows around the world? This is a sector that's getting a lot of attention these days, so let's get the conversation started right here under the Banyan train.
00:01:34
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Well, Paul, it's wonderful to have you back here on the podcast under the
Commodity Prices and Economic Impact
00:01:38
Speaker
banyan tree. Now, we wanted to really focus on commodities at the moment because there's so much geopolitical noise. There's so much talk about tariffs, for example. um There's so much concern about Chinese economic growth in particular.
00:01:51
Speaker
Tell us just in a snapshot, where are global commodities currently? Have we seen a big sell-off? Are they kind of holding up? ah What's the sort of the overall trend in global commodities at the moment?
00:02:02
Speaker
Yeah, well, great to be here. So the the overall story is that commodity prices are still holding up fairly well. But this is because gold prices are up quite substantially. They're at a record high at the moment.
00:02:13
Speaker
ah But below the surface, I think you can see different trends. For example, energy prices have come down a bit. Oil prices have come down a bit. Gas prices have come down a bit as well. So it's the overall story is holding up.
00:02:26
Speaker
But this is because gold prices have rallied so hard. It's a reaction to what we've seen in terms of shifting trade policies as well as shifting geopolitics.
China's Economic Slowdown and Policy Shifts
00:02:35
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And that's driving safe haven flows into gold.
00:02:38
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It's also, keep in mind, gold is often regarded as a hedge against inflation. You you buy gold to protect yourself against inflationary risks. And what we're seeing in terms of US policy with trade protectionism, rising tariffs and so on, is perceived as a potential upside risk for inflation as well.
00:02:53
Speaker
Now, that's interesting you say that because I can see U.S. inflation. ah There are still risks there. But when we talk closer to home, China, major economy, the opposite is true, right? Deflation. Now, China has been very important for global commodities in in their last couple of decades.
00:03:09
Speaker
um The ongoing weakness in the Chinese economy Is that what's pulling down prices for other commodities outside of gold? You mentioned oil was weaker. I'm thinking iron ore, for example. Iron ore and steel. Gas. like how How does the weakness in Chinese growth, or relative weakness, kind of impact the other kind of more industrial ah types of commodities?
00:03:31
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I think it's that weak China story that is part of the reason why those other metals haven't been rallying. In fact, they've on the margin been weakening. And in particular, you've seen it in the what we call the bulk commodities. So things like coal and iron ore, where prices have generally come lower.
00:03:47
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And that is that is a China story. So I guess the question now going forward is China is pulling more policy stimulus levers. How are we going to see that show up in commodity markets?
00:03:58
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and And our view is that given that China is looking to support its consumer spending more and it's less about the property sector and less about manufacturing, it's probably going to provide support for agricultural commodities, but not necessarily for metals as much as it has done in the past, and particularly not for those bulk metals like, as you say, iron
Performance of China's Equities and Property Sector Challenges
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ore.
00:04:17
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Now, Paul, Chinese commodities have performed incredibly well so far this mean equities or commodities? Sorry, did I say commodities? I mean equities. So equities have performed very well. Stock market is up.
00:04:29
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ah Hong Kong as well. Have we already seen this being reflected and in commodity prices as well? Or is there overcapacity and and these sort of issues that hamper that? My reading of that story is a big part of this is to do with the tech sector and a lot to do with ah sort of a pickup in enthusiasm around the tech story.
00:04:47
Speaker
It's not clear necessarily to me that the China story or the the China recovery, even the equity market recovery, is a reflection of the sorts of big scale sort of investment we've seen in the past in property or in infrastructure or in manufacturing capacity, even where we've seen a a lot of manufacturing capacity built over the last few years.
00:05:07
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So those things tend to be less metals intensive and generally less commodities intensive overall. I think the other thing that I would point out is that there is a large excess supply of property.
00:05:18
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Some of it is in the wrong places at the moment. ah They might need more in the southwest, but they need less in the northwest. And so i think you're going to, in all likelihood, see that there's got to be quite a lot of material that comes into the recycling process. And so if you start recycling the existing property, that puts a lot more rebar into steel and you've produced a lot of the steel already.
00:05:39
Speaker
It lead means less demand for iron ore and for
Energy Transition and Metal Demand Dynamics
00:05:42
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coking coal. yeah So this is sort of the heavy industry stuff we're talking about, but then there's also still a lot of emphasis, you said, of course, AI, but technology in general, right, and that also encompasses green technology, for example. We still see the EV boom in in China.
00:05:59
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What does this mean for sort of the rare earths and and also the commodities that feed into kind of the electrification of China, the environmental technology, the copper sort of copper and and so forth?
00:06:12
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do Do you see there a pickup? What's what's going on in that space? So for copper, this the story and the the the energy transition metals, yeah the energy transition is continuing.
00:06:23
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There is still continued demand for copper, but there is also a lot of copper embedded in all this housing that we've got in terms of excess supply. So the property sector weakened and that weakened demand for copper. But at the same time, of course, the energy transition has stepped up um and that's been creating demand. And we've seen that net-net balance out with copper prices staying fairly solidly where they are.
00:06:43
Speaker
And then you raise a really interesting point, which is about ah the rare earths. and and And I guess if you extend that a bit further, some of the critical minerals. So rare earths are a list of 17 different obscure looking commodities that no one's really heard of.
00:06:56
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um These are a very small part of overall commodity production globally. Actually, if you add them all together, their total value of trade in any one year is less than ah or about a day's trading in oil, just to give a sense of they're very small, but they're obviously ah of critical importance. They go into all sorts of electronics. They go into defense material.
00:07:16
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They're for making magnets and making metals stronger so that you can do all this sophisticated stuff. So what happened to the prices? yeah What happened to the prices on those? So the rare earth prices, i mean, it's very difficult because these are not exchange traded, most of them.
00:07:29
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um Critical minerals prices have gone up um and you are seeing what we've been talking about for a while now is as an expectation, at least on the back of the Trump administration being elected. We're seeing fragmentation in a lot of these markets where um there's no one price for a lot of products anymore.
00:07:45
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um This is even happening in deeply traded markets like copper, for example. The onshore price of copper in the US has gone up substantially relative to the the price in other markets. And you're seeing that sort of that fragmentation play out. That's happening in in the rare earth space as well.
Oil Price Trends and OPEC's Role
00:08:09
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So going from the rear commodities to oil, ah it's the biggest commodity. very important for fret because of inflation numbers and these sort of things. um I was going to say I drive electric. It's not that important for me. It's not as important for you personally.
00:08:23
Speaker
But still, as an economist, it's something you want to watch, right? what What's happened with oil prices as of late? Well, in general, oil prices, certainly relative to six months ago, have come down, and we think they're going to gradually edge lower ah yet.
00:08:37
Speaker
and And the story there is that we've got ample supply globally. um you know The OPEC plus countries have been holding six and a half million barrels a day off the global market. They've been constraining supply. Now, for those who need to keep track, we we consume about 103 million barrels a day of oil. So yeah we're talking about um about 6% of global supply is being held off the market to keep the price elevated.
00:09:02
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But they have had a plan for a while to add that back onto the global market, and they are now saying more increasingly so that that's coming back. That come April this year and and beyond that, they're going to start adding back 2.2 million barrels a day. And so that's the big feature we're looking out for that's likely to put more downward pressure on oil prices over time as more supply comes onto the global market.
00:09:24
Speaker
good So that's good for you, Fred. It's good for the inflation um inflation numbers. yeah but um It's interesting you say we don't have a ah single, as you said before, commodity story. We have gold was doing very well, but you have oil being weaker. You have different things going on in industrial metals versus rare earths, for example.
Global Food Prices and Trade Restrictions
00:09:43
Speaker
There's one other commodity that that matters a lot, a class of commodities, and that is agricultural products, food, for example. And we saw... A lot of food price disruptions over the past year across Asia. I'm just thinking about India, for example, the last couple of years.
00:09:59
Speaker
You saw it in Southeast Asia. also think chocolate and and to coffee, I believe. Well, yeah, yeah. So that, that of course, that's very, very important for Harold, obviously. But I think for the vast majority of Asians, was rice ah prices. That increased quite a bit as well.
00:10:15
Speaker
but so So, yeah, there's a lot of different trends there as well. um Give us a sense of of ah where we are on global food inflation and and and how that would matter for Asian consumers.
00:10:27
Speaker
Well, we think there's upside risk to global food prices. um We're seeing some of the grain prices start to rise from their trough. They had been falling and they've started to pick up.
00:10:38
Speaker
And as you say, there's a whole collection of these finer food products. That's what we call them, ah like cocoa that goes into chocolate, like coffee, orange juice, olive oil. Actually, you can go as far as eggs right now. Eggs prices have gone up substantially um on the disease environment.
00:10:53
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But it's weather-related, geographical concentrations. A lot of these products are produced in just a small number of countries that are obviously ah can be affected by the weather. And so their prices have gone up a lot, and they seem to be quite elevated and likely to stay there.
00:11:06
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And then the grain prices we think are going to be on an upward trend as well. um In part, one of the things we're watching carefully is the possible changes in terms of US migration policy, because a lot of the workers that work in the US agricultural sector are recent migrants um and informal workers. So that's something to watch. Trade policy might have an implication there.
00:11:26
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One remaining point would be for Asia though, rice prices have started to come down. So rice seems to be the exception in this mix, in part because India's ah loosened up around its trade restrictions that it put in place previously.
00:11:37
Speaker
Now, you mentioned, and I think it's interesting, there is climate change issues that are playing a role here in terms of raising structurally potentially the risk of higher food prices going forward.
Geopolitical Risks and Food Supply Security
00:11:50
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um But is there also a geopolitical element that's coming in here in that... countries think more about their supply chain self-suffici self-sufficiency, for example, because we've seen in the past that the world actually produces enough food, but it was always the political disruptions that prevented the distribution of food and ultimately led to localized food price increases. Is that something that that's equally of worry?
00:12:18
Speaker
I think certainly something we're watching is a risk factor. And I so i think if you look, for example, in China, there's been in a lot of investment going on in agricultural production in recent times. And I think part of that is a general strategy that China's delivering to secure a supply chain for a whole range of commodities. They're doing it for lots of things, but including their food supply. And a part of that has been accumulating more reserves, holding more inventories and doing more investment.
00:12:43
Speaker
And I think if you look at what's going on in terms of the shifts we're seeing in global trade policy. and That was the sort of main feature of this report, actually, that we put out was all about Trump and tariffs and trade.
00:12:54
Speaker
You know, the fragmentation we're seeing happening across global commodity markets is something to watch very, very carefully. And I think that it's something that that's going to stick around. It's going to be around for a while, I think.
Multi-Driver Commodities and Economic Relevance
00:13:05
Speaker
And agricultural markets are particularly important in that regard. So Fred, if i listen to Paul here, and what does that mean for you with regards to inflation in in in Asia in general? is that Well, I think in the near term, you know oil prices not being, you know having fallen or generally being well to behaved. and on the way that That keeps, of course, near term price pressures in check. But the vast majority of Asians' expenditure basket, if you kind of you take the average Asian consumer, they spend a lot more on food. If you think about Southeast Asia, India, for example. And so...
00:13:37
Speaker
what Paul is saying with both climate change issues and geo fragmentation coming in, if that raises food prices going forward, that will have a big impact on the pocketbooks. yeah um Now, a final thought about this all, ah Paul, I find that listening to you that the commodity space is It kind of has become more interesting again. It strikes me that, you know, in the 1990s and 2000s, we didn't really have to think about commodities as much. there was one single driver, which was the rise of China or these sort of things. Yeah, or even before that, that wasn't they weren't very inflationary. so I'm thinking further back, 1990s, 2000s, and then you came to the late 2000s, commodity prices started to rise because of China.
00:14:18
Speaker
But now China is no longer the singular driving factor. Now we have geopolitics, we have climate change, we have the transition of of the global economy towards you know restructuring towards green energy, for example.
00:14:31
Speaker
There are lot more drivers and and therefore the impact of commodities themselves on economic activity, that certainly is a rising trend. it It's more important today than it would have been, say, in the nineteen ninety s I think that's definitely right. And if I think about the way central banks are seeing the world right now, they're increasingly asking themselves, you know, they've spent a lot of time managing demand cycles in the economy.
00:14:55
Speaker
And now we're faced with all these supply changes. We had the pandemic and now we've got climate change, which is much more vivid in terms of you can see more erratic weather conditions. And now you've got trade policy changes and geopolitics and one manifestation of all of those supply disruptions.
00:15:12
Speaker
is through the supply, you know, the the freedom of movement of things between borders, but then commodities obviously are are a big part of that.
Impact of Geopolitics and Trade on Commodities
00:15:19
Speaker
Traded commodities are critically important and they come from lots of different countries and they get affected by all those different supply shocks that we're seeing play out.
00:15:27
Speaker
Fantastic. That would make your life as a commodity analyst more interesting, I guess, going forward and makes it more relevant for us to ah to read your research. And I'm sure we're going to have Paul back soon. Thanks very much, Paul. Fantastic. Thank you very much. Thanks, guys.
00:15:41
Speaker
And that brings us to the end of another great conversation here under the menu tree. A pleasure, as always, to have you with us. We're just one week away from HSBC's Global Investment Summit here in Hong Kong. And if you happen to be there, please do say hello.
00:15:56
Speaker
Don't forget to listen, like and subscribe to our sister podcast, The Macro Brief, which will feature a special episode recorded at the GIS. The two of us will be back again next week.
00:16:07
Speaker
Take care till then.
00:16:31
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.