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Under the Banyan Tree - If China's slowing, what's driving commodities?
32 Plays1 year ago
With commodity prices still high despite China's growth slowing, Fred Neumann talks to Paul Bloxham, Chief Economist for Global Commodities, about what's propping up a market historically propelled by Chinese demand. Disclaimer: https://www.research.hsbc.com/R/51/XGJnrQF Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction to HSBC Global Viewpoint
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Focus on Asian Economics
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Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
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I'm Fred Newman, Chief Asia Economist here at HSBC.
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On today's show, we're asking, is Chinese growth still a key driving force for global commodity prices?
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And if not, why not?
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Joining me to help answer that question is Paul Bloxham, our Chief Economist for Global Commodities.
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Paul, welcome to the podcast.
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Great to be here.
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From Hong Kong and Sydney, this is Under the Banyan Tree.
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Now, before we get started, here are a few facts and figures to frame the conversation for our
China's Growth and Global Commodity Prices
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audience.
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China has traditionally been a major linchpin for commodities, particularly construction materials.
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In fact, in the early 2000s, Chinese demand was so strong that it fueled economic booms for exporters in many different parts of the world.
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However, economic growth back then was probably north of 10% or so, and today it's probably roughly closer to 5% on a good day, and the property slump in particular has taken its toll on materials prices.
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Interestingly though, commodity prices have remained resilient despite the weakness in Chinese demand.
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So Paul, let's start on
Supply Constraints on Commodities
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that point.
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How do you explain this disconnect of elevated commodity prices despite China slowing, and does it surprise you?
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I think it is surprising how much China's growth story has slowed and I guess how concerned market participants are about the outlook.
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And yet commodity prices have held up pretty well.
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Now, they have come down, so they are sort of down from their peaks.
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But if you look at where we are on the commodity price index globally,
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We're still 50% higher than we were pre-pandemic.
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We're still at elevated levels.
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If you look at things like oil prices, we're still around $90 a barrel.
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And if you look at copper, we're at over 8,000 a ton.
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So it's certainly the case that those commodities have held up more.
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And it sort of fits the theme we've been running for a little while, that although global growth is expected to slow,
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We don't expect commodity prices to come down that sharply or to very low levels because the supply side is so constrained.
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And we've been describing this as a super squeeze, underinvestment or less investment in fossil fuel capacity globally because we're all trying to make the energy transition.
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The climate is changing and the impact that that's having on redistributing where agricultural production can be and constraining the agricultural production side and even the energy transition itself, which is,
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driving strong demand for a whole range of these critical metals and green metals, but there isn't actually that much investment or hasn't been that much investment going on.
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So there's sort of constrained supply relative to the amount of demand that's out there to make the energy transition.
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So all of these things, these three factors in our view, the climate, the energy transition and the geopolitical environment are all putting a floor under commodity prices, despite it seems the global and China slowdown that's underway.
Commodities and Chinese Economic Signals
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Now, I want to unpack a little bit this idea of a super squeeze, as it's called, this idea of supply constraints.
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But before we do that, because commodities are very sensitive still to Chinese growth to some extent, are there any green shoots you can see in terms of in the last couple of months, for example, where commodity prices have traded up a little bit?
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Is that a reflection of perhaps the Chinese economy not being or kind of reawakening a little bit?
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Well, certainly we think so.
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You look at the commodities picture and you don't get a picture of a great deal of concern about China slowing down.
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The trade numbers that just went by that we got for China showed actually reasonably strong demand for the metals.
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We're seeing that oil demand is actually holding up pretty well as well.
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And then if you look at the prices, which obviously are the reveal in a sense of that balance between demand and supply, and they're all holding up reasonably well as well.
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I think part of this reflects that China's economy, that the services sector still is on some sort of recovery pathway.
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And so there is more demand for oil and that's driving activity.
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I think on the metal side, it's that the world is still quite short on these metals relative to the amount of investment that has to happen to make the energy transition.
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That's driving a global story, it's driving some of the local story in China as well.
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And this is all happening despite, of course, that the property sector has got some challenges.
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Now, let's just talk a little bit about the individual sectors within
High Oil Prices Amid Global Slowdown
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commodities.
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Energy, of course, very important.
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We had the big energy shock over the past year, which was driven by geopolitics in large part.
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But oil prices are still quite high.
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given where we are in the global cycle.
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I think some of the indicators suggest that global industrial production is actually contracting, but yet oil prices haven't adjusted downwards.
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Is this partly a demand story?
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Is it supply?
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Is it still a geopolitical risk premium in there?
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How would you explain that oil prices have held up so well, given where we are in terms of global growth, not just in China, but globally, really?
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Well, this really fits the super squeeze narrative quite well in terms of what's going on, at least in our view.
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the supply side is still quite constrained.
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And one of the reasons for that is we've seen such discipline from the OPEC members, OPEC plus members, and they're constraining supply.
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They've extended their cuts even further.
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And that's putting a floor under prices because we have got a shorter supply of oil on the global market.
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The other factor I think that's a bigger picture story is, of course, in making the energy transition,
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We are doing less investment globally in capacity to produce energy using fossil fuels.
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We're in the process of building capacity to produce renewables, and that's going to take a long period of time.
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But in doing less investment for any given amount of demand that's out there, we're going to end up with supply that's shorter than it was, and prices probably that remain more elevated.
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So this is a part of our sort of broader structural story, and it does seem to be playing out that way.
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We've got oil prices still sitting around $90 a barrel at the moment, despite the fact that global growth
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has slowed and as you say, industrial production globally has been in a downswing.
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And that's some, you know, it tells us that it's, we think, largely supply related and supply constraint related rather than a demand story that's holding up these prices.
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It's interesting that you mentioned that the energy transition itself is keeping fossil fuel prices elevated because less investment is going into that sector for the moment.
Fossil Fuel Prices and Energy Transition
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But surely at some point there must be a tipping point where the world is moving towards other sources of fuel.
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We know there's massive investments, solar and wind, for example.
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Is it possible to say when at some point the demand for oil and gas would decline enough to really bring down prices because the world has moved on to other types of fuel source energy sources?
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Well, it's a great question, but it's really quite hard to answer.
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And if you look at the report we've just published that the oil and gas team go through this in a lot of detail, forecasting demand for oil and gas and the fossil fuels
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is really a scenarios-based story because it depends how fast policymakers move in terms of making the energy transition.
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It depends how fast we can actually bring on stream all of this new renewables capacity in solar, wind, and then have the battery backup power that's required for that as well.
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And what I think we should fairly think is that it's going to be a, the transition to that is going to take multiple years.
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It's a longer term story.
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And in the interim, while we're making that transition,
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We think that we're going to see these fossil fuel prices, oil prices hold up at higher levels because we won't be doing the investment.
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We will continue to have the demand and it will take time for that renewables capacity to come on stream.
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And then, of course, the other element of this is, well, in building that renewables capacity, there's going to be high demand for things like the green metals and the critical minerals that go into it.
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And again, we spend a lot of time in this report sort of fleshing out where that is and who's going to benefit from that story as well.
Beneficiaries of the Energy Transition
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And is it possible to say in a macro level who the beneficiaries are from that green energy transition?
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Surely oil exporters ultimately will have some headwinds, but can you point to economies maybe that may face a bit of an uplift from this energy transition in the medium term?
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Yeah, certainly.
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So the countries that have got big reserves and are investing a lot in all of the things that we need to make the energy transition and
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Copper is a big one of those.
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So Chile and Peru have got large copper reserves that big produces globally already.
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And so there's that story that's quite positive for that area.
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Lithium is in high demand as well.
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And Latin America's got some of that, but Australia's got a large reserves of lithium and there's a lot of investment going on in that space as well.
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And in Asia, you've got Indonesia, which is very moved on the nickel story.
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They're a big producer of nickel.
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They're even moving
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up the value add chain and doing more of the processing and that's supporting Indonesia's growth as well.
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There are parts of Africa where things will get support.
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South Africa is a big producer of platinum, the platinum group metals, and a number of those are in demand.
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And then there's more niche stories as well around what people are talking about and calling the critical minerals.
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And so things like the rare earths and some of the more abstract rarer commodities are
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And there are pockets of those in all sorts of locations, but big beneficiaries might very well be, again, Latin America, Australia's got a lot of this stuff.
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And we can't forget, of course, that China is a large producer of both these commodities and, in a lot of cases, the world's largest processor of these commodities as well.
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And so that's a big part of the China story too.
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And we've got to keep that in mind when we're thinking about the China slowdown at the moment and so focused on the property sector.
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that there's actually all this other stuff going on in the energy transition space that's actually a key support for the China growth story as well.
Agricultural Supply and Price Constraints
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Thanks, Paul.
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We're going to take a quick break now.
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In part two, we'll be going deeper into the energy transition and looking at how the weather is affecting commodity prices, particularly in agriculture.
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So, Paul, we're investing in alternative energy and the energy transition in part because of climate change related concerns.
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We're recording here in Hong Kong while we've seen weeks of very erratic weather patterns, and that's actually been globally the issue.
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Do you see these erratic weather patterns impacting the agricultural sector globally?
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Is that impacting prices for key commodities at the moment, or are the headlines exaggerating
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really the impact on the agricultural space?
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It looks as though the evidence is that the climate, which is changing faster and we're getting unusual things like the hottest year on record this year and quite unusual and more extreme weather events, is having an impact on agricultural supply.
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And we can see that across a range of different dimensions.
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One of the ones recently, of course, is we've seen traded rice prices hitting their highest level since 2011 and spiking higher.
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A part of that is on concerns that the current event, we've gone from La Nina into an El Nino event and after three years of La Nina and the El Nino event tends to lead to drier conditions, less grain supply, particularly in Asia, particularly in Australia as well.
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And that is sort of seen as a concern for rice production.
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And we've seen countries taking action.
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We've seen India put in place restrictions on exports of rice, for example,
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which is constraining the amount of that supply coming out of India.
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And so that's one example.
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But if you look across the grain story, you're certainly seeing evidence that the climate story is important here.
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The other thing I'd point out is, you know, again, back to a sort of broader theme that the supply side is quite squeezed globally.
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One of the elements is climate.
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The other elements is geopolitics.
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And, of course, we've seen the Black Sea Initiative, which had reopened the ports in Ukraine.
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Well, it's come to its end.
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And so we've got quite a constraint there on the availability of wheat and corn that comes out of that market and fertiliser to a degree as well.
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So that interaction of climate changing, as well as the geopolitical environment, is seeing agricultural prices remaining quite elevated.
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And that is, of course, going to contribute to making it harder to get global inflation to come down as well.
Commodities Beyond Chinese Influence
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And the way you describe it is possibly a more permanent phenomenon because in the past we've seen a harvest being disrupted maybe in one part of the world or the other.
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We had a temporary maybe one-year rise in prices.
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The rice price spike in 2008, for example, that was really a nine-months or so affair.
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The way you describe it, we might actually see several years of elevated and very volatile agricultural prices because the underlying reason is not something that will disappear.
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That does certainly seem like the risk that we're facing.
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And we've been writing quite a lot about this over a run of a period.
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Again, it sort of seems like there's a structural change.
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A part of it is geopolitically related, but a part of it is also the climate change and its impact.
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And then if you look just at the timely indicators, as I say, we're switching into El Nino and a lot of the climate scientists are writing about the idea that
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Well, that combination of higher global temperatures and climate change overlaid with an El Nino event might very well make things even more variable and more difficult to and more constraining in terms of agricultural supply.
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And then you overlay that again with the fact that.
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Well, if this is foreseen by policymakers, we're seeing policymakers take action to build stocks, constrain exports, constrain supply.
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And so the combination of those things may very well mean that this does end up being a feature of the story in a persistent sense.
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So just to sort of sum up, I really like the way you frame it.
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It's a super squeeze.
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It's a constraint on supply.
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And it looks then, if we take a step back, that really commodity markets have become less sensitive to the Chinese growth cycle and have become more sensitive really to other factors that affect supply.
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And that's squeezing prices higher.
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Now, if you look at the history of commodities, often high commodity prices induced a lot of investment and then prices came crashing down with a certain leg.
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Do you see a more permanent plateau here or would you be worried that maybe within a year or two you see prices coming down because we're just now investing so much because of these high prices?
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Well, so this is a great point.
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And this is something we've been trying to draw out as to why this event, the current episode we're going through,
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seems to look different to previous super cycles, if you like, the early 2000s one, for example, where it was all about China's demand and the prices went up because of China's demand.
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And then we went across the world and we built lots and lots of capacity across the range of products in order to meet that demand.
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So there was this huge upward investment upswing globally in the resources
Structural Changes in Commodity Markets
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sector.
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And this time around, it's a bit different because if you've got high oil and gas prices, high energy costs and so on,
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you're not just going out and doing a lot of investment in large scale productive capacity for fossil fuels because you're trying to make the energy transition.
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So you're constraining that.
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And then at the same time, you are investing in capacity to produce renewables.
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But and a part of that comes through in terms of metals and investment in things like copper and lithium and nickel and aluminium and so on.
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But a very large part of it also comes through an investment in technology, in the manufacturing capacity and so on.
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So it's not quite the same story for the resources sector itself.
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you don't get the same very broad-based, large investment upswing from the higher prices.
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And without, of course, the additional supply of the fossil fuels, with the constraints that we've got in the agricultural sector as well, and with the high demand for those metals that we haven't got enough of as yet in terms of our investment, it leaves the prices probably more elevated, but for quite a different reason in some sort of sense to what we saw, say, in the super cycle of the early 2000s that was driven by China.
00:17:11
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So really structural changes going on in global agricultural markets and commodity markets in general.
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And I'm sure Paul will go back and call on your expertise as we see the story unfold.
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And we'll touch base again soon to see how the story really develops.
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Thank you very much, Paul.
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Thanks for having me.
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Well, folks, that's it for today.
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Thank you very much for joining us as always.
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We'll be back next week putting Asian markets and economics in context right here on the Banyan Tree.
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Talk to you then.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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