Commodities Call

By Ryan Haque and Affan Ahmad

There are 4 sectors in the world of commodities.

To help paint the picture of how COVID-19 has impacted the commodity markets, we can compare it to other major events such as 9/11 and previous recessions.

During global recessions commodity prices tend to fall – the largest declines for oil and copper prices occurred during the 2009 GFC. Gold prices tend to initially rise during recessions, before dropping back.

As we can see from the chart, the drop in oil price (due to demand) has occurred far more rapidly than any previous episode in history.

For mining-related commodities, the reduction in supply helps push up the price and may partially offset the downward pressure on commodity prices. Mines are usually located in remote places and require Fly In, Fly Out (FIFO) workers, making it difficult to operate under travel restrictions. This leads to reduced supply, which in turn increases price (or in this case slows the drop.)

It appears that we are beyond the peak of new COVID-19 cases and as a result, there are glimpses of a correction within the commodity market appearing in May. As countries begin to ease restrictions, we can expect the demand of commodities such as oil to increase. Analysts from UBS have said the easing of restrictions would help lead to a balance in supply and demand for the oil market in the third quarter, even projecting an undersupply by the fourth, forecasting an end of 2020 recovery for Brent to $43 per barrel and $55/bbl by mid-2021.

The combination of both major demand and supply shocks occurring simultaneously is unprecedented among previous events. The current pandemic particularly stands out for the speed and magnitude of the decline in both oil prices and oil demand resulting from the sudden stop in activity.

The prices of most industrial metals have fallen, but substantially less than oil prices. The largest declines have been in copper and zinc, which have fallen by around 15 percent since January. Metals are most affected by the slowdown in global activity, particularly in China which accounts for more than half of the global metals’ demand. However, production disruptions resulting from mine and refinery shutdowns are also impacting supply. Industry estimates suggest 15 percent of copper mines and 20 percent of zinc mines are currently either offline or operating at reduced capacity. Conversely, major iron ore operations in Australia and Brazil are less impacted because of their highly automated and remote operations.

The impact of COVID-19 on commodity markets may persist for an extended period. In the short term, the deepening economic contraction may further reduce demand for industrial commodities, causing further pullbacks in prices. The graph below illustrates some of the impacts COVID-19 has had on the commodities markets.

Sources: Bloomberg, World Bank

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