HSBC Identifies Increasing Downside Risks for Commodities

Analysts at HSBC are highlighting increasing downside risks for commodities, even though prices have remained high for a significant portion of the last 18 months. While supply-side constraints have largely influenced these prices, diminishing global demand and geopolitical uncertainties present new challenges.

According to HSBC, global commodity prices are currently considerably lower than the record highs noted in mid-2022 but still remain elevated. As of August 2024, prices were approximately 44% above their pre-pandemic average in nominal terms. When adjusted for inflation, these prices align more closely with the 20-year historical average.

This price stability has primarily stemmed from a strong supply-side “super-squeeze,” identified by HSBC as a key factor since 2022. However, global economic growth is slowing, which is anticipated to impact commodity demand negatively. HSBC predicts global growth will be 2.6% in both 2024 and 2025, a slight reduction from 2.7% in 2023.

A significant challenge for metal prices, particularly, is the sluggish global manufacturing sector, worsened by the ongoing property crisis in China. The contraction in China’s housing sector, a major consumer of metals like iron ore and copper, poses a considerable downside risk, with construction indicators still showing contraction despite government efforts to stimulate the market.

While metals associated with energy transition initiatives have shown better performance, those more reliant on traditional infrastructure face considerable demand difficulties. HSBC’s proprietary Commodity Cycle Selector has indicated that commodities entered a bearish phase in mid-July 2024. This model indicates potential further downward pressure across various commodities, including oil and copper, although certain commodities have recently seen price increases due to geopolitical concerns.

Despite challenges on the demand side, supply constraints continue to offer some stability for commodities. Geopolitical risks, such as the ongoing Russia-Ukraine conflict, disruptions in the Red Sea, and elevated shipping costs, contribute to this dynamic. These supply disruptions, along with climate change effects like extreme weather impacting agricultural output, lead to persistent volatility in global commodity markets.

Within the energy sector, HSBC’s oil and gas team predicts that OPEC+ production cuts and record-high U.S. crude production may result in a market surplus by 2025. However, current geopolitical tensions continue to keep oil prices relatively high.

The ongoing global energy transition is increasing demand for metals such as copper, lithium, and hydrogen, crucial for renewable energy technologies, electric vehicles, and battery storage solutions. Nonetheless, HSBC warns that supply chain issues and geopolitical challenges could hinder the flow of these vital materials.

In agricultural markets, weather remains a principal factor driving prices. Grains like wheat and maize have seen price declines due to favorable growing conditions, particularly in the U.S. Conversely, specialty foods such as cocoa, coffee, and olive oil have seen substantial price increases due to adverse weather and supply disruptions in key regions.

HSBC notes that global food prices could experience continued volatility, with risks arising from climate change, geopolitical tensions affecting trade routes, and shifts in trade policies, particularly in light of recent rice export restrictions in India.

Precious metals, especially gold, have surged to peak levels above $2,500 per ounce. The rally has been driven by significant safe-haven and hedge fund purchases, fueled by expectations of rate cuts from the Federal Reserve and other central banks, alongside growing economic and geopolitical uncertainty. Gold’s status as a hedge against inflation and economic instability is likely to remain strong, with potential for further gains depending on the broader macroeconomic and political landscape.