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The Wildcards of Global Commodities

Uncertainty abounds where commodities are concerned. A new report from, Citi Research’s Ed Morse looks at some of the potential wildcard scenarios.

The new Citi Research report sketches out several wildcard scenarios that could impact commodities, from supply chains to stockpiling, a new gold rush to central bank policy machinations.

Wildcard Scenarios

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Source: Citi Research

Here we’ll present a quick run through of the top five of these wildcards- for the full analysis and details of the rest, see the full report.

To be clear- these aren’t predictions but scenarios to be mindful of and inform thought.

Wildcard 1: A 180 degree turn in weather year on year would lower energy prices

If weather patterns were to flip completely vs. last year, the potential for more reliable renewable generation, fewer hurricanes over the Atlantic and less coal production disruption would lead to lower natural gas and coal prices and perhaps even diesel prices too.

Renewable power generation in Europe is now much above last year’s level

Source: Citi Research, Bloomberg

And along with warmer weather and consumers cutting back on demand, natural gas-fired generation has fallen. This could continue throughout the year, as shown below. 

Source: Citi Research, Bloomberg

Wildcard 2: Global Supply Chains Pressures Reignite

Supply chain pressures abated in the second half of last year and are now only somewhat higher than pre-covid levels. Pressures will most likely continue to ease further in 2023, but unexpected shocks could halt progress or even reverse it. If supply chains were to become impaired again, Citi Research analysts reckon it could have material economic implications—most notably for goods inflation which would likely accelerate once more. Renewed goods inflation would make it tougher for central banks to bring inflation back to target levels and lead to tighter than expected policy moves.

Citi Global Supply Chain Pressure Index

Source: Citi Research, Bloomberg

Supply chain disruptions earlier in this cycle were driven by a surge in the demand for goods caused by the pandemic and supply shocks such as lockdowns in China and the war in Ukraine. Any reignition of supply chain issues would probably arise from issues like covid getting worse (particularly in China), a recovery in spending on goods, a conflict on a major trading route—or some combination of these.

Wildcard 3: Countries move aggressively to stockpile key materials and dramatically accelerate investment in domestic manufacturing and mining

Security of raw materials is of increasing importance to policy makers as they look for ways to enable global growth as well as the energy transition. This focus on raw materials is perhaps no surprise given developments in Russia/Ukraine, the worlds high exposure to Taiwanese semi-conductor chips, and an increasing global dependence Chinese EV battery, solar and wind components. Any aggressive stockpiling by regions of materials, including oil and gas, battery metals, EV batteries, semi-conductor chips coupled with accelerating investment in domestic manufacturing and mining--a partial reversal of globalization—could impact global commodity markets over the coming year. 

Wildcard 4: Gold trading posts fresh nominal price record, clearing $2,100/oz over the next 9-12M

Gold’s ~$425/oz peak-to-trough decline from March-October last year was meaningful, Citi Research analysts say, but the yellow metal actually did well to outstrip its historical beta.

If physical demand (e.g. jewelry) stays high, a dovish Fed pivot in the first half could send bullion prices higher later in the year. Gold flows could benefit from a US recession later in 2023, underlining its safe-haven credentials.

Wildcard 5: Further deterioration of US-China relations, leading to more sanctions and trade and supply chain disruptions

In a worst-case scenario, US-China trade and/or tech conflict could lead to significant disruptions to global trade flows and supply chains. While the degree of damage to the world economy would depend on the scope of such tariffs/sanctions, they would nevertheless likely lead to heightened goods inflation and widespread recessions. Combined with fractured Chinese commodities demand due to lower exports of manufactured goods, and broad risk-off sentiment, this would appear to be a perfect storm for global commodity markets.

For the full rundown of Citi research’s 15 commodities wildcards, see the full report here Global Commodities - Wildcards 2023: Global and domestic shifts could make 2023 a banner year for the unexpected (6 Feb 2023)

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

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