Tailwinds from 2017

2017 was a successful year for commodity investors and with the positive global growth prospects forecasted, 2018 has teed itself up for yet another year of commodity price gains.

  • The World Bank has lifted its economic growth forecast to 3.1%. The IMF expects global GDP to rise 3.6% this year.

A key indicator of global commodity performance is the US dollar (USD) - a strong USD tends to be bad news for commodity prices. The reason for this is that there is a strong inverse relationship between the USD and commodity prices and although the drivers behind this relationship are complex and the relationship is not necessarily one of cause-and-effect, the historical consistency of it indicates that it warrants a close watch.

Following Trump’s successful presidential candidacy campaign in which he promised to prioritise tax cuts, increase infrastructure spending and make “America great again”, it was anticipated by many that the USD would have a strong year and as a result global commodity prices would take a hit.

In reality, the opposite was the case – the US currency was overvalued and numerous policy bumps restricted any momentum in the greenback.

As a result, 2017 was a year of a weakening USD and strengthening commodity prices. It’s a theme that looks set to continue in 2018.


  • The OPEC-led supply cuts vs non-OPEC price ramp up – what next?
  • Global growth vs a green energy agenda – what does this mean for demand, and in turn prices, across the energy sector?

The gains in oil price dominated 2017’s commodity sector and with crude prices being the underlying pricing mechanism for most of the world’s energy (electricity, gas, LNG), the implications of this have been far-reaching.

The OPEC-led supply cuts vs non-OPEC price ramp up – what next?

Brent crude, the global benchmark, has already traded above $71 a barrel this year, continuing gains achieved in 2017. The most obvious source of last year’s gains was the OPEC-led supply cuts which succeeded in removing 1.8m barrels per day (bpd) since January 2017 from the oversupplied market. But it is important to not neglect the fact that a series of supply disruptions – from the US Gulf, to Libya, to Venezuela, to Iraqi Kurdistan – also played a crucial role in securing the near $70 a barrel prices we have seen so far this year.

Looking ahead into 2018, it is even more important to widen consideration beyond the continuation of the OPEC-led supply cuts. The reason for this is that although the cuts have been extended until the end of the year, there are talks planned for June during which an exit strategy is to be discussed. It is therefore crucial to play close attention to all fundamental drivers and assess how these influence crude prices over the coming months.

A ramp-up production as producers move to maximise on high prices is arguably the most prominent factor likely to dictate crude prices going into 2018. Those betting against a continued price rally expect that US shale production, combined with other non-OPEC supply, will ramp up much quicker than consumption, in turn leading to oversupply regardless of the continuation of the OPEC-led supply cuts. The US Energy Information Administration (EIA) forecasts that US shale output will increase by 780,000bpd in 2018, over double the 380,000bpd growth seen in 2017, and the International Energy Agency expects that non-OPEC supply will reach 1.6m bpd as a result of pre-crash commissioned projects in Brazil and Canada coming online. Although some may argue that the lack of capital investment in new and existing projects since 2014 is likely to somewhat inhibit the rate at which producers are able to ramp-up output, the increase in US rig count experienced in 2017 is likely to offset any such inhibition. Not to mention the signs of a North Sea “renaissance” being underway.

It also cannot be ruled out that some OPEC members may be led astray by the temptation of the higher prices and open their taps to get their own “piece of the prize”. Even if it were just a slight increase in production, the cumulative effect of several OPEC members making the same move could result in a notable supply increase contribution.

The reality is that it is extremely unlikely that 2018 will be able to continue delivering price gains at the rate that 2017 was able to. It will take some doing from Saudi Arabia-led OPEC to orchestrate an end of the production cuts which doesn’t result in a flooding of the market. Even if the exit is a success and all members refrain from opening their taps for self-gain, US shale production is expected to continue building inventories throughout 2018 with new supplies continuing to come online, making sustained $80 a barrel level prices highly unlikely - unless demand side factors somehow manage to keep pace.

A positive outlook on global growth – will this be reflected in crude demand growth?

Although oil supply has dominated the market over the past 3 years (supply grew by almost 5m bpd in the two years leading up to 2017, compared to less than 1m bdp growth during oil’s peak $100 days) and is set to remain the most influential market driver in 2018, the impact of demand on prices also warrants some thought. At face value, with the majority of forecasters now agreeing the world is due to enjoy its strongest expansion period since the financial crisis, global oil demand appears to be set to remain positive.

However, once you factor in the current “EV revolution” and governments across the world pushing for a greener energy economy, demand growth is not guaranteed. According to Bloomberg New Energy Finance the growth of EVs will displace 12m bpd of crude, and necessitate 2,700TWh of electricity (15% of 2015’s global electricity demand), by 2040.

Although this global shift away from “dirty” energy is not likely to drastically impact on demand over the course of this year, what is likely to impact demand is high oil prices. As with any commodity, if prices are high buyers tend to abstain in buying in the hope that prices will fall off enabling them to secure a better deal. If too many buyers do this, demand falls off and prices tend to be under pressure. But with China set for continue building its strategic reserves (150m stockpiled in 2017 with a further 130m potentially accumulated over 2018), any significant changes to crude and electricity demand growth are likely to be postponed for a few years.

So what does this mean for prices across the energy sector? Electricity and gas prices are likely to continue to closely track crude prices, with cold weather snaps inevitably leading to tightening gas markets over the winter months, and the longer summer days providing some relief to power prices when days are longer and demand is subdued. Close attention will also have to be paid to the EV sector and the implications charging demand has on consumption patterns.


  • The EV battery revolution – the winners and losers
  • China’s crack down on supply – the implications on industrial metals

2017 was a year to be remembered across the board for metals. From the take-off of battery metals for EVs and a mass shift away from diesel cars, to Chinese steel capacity cuts – last year saw the majority of the world’s mining companies relish in bullish metals prices. And 2018 is looking set to be no different.

The EV battery revolution – the winners and losers

The rate at which the transportation sector is moving towards an EV dominated market is remarkable. Bloomberg New Energy Finance forecasts that EV sales will hit 41m by 2040, accounting for at least 35% of all new light duty vehicle sales, and that in the 2020s EVs will become more economical than conventional petrol or diesel cars in the majority of countries. This growth corresponds to a 21.7% annual growth rate in the lithium-ion battery market – a growth rate which is likely to have severe implications on battery metals demand, and in turn prices, in 2018.

2017 saw cobalt and lithium carbonate prices surge by 120% and 36% as EV and battery manufacturers rushed to secure supplies. The majority of investors believe these price gains are likely to be sustained until new supply is able to make its way onto the market.

Although Australia is currently the world’s leading lithium producer, the majority of the world’s reserves are found in the “lithium triangle” – Argentina, Bolivia and Chile. Although new projects in both Australia and South America are planned, until these start coming online in 2019, supply availability is likely to remain restricted. And with there being no signs of demand for the battery demand slowing over the coming months, prices are expected to remain supported with further prices gains likely. Close attention should however be paid to developments in battery technology which may see lithium become a substitutable battery component. If this happens, the lithium market could find itself in a position of being oversupplied – especially if the new supply is introduced as early as 2019.

65% of the world’s cobalt reserves are in the conflict-prone Democratic Republic of Congo (DRC), whose mining sector is infamously corrupt with a worryingly poor reputation when it comes to human rights (think child labour and worker exploitation of the worst kind). Although the news that Glencore is set to double cobalt output from its Katanga Mining subsidiary in the DRC will be a welcomed relief for EV manufacturers, most believe that the issues associated with the corrupt and unethical cobalt supply chain need to be rectified before a ramp up in supply is attempted. The complications in doing this means that any drastic increase in supply in 2018, and in turn easing in prices, is unlikely. And most investors tend to agree – miners are continuing to refuse to offer carmakers such as Volkswagen long-term, fixed price deals, and investors are continuing to grow their stockpiles in anticipation of higher prices on the horizon.

Although the continued acceleration to an EV-dominated car market seems inevitable, it is worth considering a few factors which could inhibit this growth, and in turn the demand for battery metals – (1) changes to subsidies in China, the world’s largest EV manufacturer, which could impact 2018 EV sales figures, (2) the development of battery technology which could see some battery metals including lithium and cobalt become substitutable for cheaper, more readily available metals or being required in lower volumes and finally (3) the discovery of new supplies which would ease pressure on supply availability.

And let’s not forget about the metals our conventional diesel and petrol cars depend on. Palladium is used as a catalyst in petrol engines, and platinum in those of diesel engines. In the long run, if the EV revolution materialises as is anticipated, the demand in turn for both these precious metals is likely to take a massive hit.

In the meantime however, 2018 is likely to see palladium continue its price gain streak as drivers continue to move away from diesel cars. 2017 saw palladium trade at 17-year highs, achieving an annual price gain of 50%, making it one of last year’s best performing commodities. Platinum comparatively fell to a 22-month low at the end of the year, making it cheaper than palladium for the first time since 2001. Although these performances are likely to somewhat plateau in 2018, it can be expected that until the EV market comes into its own in the 2020s, petrol cars will continue to drive palladium demand, whilst platinum struggles to gain any momentum.

China’s crack down on supply – the implications on industrial metals

China consumes half of the world’s raw materials and is expected to remain one the world’s leading influencers in the industrial metals sector.

2017 saw Beijing impose a revolutionary crack down on excess steel-making capacity and inefficient mills in an effort to improve air pollution, which had plagued its industrial provinces for decades. The crackdown offset the drop in domestic demand which followed a tightening of monetary policy and slowdown in the residential property market, much to the relief of miners which feared a decline in demand from the world’s largest consumer would impact on global prices and eat into their margins.

With the capacity cuts scheduled to continue into 2018, it is likely that industrial metal prices will be sustained. Steel prices will benefit from reduced production capacity, tightening supply and in turn supported prices, and high grade iron ore demand will be on the up thanks to the focus on moving production to mills with the greatest efficiencies which require higher grade iron ore to realise the sought-after environmental benefits.

Looking away from China now to South America, where in Peru and Chile planned labour contract reviews could result in copper supply disruptions. Copper is currently trading around the $7,000 mark and although there is plenty of supply to meet demand, the high price means that labourers are unlikely to be willing to give much ground during renegotiations. If strikes end up taking place during these contractual reviews, up to 25% of the world’s copper supplies could be affected. Prices could as a result see further support over the coming months.


  • Stable world growth – but will the UK agricultural sector lag behind?
  • Another year of record harvests and low agricultural commodity prices – how will farmers cope?

To an extent, weather impacts all commodity sectors – whether it’s on yield, production, demand or supply chain logistics. Agricultural commodities are, however, more susceptible to the weather than most.

From Hurricane Harvey and record low temperatures over the winter period in the US Midwest, to drought conditions in New Zealand – 2017 was a year in which the extent of the impact weather can have on agriculture was severe. Around the world supply chains were disrupted and yields hampered by unfavourable weather conditions and although nobody knows for certain whether or not 2018 will lead to the same degree of weather-driven disruptions, what is almost certain is that the world’s climate will prevail as a leading influencer in the sector.

And the uncertainty inflicted on the UK’s agricultural sector is likely to be particularly drastic in 2018 as with Brexit negotiations under way, the political implications are arguably almost as uncertain as those incurred as a result of weather.

Stable world growth – but will the UK agricultural sector lag behind?

As a member of the EU, the UK’s farming and food supply chains are governed directly by EU policies via the Common Agricultural Policy (CAP), and indirectly by the World Trade Organisation (WTO). These policies are what govern both international trade of agricultural products and the public support on offer to farmers – two highly critical elements of the UK’s agricultural sector. And two elements which remain a hotly contested topic in the Brexit negotiations.

Once Brexit takes place, and the UK is officially no longer part of the EU, trade deals will have to be renegotiated not only with the single market, but with other countries. The uncertainty surrounding this not only lies in what these new trade relationships will look like, but also in how long they will take to be agreed upon.

As a result, 2018 is poised to be a year of heightened uncertainty for the UK with the agricultural sector unlikely to escape any damage as a result, despite the positive outlook forecasted for global growth.

Demand for British agricultural commodities could be impacted as soon as this year even if trade remains under EU regulations. It is likely that European buyers will seek alternative sources of supply in anticipation of the tariffs and fees that are likely to be imposed once new trade agreements are in place.

Another year of record harvests and low agricultural commodity prices – how will farmers cope?

Low commodity prices have led many of the world’s farmers, in particular in the US, through yet another period of recession with farm incomes now down by 25% compared to 2014 levels. And with further record grains harvests forecasted for the 2017/18 period, there is little sign of relief.

With margins already squeezed, the bullish energy prices which have been brought about by the gains in oil price over the past 12 months are likely to bring even more unwelcomed pressures to farmers around the world. Increased energy prices are damaging enough at the best of times when it comes to increasing production costs, but when margins are already as tight as they are, farmers are likely to feel the pinch all the more.

Cost pressures will also be felt by farmers from the chemicals sector. As a result of a recent wave of corporate consolidation, which has drastically decreased the competition between fertilizer and pesticide providers, farmers are finding themselves victims of high prices. Ultimately – farmers don’t appear to be getting a break.

The inevitable appears to be on the horizon for the world’s leading agricultural regions – automation, biotechnology and data processing investment is needed to bring production costs to the lowest levels possible. The rate at which momentum is gathering in these industries does indicate that a significant shift in the global farming sector is underway.