The Asia Pacific region will likely do better this year than major developed economies like the US or Europe. With inflation already coming down in many economies, ING’s Asia Pacific regional head of research, Rob Carnell, believes there could be some light at the end of the tunnel in the latter part of the year, setting the scene for an improved forecast in 2024.
At a recent briefing, Carnell says he is hopeful that when China’s Covid-19 waves pass, rate policy, currency and other market strains will follow suit in easing — although this could take time. “Official data on this cannot be taken remotely seriously, but it doesn’t sound like it is going well at the moment, and it may be some months before the situation calms,” he says.
In the meantime, progress with China’s reopening story would also be promising for the global commodities complex, whose performance is contingent on demand from the world’s largest buyer of natural resources. As China continues lifting its zero-Covid policies this year after starting to ease them at the end of last year, Beijing’s policy environment could make a sharp turn from being a significant downside risk to an upside risk this year.
China’s appetite for natural resources could see more robust demand and reassert its dominance in the commodity markets this year. Much still depends on how quickly China’s economy can recover and the severity of its Covid-19 outbreaks in the year’s first half.
Admittedly an “extremely tricky” situation, an improvement in China’s handling of Covid-19 should eventually deliver a more favourable trade environment than currently exists. Double-digit declines in export growth across the region, which reflect weakness externally and in China, may get slightly worse first before stabilising later in 2023, says Carnell.
His expectations for economic activity in 2023 are “cautious”, although the expected pickup later on in the year should inspire some room for market confidence. “Not only will the global rate cycle likely hit its peak in early 2023, but it is also entirely conceivable that we see some decline in global rates before the end of 2023, taking pressure off local Asian policy rates, bond yields and currencies,” he says. “All of which should also be a catalyst for some pick up in equity prices, also helped by declining inflation rates, which have peaked in most of the region.”
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On top of Chinese recovery, peace in Ukraine would only be a further shot of confidence for markets and undoubtedly be welcomed in Asia and worldwide, taking pressure off energy and agricultural prices. “One can imagine markets rallying hard and delivering prosperity if either of these events transpires,” says Carnell.
Looking back at 2022, the commodities market saw significant strength, says Warren Patterson, ING’s head of commodities strategy, in the same briefing. The Bloomberg Commodities Index ended last year almost 14% higher than it closed in 2021, despite the significant volatility in critical global markets.
“It’s no surprise that many of the supply risks we’ve been seeing are related to Russia and the war in Ukraine. The demand story has also been very uncertain, driven largely by China and, increasingly, the global growth story,” says Patterson.
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For 2023, he holds a “fairly constructive” view on the commodities complex, although he is not holding out for volatility to wane. “We don’t think volatility will go away; it’s an increasing fact that we’re going to see that throughout the year.”
Oil to tighten
Patterson expects oil to reach an average of over US$100 ($131) per barrel in 2023, a change from the weakness displayed in the second half of last year. “Firstly, everyone had aggressive views on how quickly we could see the Russian oil supply falling. That didn’t happen; Russian oil has been a lot stickier than we thought it would be because buyers such as India and China have been there to buy discounted Russian crude oil,” Patterson explains. “Weaker Chinese demand has also weighed on the market quite significantly.”
On the other hand, he says that the interventionist roles that governments worldwide, particularly the US government, have played in releasing oil from strategic petroleum reserves (SPR) to take some pressure off ballooning oil prices have helped markets.
US President Joe Biden authorised a historic emergency release from the US SPR and, throughout 2022, drew an estimated 180 million barrels of oil from its reserves. Patterson believes the growth of oil stockpiles from members of the Organisation of Economic Cooperation and Development (OECD) over the year reflects SPR releases.
Although supply is expected to range from “fairly balanced” to “some surplus” in the first quarter of the year, he is anticipating supply-side deficits from the second quarter. “We expect to see Russian oil supply fall as we move forward. We had the EU ban on Russian crude oil coming into effect in early December last year. In early February, we will see the EU ban on refined Russian products coming into force.”
Patterson expects Russian oil suppliers’ results to fall in the region of 1.5 to 1.8 million barrels daily, year-on-year. In addition, in December last year, the Organization of Petroleum Exporting Countries (OPEC) agreed to cut supply, which he says effectively works out to supply cuts of around one million barrels of oil daily.
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“This deficit is expected to continue through 2023, at least over the year’s first half, before maybe easing in the second half. That’s going to continue to tighten the markets,” he says.
Patterson also expects demand to grow by about 1.7 million barrels a day in 2023, taking markets to exceed pre-Covid-19 demand levels — contingent on the pace of China’s reopening. “Previously, we anticipated that China would gradually reopen from the second quarter onwards, but this has happened much earlier than expected. We could see a bit more upside demand due to that.”
“China is key because, in our demand and growth numbers, it makes up about 50% of oil demand growth this year,” he adds.
Upside risk for LNG prices
Natural gas — whose largest exporter is Russia — remains the “most volatile” among the commodity classes. “It’s important to look at what’s going on in Europe. To start with, we expect prices to trend higher from where we are at the moment — the global natural gas market supply issues have not disappeared,” says Patterson. “There has been a bit of luck with the weather we’ve been seeing across Europe, which has meant prices have come under significant pressure over the last month or so.”
This month, natural gas prices in Europe dropped to their lowest since September 2021 despite the arrival of a cold snap, as the supply of liquefied natural gas (LNG) continued due to a lack of competition from China, where stockpiles are filled.
Patterson expects the EU will not suffer supply issues of natural gas this winter, with storage capacities standing at about 83%, a healthy margin above the five-year average of about 67%. “But the risks don’t disappear for the following Winter of 2023 and 2024,” he adds.
He is expecting a fall of some 60% in Russian gas supplies to the EU, tightening up European stockpiles for the next winter season. “We must keep prices elevated to ensure we see enough demand destruction to get us through the following winter.”
Adding to this is, again, the Chinese reopening story. In recent years, China has been the largest LNG importer in the world. Last year, however, imports fell about 20% year-on-year. “If we see a recovery [in China], we are going to see Asia pulling in more LNG into China, which will create some issues for the EU,” says Patterson.
For 2023, he still sees upside risks to natural gas prices, which he expects to average around EUR125 ($178) per megawatt-hour. “That should continue to support Asian LNG prices, given the strong correlation that is received between those two markets.”
Energy transition sees metals win
Meanwhile, Patterson says the metals market has a “constructive” supply picture, although macro risks remain. He adds that the markets rarely turn from looking at supply risks to demand risks, including the China story. While there has been a demand story for metals over the last year — with critical drivers including the strong US dollar that has been “weighing heavily” on the metals complex as the US Federal Reserve tightened its monetary policy throughout 2022 — there have also been several supply risks right around Russia, which is a crucial supplier of several metals.
“Looking forward, our view is towards how much more upside there can be in the US dollar. If anything, we could see the dollar a little bit weaker or sort of trading sideways, so I don’t think that’s going to put too much pressure on metal prices,” says Patterson, who adds that the “bulk” of monetary tightening is behind us.
Longer term, metals will continue to play a critical role in the energy transition, which he expects to “pick up in pace” over the next five to ten years. “If fossil fuel prices stay at these elevated levels — we’re expecting higher oil prices this year going into the next — that only supports the view of a quicker energy transition.”
With the extensive time required for the mining infrastructure, Patterson says that supply will take years of sustained demand. “You can’t wait for prices to go up and think supply will come into the market in the following year,” Patterson continues. “We need to see higher prices to ensure we see the necessary investment to meet that increased demand in the next decade.”
