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- Commodity prices during the summer continued the trend of decline or remained at the same/similar levels
- The war in Ukraine, polarization of the world, inflationary pressures, and fear of recession are still current
- The energy sector is still under the greatest pressure, and drought in Europe is creating problems
- The prices of gas and the fear of recession in Germany have put pressure on the European currency
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Generally speaking, commodity prices during the summer continued the trend of decline or remained at the same/similar levels as a month ago, with some exceptions (primarily gas). For instance, global indices such as Dow Jones Commodity Index and Bloomberg Commodity Index fell by about ten percent compared to levels at the beginning of June.
For manufacturing industries and the global economy, this is certainly positive, as the previous period was marked by pressure on their operations coming from rising commodity prices.
As for the environment we find ourselves in, the same factors still prevail – and after six months, the war in Ukraine is still ongoing, with, unfortunately, an increased percentage risk of the outbreak of WW3, the polarization of the world into two blocks continues, inflationary pressures remain quite pronounced, and the fear of recession and slowing global economy has not disappeared. The pandemic and corona are not talked about as much, but that should not mislead us into thinking that it is past tense. So there are still many dark clouds around us.
Pressure on the energy sector
The energy sector is still under the greatest pressure. Certainly, the fact that the price of oil is falling and has been below $100/bbl for a long time positively affects the economy. Oil has been declining since June, primarily due to fears of recession and slowing global economy, while central banks are curbing demand with aggressive interest rate hikes to tame rising inflation.
At the same time, the world’s largest oil importer – China – has its own challenges in maintaining economic growth when faced with electricity shortages caused by the worst drought in the last 60 years and a construction-real estate bubble that has yet to resolve.
Discussions continue between the US and European allies regarding Iran and their decision to reactivate the nuclear program. A solution needs to be found that would maintain stability in the Middle East while ensuring that Iranian oil is available for purchase without sanctions.
And while the price of oil is falling, the price of gas has skyrocketed to absurd levels. How else to describe the price when it hovers around €290/MWh, while just in the first half of June it was at €80/MWh, and the multi-year average was previously between €15 and €20/MWh. If we draw an analogy with oil, then the equivalent increase in the average price of 16x would mean that the spot price of oil today would be $960/bbl!
Increased risk of recession
Now, either the price of gas is unrealistically high or the price of oil is undervalued. Russian Gazprom announced new maintenance work on the Nord Stream pipeline, which will completely halt gas deliveries to Germany for three days (from 31/08 to 02/09). This further affects concerns about the plan to fill gas reserves in Europe (80 percent by the end of October) and increases the risk of recession, especially if interruptions in gas supply from Russia become frequent in the upcoming period.
All of this negatively reflects on European electricity production. In such situations, trouble never comes alone, and this year Europe has been hit by a major heatwave that has increased demand for electricity, while at the same time the pronounced drought has reduced water levels in all major rivers to the extent that it limits the production of nuclear and hydro energy.
Because of all this, some political options in Germany advocate for the activation of the Nord Stream 2 pipeline. If this initiative is further pushed, Germany will be at a crossroads: either decide to go in that direction, abandoning the alliance with the US and the UK, or commit economic suicide for the third time in the last 107 years.
The EUR/USD relationship is once again dancing around parity. The prices of gas and the fear of recession in Germany have put pressure on the European currency. On Thursday, there is a meeting of the ECB. We will see if there will be any encouraging messages for the market after the meeting. The market expects the ECB to be more aggressive in defending the euro. The strengthening of the US dollar limits the upward potential of dollar-denominated commodities while simultaneously supporting the price increase of European products or increasing exports at existing prices.
Production problems
In the agri world, one of the key events during the summer was the opening of an export corridor for grains and oilseeds from Ukrainian Black Sea ports. So far, about twenty ships have set sail exporting goods from the ports. This corridor has not yet fully functioned, and there is a daily risk that deliveries through it will be halted, but it has certainly helped increase export volumes of goods from Ukraine.
The lack of exports from the Black Sea is being compensated by increased exports of goods from Europe. However, Europe has a problem on the production side. The drought has left a significant mark. The condition of crops in France is deteriorating, especially corn. Only 50 percent of crops are rated as good/excellent (vs 85 percent last year at this time). The corn harvest is 15 days earlier than last year, or 7 days earlier than the five-year average.
A similar situation exists in all other countries in the Danube basin. The latest estimates of corn yields in the EU range between 55 and 57 million tons (not so long ago, estimates were up to 73 million tons).
In addition to production, the lack of rainfall during the summer has also resulted in a drop in water levels on major shipping routes in Europe, leading to significant logistical challenges and rising transport costs that evidently must be passed on to consumers, but partly also to producers. Prices of wheat and corn have slightly recovered after falling to their lowest levels since March last week. A similar scenario is seen on the Chicago exchange. After the price of wheat fell to its lowest level in the last six months, it has slightly recovered. As for the prices of corn and soybeans, they are under pressure from generally unfavorable weather conditions.
Metal prices are at somewhat higher levels than a month ago, but still significantly lower compared to prices from May/June, or lower than they were at the beginning of this year. The fear of recession, falling demand, and economic and production slowdown in China limit the potential rise in metal prices.
