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Twelve months ago, at the time of our half year results for financial year 2023 , we introduced the “three Rs”– framework to synthesize the outlook for CY2023: reality (of slower growth in the developed world), relief (that the inflationary wave appeared to have crested); and re–opening (the China dynamic). Complementing that, we positioned China and India as a source of stability for commodity demand in the face of the widely anticipated developed world slowdown. An ebb and flow between these forces was expected to continue throughout the year. Our basic framing against this multi–faceted backdrop was that we expected that price formation would, on average, improve across calendar 2023 versus the second half of calendar 2022, when pessimism on Chinese growth prospects was at its height, the US Fed was at its most hawkish and the energy price shock was at its peak. But at the same time, we gauged that the constellation of prices observed at the time (January–February 2023) overstated how tight physical commodity markets were likely to be over the full year, especially in non–ferrous metals where roughly half of global demand emanated from outside China. We also argued that should there be phases within the year where prices do trade to the downside, these dips were more likely to be shallow rather than deep, noting that industry–wide cost inflation has raised real–time price support well above pre–pandemic levels in many of the commodities in which we operate, and value chain inventories in general were low across multiple industries.
In August 2023, at the time of our full year results for financial year 2023, we extended and updated that framework, with the biggest deviation being the fact we moved to a conditional forward view of the Chinese economy, acknowledging ineffective policy transmission in real estate and an overhang of weak confidence had held the system back in the first half of calendar 2023, despite a promising start. The expectation of slower growth in the West feeding into soft demand for commodities, and demand and supply forces both contributing to a continued unwinding of the general inflationary wave, needed no adjustment. Indian demand was strong, as expected. China also held up its end of the “stability bargain” where commodity demand was concerned, though this presented a paradox in the eyes of generalist observers due to the underwhelming nature of the broader data flow, and outright disappointment from housing.
Against that backdrop for demand and inflation, which sat alongside the usual uncertainty on the supply side of commodity markets, we judged that commodity price dynamics were expected to be highly complex once again in the second half of calendar 2023. Non–ferrous prices did under–perform, as expected, but steel-making raw materials did better than anticipated, especially in the final months of the period. The reasons for this, and what that performance might mean for calendar 2024, will be a major theme of the commentary across this article .
On the specific commodity clusters, energy, food, and fertiliser markets spent much of the last twelve months unwinding the stunning peaks that emerged in calendar 2022. The main exception among energy commodities was uranium, which passed $100 per lb in the first weeks of calendar 2024, trading over 5 times the low point reached in its post–Fukushima decennium horribilis. Across calendar 2023, the steel–making value chain saw gains in the March quarter, downward pressures in the middle quarters, and then an “unlooked for” rally in the final quarter of the year. Within the general theme of under–performance under the shadow of weak OECD demand, non–ferrous metals diverged over the last six months, with nickel under relatively constant downward pressure as the supply glut deepened and spread to Class-I in disruptive fashion, while copper range–traded through most of the period – outperforming nickel but lagging behind the gains made by the steel–making complex. Copper though ended calendar 2023 on the front foot, with the inflation–interest rate nexus having tilted in a pro–growth, pro–risk direction, and supply challenges coming to the fore once again. At the time of writing, the most pronounced shift in copper has been in a spectacular decline in treatment charges in the concentrate market, with base refined prices and premia continued to trade in a defined range.
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https://www.bhp.com/investors/economic-and-commodity-outlook/2024/02/bhps-economic-and-commodity-outlook |
