Soaring demand, risk appetite pushing commodity prices

This month we’ve experienced rallies by several commodities following the phase trade deal between China and the US, boosting investor risk appetite and the equity markets. But since the Coronavirus Outbreak, precious metals have been taking the lead as investors scamper for haven assets such as gold, Iron-ore, Palladium, and Silver.

According to Oxford Economics, analytics and forecasting firm: “Iron-ore and gold prices are currently up 6% month-on-month, while copper is up 2% and aluminium 1% month-on-month. However, oil prices were very volatile owing to fears about a US and Iran military conflict, down 1% month-on-month.”

Brent oil prices rose beyond $70 per barrel earlier this month when Iranian general Qasem Soleimani was killed during an airstrike by US drones. But its impact on commodity prices was fleeting.

Oxford Economics noted: “We still expect the global oil market to be oversupplied in the second half of the year and next year, which will limit the scope for higher prices even during periods of heightened political risk.”

The Organization of the Petroleum Exporting Countries (OPEC) is working round the clock to underpin prices, as surplus continues to build. The fraternity’s next meeting is in March when they’ll be discussing their rebalancing plan for 2020. The oil producers met last year in December and agreed to cut supplies until March this year.

Increased investor appetite has boosted base metal markets, but fundamental drivers are still essential for differentiating trends across commodities complex. For instance, aluminium prices have moved upwards following improved Chinese car sales and manufacturing data.

Oxford Economics pointed out: “With the country set to boost production significantly this year, aluminium’s reluctance to follow other markets higher is understandable. Zinc, on the other hand, rose by a more substantial 4% month-on-month, reflecting decent demand from the construction and steel sectors. In terms of the broader industrial metals complex, palladium prices are soaring, jumping by 37% month-on-month, with the switch away from diesel cars causing a market dislocation.”

Millers are ramping inventories ahead of the Chinese New Year, giving rise to an increase in the demand for iron ore.

Likewise, the prices of steel in Europe and the US have been on the rise following last year’s fall both in demand and production. However, the market started to pick up again at the start of the year.