23 April 2020
Covid-19 has shaken up the world’s commodities sector despite price volatility being no stranger to its market participants. Reduced demand from an economic slowdown has meant falling prices, lack of investment, and logistics log jams. Clarissa Dann reviews Deutsche Bank research and highlights overall fundamentals
Commodity markets are volatile and commodity traders always like volatility and the contango where the spot price is lower than the forward price. Covid-19 has sent most commodity prices tumbling – but history teaches that a bounce-back will come – this time when Covid-19 stops suppressing economic activity.
When global production stops, the requirement for input to production declines and the market does exactly what it ought to, something we can see played out by the crude prices, low demand, insufficient storage and the price behaviour.
However, in a world where around a third of its inhabitants are in some sort of lockdown, an uptick in transport-related demand is not exactly round the corner. Energy and industrial metals have seen significant price contractions (while the gold price goes the other way as investors seek safe havens), while food security is threatened in economies where manpower displacement affect planting and harvest cycles.
What does this mean for commodities? Global GDP is underpinned by the access to and revenues from commodities asset conversion and trade, creating a labyrinth of interconnected supply chains. Crude oil is refined to power automobiles and aeroplanes – but lockdown keeps consumers off the roads and out of the skies. Vegetables are dumped as mass-market farmers find their commercial clients have no customers to service – but many supermarket shelves are bare. From farm to fork, from “rare earth” mineral to computer chip, everyone is touched. Covid-19 has changed the dynamics of supply and demand.
However, the world will always need commodities, and that in itself introduces a form of stability. Deutsche Bank’s Global Head of Structured Commodity Trade Finance (SCTF), Sandra Primiero reminds us, “Covid19 is a challenge for all - and being a lender in the commodity industry is insofar comforting in that our corporate clients are well established and familiar with the volatility of commodity prices, and they will also adapt to this new normal.” She continues, “They know that the only stable factor in their industry is that commodities have always been, and will always be needed. And that itself is a source of energy these days.”
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