BCIM - Why 2024 Could Be Positive For Commodities Even If Economic Growth Slows

2023-12-13 02:26:00 ET

Summary

• Outlook for commodities in 2024.
• Will slowing growth hurt commodity prices?
• Commodities demand: What to expect from China in 2024.

Numerous recent economic indicators have been signaling that economic growth may be starting to slow. Daniel Ghali, Senior Commodity Strategist with TD Securities, explains why softer growth may not lead to lower prices for commodities.

Transcript

Anthony Okolie: While the US Federal Reserve is expected to hold rates on Wednesday's decision, it may be a while before they begin to come down from current levels. And amid those higher rates, we're also beginning to see signs of potential slowing growth ahead for the global economy. So what does this all mean for commodity prices in 2024? Joining us now to discuss is Daniel Ghali. He's a Senior Commodity Strategist with TD Securities. Daniel, thanks for coming to the show.

Daniel Ghali: Yeah, thank you very much for having me.

Anthony Okolie: OK, so Daniel, you feel that commodity prices are still supported amid high interest rates and slowing economic growth? Walk us through your thinking.

Daniel Ghali: Yeah. Well, right, if you think about it, commodity prices over the last year are basically unchanged. We're talking about oil prices, despite the fact that they've just been selling off aggressively, are still relatively unchanged on a year-on-year basis. The same is true for the base metals complex. All of these commodities are very highly sensitive to global economic growth.

This time last year, the world was thinking that a recession was fairly imminent. That still didn't pan out. You had China's reopening. You had all these bullish factors that were since unwound. And in fact, if you look at the situation in China, they've just been facing a downward spiral in the real estate sector, which is one of the most commodity-intensive consuming industries in the world. Yet, prices are basically unchanged.

So despite the fact that we're in a high interest rate environment, that global growth is slowing, commodity prices have actually shown an incredible amount of resilience here. And that actually is a structural supply story, which I think is important to be able to see the forest from the trees.

Anthony Okolie: OK, so given that backdrop, how do the short-term challenges for the overall space stack up against the long-term potential?

Daniel Ghali: So firstly, I'd say commodity prices are very cyclical in nature. They behave in cycles by the nature of the asset class, really. There are two cycles within that. One is the business cycle, which tends to impact all asset classes. And the other one is a term that is typically referred to as a "commodity supercycle." That's--

Anthony Okolie: So what does that mean?

Daniel Ghali: Well, that refers to periods of time when you're in a structural imbalance in the market, where you're structurally in a deficit of a certain commodity or in a surplus of that certain commodity, which tends to reflect global incentives to invest in supply. Or the last supercycle reflected China's entry into the World Trade Organization and the tremendous growth in their commodity appetite that came from that. These are very long-term structural trends that impact commodities markets.

Right now, we're actually at a very interesting point as we see the business cycle is on the decline. And in fact, 2024 might be the trough of the business cycle, whereas we're on the beginning of a commodity supercycle in which the world has structurally underinvested in commodity supply for the last decade. And we do see a supply cliff on the horizon, which necessitates higher commodity prices in the future.

Anthony Okolie: OK, so now I want to talk a little bit about interest rates because we've got the Fed coming up this week. When we start to see the Fed pivot to more dovish stance, what do you think that will mean for commodities going forward?

Daniel Ghali: Well, typically, a dovish stance from the Federal Reserve is very bullish for commodities. Firstly, it relates to global demand growth. So lower interest rates tend to stimulate demand in the future. But secondly-- and this is particularly relevant in this case where we've had the most aggressive Fed tightening cycle on record-- the cost of carry of holding these commodities for speculators or for commodity merchants out there that actually hold physical inventories is extremely elevated.

Your trade-off here, if you're a money manager, is to buy a cash-like product that is yielding very high rate of return versus paying to store and to finance that storage of a commodity. It's a very tough bargain. And despite that fact, commodity prices have still been resilient so once again showing the beginning of the supercycle having an impact on prices.

Anthony Okolie: OK, now you talked about China. What about the outlook for their commodity demand? And do you expect government stimulus to boost their appetite for commodities next year?

Daniel Ghali: Yes, we do. Over the last year, we've taken a cautionary tone, thinking about the fact that China's stimulus has been very targeted in nature. It hasn't been the type of broad-based stimulus that they've deployed in the past. They're wary of the debt trap that that kind of stimulus has created in the past. And they've been looking for ways to avoid it.

That being said, increasingly there is pressure on the central government to deploy a fiscal stimulus package to help to provide at least a floor for the economy, which seems to be in a downward spiral due to the real estate intensity that they have in their economy. So saving the real estate sector from that downward spiral is key to the central government. And, increasingly, you're starting to see signs that they're putting that in place.

I will say this as well. The targeted stimulus that they have deployed over the last year has actually been very commodity-intensive, far more than we initially anticipated. If we're talking about the real estate sector, they focused on completing projects. That is actually very copper and aluminum-intensive. The completion stage tends to consume a lot more of that than the beginning stages of construction.

So even the traditional sectors there had received some support from Chinese stimulus. But, increasingly, the targeted nature of their stimulus has focused on new energy sectors. Solar power generation has far--

Anthony Okolie: Transition to clean energy.

Daniel Ghali: Absolutely. That energy transition in China-- China is really leading the way on that. And the amount of solar power generation that they've built up in terms of capacity over the last year has far beaten even their lofty central government targets for 2023. And we expect that that's going to continue to remain, notwithstanding the fact that electric vehicles are actually probably the biggest and most important sector that they're leaning on.

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