Geopolitical crisis, Fed, and China factor hampered commodity demand in 2023

Commodity prices witnessed a mixed sentiment last year. Despite gold rallying to record highs, demand concerns due to the softening of the global economy adversely hit the prices of energy and base metals.

Gold was the best-performing asset in the commodities gaining more than 15 percent in 2023. It hit an all-time high of $2135 an ounce in the international market due to increased geopolitical uncertainties and hopes of a possible rate cut by the US Federal Reserve. Unlike gold, its sister metal, silver, changed little and is poised to close near $24.10 an ounce.

However, in the domestic market, both gold and silver hit fresh all-time highs. In MCX futures, gold prices boomed to Rs 64,460 per ten grams in December while silver tested a high of Rs 78,330 per kg. This was due to firmer overseas prices, a weak Indian rupee, and a rise in jewelry demand.

The Israel-Hamas conflict and the Russia-Ukraine war boosted the demand for safe-haven assets throughout the year. Traders were confident that the US Fed would cut interest rates next year, which may lead to a liquidation in US assets like the dollar and bonds, and this assisted bullion to gain further.

Demand concerns amid a soft global economic outlook and oversupply worries affected energy commodities. Crude oil in the benchmark NYMEX platform broadly held in a tight range with negative bias while natural gas prices have lost about 40 percent since the start of the year.

Forecasts of lower demand from the world’s second-largest consumer of oil, China adversely affected global oil prices. China was supposed to be the driving force of the global oil demand growth last year, but consumption of the country appeared well below the estimated levels.
A surge in global output was the other reason that weighed down the oil market. The production cut initiated by OPEC Plus countries including Russia has failed to lift oil prices due to record production from the US and an increase in output from other OPEC members like Iraq, Iran, and Libya. Natural gas prices remained under pressure, held down by increased output, high inventory levels, and worries over industrial and heating demand. A complex interplay of supply and demand dynamics largely affected the outlook of the fuel all through the year.

In the key NYMEX futures, prices started at $4.4 MMBtu in January but lost momentum and are now set to close near $2.6 MMBtu, down by more than 40 percent. A similar bearish outlook was witnessed in the domestic futures as well.

Base metals prices retreated from their January highs as Chinese economic woes threatened the demand from the world’s largest commodity consumer. Fears of excess supplies and the US Fed’s rate hike policies also added pressure on prices during this period.

China’s economy started 2023 with a bang, but later it showcased a bumpy recovery. The world’s largest commodity consumer faces challenges in areas like the property sector, exports, debt, unemployment, consumption, spending, and investment, affecting the demand for commodities.

In the benchmark LME platform, prices of the most used industrial commodities like Copper and Aluminium shed considerably from their January highs. Zinc also posted losses while Lead prices were almost unchanged. A similar move was witnessed in the domestic MCX futures, but losses were slightly limited due to weak domestic currency.

Looking ahead, traders are largely focusing on the US Fed’s policy announcements as they have already hinted at rate cuts in the coming year. Cutting rates may boost global economic growth and thus the demand for commodities. Likewise, the performance of the US dollar, China’s growth outlook, and the ongoing geopolitical crisis will largely guide the direction of commodities in the coming year.

(Hareesh V is Head of Commodities at Geojit Financial Services. Views are own)