{"id":23988,"date":"2023-06-17T14:11:47","date_gmt":"2023-06-17T18:11:47","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/the-u-s-will-soon-be-in-a-recession-based-on-commodity-price-declines-strategist\/"},"modified":"2023-06-17T14:11:48","modified_gmt":"2023-06-17T18:11:48","slug":"the-u-s-will-soon-be-in-a-recession-based-on-commodity-price-declines-strategist","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=23988","title":{"rendered":"The U.S. will soon be in a recession, based on commodity price declines: strategist"},"content":{"rendered":"
Prices for most commodities have moved lower year to date, with coal, natural gas and nickel among the big decliners, suggesting inflation has reached its peak and recession may not be too far behind.<\/p>\n
\u201cThe general decline in commodities from the March 2022 peak suggests expectations of slowing U.S. and global growth, and actual slowing growth has pressured commodity prices,\u201d said Roland Morris, commodity strategist for VanEck\u2019s active Natural Resources Equity Strategy, adding that we may have seen the peak in U.S. year-over-year CPI inflation of 9% a year ago.<\/p>\n
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\n \u201c<\/span>\u201cWhen recession finally arrives, commodity prices could bottom and resume a longer-term bull market, reaching several new highs over the next five to 10 years.\u201d\u201d<\/span>\n <\/p>\n
\n \u2014 Roland Morris, VanEck<\/span> \n <\/small><\/p><\/div>\n<\/p><\/div>\n
The commodity price declines also suggest that the U.S. has \u201centered, or will soon enter, an economic recession,\u201d he said. \u201cThe arrival of the most anticipated recession in history could be this summer.\u201d<\/p>\n
Commodities prices, however, likely haven\u2019t peaked, said Morris. \u201cWhen recession finally arrives, commodity prices could bottom and resume a longer-term bull market, reaching several new highs over the next five to 10 years.\u201d<\/p>\n
As of June 13, the S&P GSCI \n SPGSCI, \n +1.23%<\/bg-quote>,<\/span> \n a benchmark for investments in the commodity markets, traded 12% lower year to date, with nearly 6% of those losses seen in the second quarter so far. The sectors posting big declines include energy and metals.<\/p>\n
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Commodities have clearly \u201cpriced in a hard landing\u201d for the economy, said Geetesh Bhardwaj, director of research at SummerHaven Investment Management.<\/p>\n
The commodity price downturn is not based on commodity fundamentals, he said, as fundamentals for most commodities are tight with \u201cstorage across the spectrum\u201d at multi-year lows. \u201cMany commodities have not recovered from the supply shock of war in Europe, which continues to develop in unexpected ways, such as the destruction of the Kakhovka dam in Ukraine impacting 2023 to 2024 agricultural output, Bhardwaj said. \u00a0\u00a0<\/p>\n
Energy retreat<\/h2>\n
In the energy sector, declines for natural-gas and coal prices \n NCFQ23, \n +1.04%<\/bg-quote> \n are a statement \u201con the political overreactions to Ukraine and Russia, as well as manipulation by governments,\u201d said Will McDonough, chief executive officer at Energy and Minerals Group (EMG) Advisors.<\/p>\n
NGN23, \n -0.49%<\/bg-quote> \n had jumped to a nearly 14-year high in June of last year, the same month that Russia reduced gas supplies through the Nord Stream pipeline to European Union countries. \u00a0<\/p>\n
Newcastle coal prices more than doubled in 2022, due in part to worries about potential disruptions to energy supplies tied to the Russia-Ukraine war. <\/p>\n
However, a warmer-than-normal winter in the U.S. northeast dulled heating demand for natural gas, while limited liquefied natural-gas export terminals and pipeline capacity have constrained exports of the fuel, said VanEck\u2019s Morris.<\/p>\n
Year to date as of June 13, U.S. natural-gas prices fell 48%. Newcastle coal has lost 64% for the period, pulling back after last year\u2019s rally as the market\u2019s attention moved away from the European energy crisis and marked a return to efforts toward clean energy. The S&P GSCI Energy subindex \n SPGSEN, \n +1.75%<\/bg-quote> \n has lost nearly 17% this year.\u00a0<\/p>\n
Traders have pivoted to \u201cgreen energy investments,\u201d and that\u2019s repositioned capital from previous allocations to dirtier coal and [natural] gas,\u201d said EMG\u2019s McDonough.<\/p>\n
For now, Morris believes U.S. natural-gas prices should remain in the $2 to $3 per million British thermal units range unless the nation experiences a very hot summer. However, as more U.S. LNG export facilities come online, U.S. natural-gas prices may rise, he said.<\/p>\n
Crops and cattle climb<\/h2>\n
However, weather-related events have led prices for the so-called \u201csoft\u201d commodities, such as cocoa and sugar, as well as cattle to rise this year, bucking the overall downtrend for the sector.<\/p>\n
Feeder cattle \n FC00, \n +0.16%<\/bg-quote> \n is among the big commodity gainers, with futures prices up nearly 31% year to date, while sugar \n SB00, \n +1.40%<\/bg-quote> \n and cocoa \n CC00, \n +0.15%<\/bg-quote> \n futures have climbed by more than 20%.<\/p>\n
The rise in sugar, cocoa and cattle prices is a \u201csimple supply shortage story, which will improve over time,\u201d said Morris.<\/p>\n
He said food inflation has \u201cremained sticky\u201d also because of transportation costs related to rising labor cost, as well as not enough truck drivers, and grocery store or restaurant workers.<\/p>\n
Read:<\/strong> Get ready for higher beef prices this summer. Here\u2019s why.<\/p>\n
\u201cMost near-term agricultural supply shortages will self correct, but we do expect persistent supply shortages across most sectors,\u201d said Morris.<\/p>\n
Metals mix <\/h2>\n
Industrial metals have also been among the decliners in the commodities sector this year, but gold, as a precious metal, is one of the few commodities trading higher since the end of 2022.<\/p>\n
\u201cIndustrial metals will experience persistent supply challenges as we transition to more renewable energy sources, which require lots of copper \n HG00, \n -0.24%<\/bg-quote>,<\/span> \n nickel , and other minerals,\u201d said Morris.<\/p>\n
Read:<\/strong> Dr. Copper\u2019s weak performance suggests more economic woes ahead<\/p>\n
After a rally last year sparked by concerns over supplies of nickel from Russia, which is among the world\u2019s largest producers of the metal, nickel has seen its London Metal Exchange cash prices lose more than 30%.<\/p>\n
Looking ahead, however, Summerhaven\u2019s Bhardwaj expressed excitement over the metals space, \u201cas global demand is expected to grow for 10-plus years\u201d with capital expenditures and supply growth \u201cmuted\u201d over the prior decade.<\/p>\n
Electric vehicles, renewable energy and grid enhancements will create new levels of metals demand, he said, while supply will have a delayed response due to \u201cwell-known structural frictions.\u201d<\/p>\n
That will lead to a \u201cmulti-year supply-demand imbalance\u201d that may benefit metals investors, said Bhardwaj.<\/p>\n
Read:<\/strong> Here\u2019s what the U.S. plan for EV sales means for critical metals such as copper and lithium<\/p>\n
GCQ23, \n -0.03%<\/bg-quote> \n is always going to be an \u201cinflation hedge\u201d in times like these, said EMG\u2019s McDonough. Futures prices for the metal trade more than 7% higher year to date. <\/p>\n
Read:<\/strong> Why gold still has a shot to reach a record high this year<\/p>\n
Iron ore, especially high grade iron ore \n TION23, \n -0.13%<\/bg-quote>,<\/span> \n is \u201cmore and more in demand in [an] all energy transition and should continue to rise,\u201d said McDonough. The same goes for steel as the U.S. \u201caims to nationalize and limit sources of steel from China.\u201d<\/p>\n
Overall, he said huge demand and volatile supply for the core commodities are likely to drive a \u201cgreen energy future.\u201d<\/p>\n
With more than $4 trillion committed globally to developing an environmentally friendly green economy and Fortune 500 companies embracing that in a non-partisan way, \u201cyou have only rising demand for those metals \u2014 lithium, nickel, and copper, and when you peel back the sources from where we get those, and realize that [more than] 50% of global processing of those metals is in China, you get a nervous environment of what the cost to acquire those metals should mature to be,\u201d he said.<\/p>\n
EMG \u201cdoesn\u2019t expect this to be horrible for oil and gas\u2026but an \u201cenergy allocation in 2023 isn\u2019t diversified unless it has lithium, nickel, and copper in it,\u201d and is exposed to the real growth of that market, said McDonough.<\/p>\n<\/p><\/div>\n