Tuesday 26 Sep 2023
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KUALA LUMPUR (Nov 9): Prices of energy and food which are expected to remain elevated in 2023 driven by Covid-19-induced supply chain disruptions and further exacerbated by Russia's invasion of Ukraine are telltale signs that high commodity prices will continue to be a major theme that will keep inflation high.

World Bank's Prospects Group senior economist John Baffes said that although commodity prices are expected to retreat in 2023 from peaks recorded this year, they are seen to remain high for the next two years, as the Russia-Ukraine crisis disrupts production and trade of several critical commodities, particularly those of which Russia and Ukraine are key exporters, including energy, fertilisers, and grains.

"These price increases come on top of already tight commodity markets due to a solid demand recovery from the pandemic, as well as numerous pandemic-related supply constraints," said Baffes at the World Bank Group's Commodity Markets Outlook report presentation on Wednesday (Nov 9).

The International Monetary Fund's slashing of its global economic growth projection on Oct 11 to 2.7% for 2023 from 3.2% this year has further darkened the outlook for the easing of inflation next year.

"It all depends on how the global economy does, which is currently riding a lot of headwinds. The low growth is going to affect most commodity prices. You may have less supply but it does not mean you have more activities. It is because the growth is low. So it is a highly uncertain environment both on supply and demand.

"The big risk is now energy and its effects on food prices," he told The Edge.

In the Commodity Markets Outlook report, the World Bank said energy prices are expected to decline 11% in 2023 and 12% in 2024.

Brent prices are forecast to average US$92 (RM431.64) per barrel in 2023, down from a projected US$100 per barrel in 2022, before easing to US$80 per barrel in 2024.

Brent crude saw its year-to-date (YTD) highest on March 10 at US$127.98 per barrel. It fell to US$94.91 on Nov 9. Its lowest this year was seen on Jan 3, at US$78.98 per barrel.

Crude palm oil hit a YTD high on April 27 of RM7,757 per tonne and YTD low on Sept 28 of RM3,144 per tonne. It traded at RM4,152 on Wednesday.

Agriculture prices are projected to decline 5% and metal prices are projected to decline 15% in 2023 before stabilising in 2024.

Although commodity prices are forecast to be moderating in the coming years, they are expected to stay elevated in domestic currency terms as most currencies have depreciated against the US dollar.

Elevated energy and commodity prices have pushed up inflation in many countries, including Malaysia, which recorded a core inflation of 4% in September.

However, Baffes pointed out that these projections are still subject to risks of energy markets facing an array of supply concerns as worries over the availability of energy during the upcoming winter intensify in Europe.

"Higher-than-expected energy prices could pass through to non-energy prices, especially food, prolonging challenges associated with food insecurity. A sharper slowdown in global growth presents a key downside risk," he added.

Fertiliser affordability at its lowest since 2008-2009

Based on The Fall 2022 edition of the Commodity Markets Outlook, Baffes said although fertiliser prices fell in the third quarter of 2022, they still remain at historically elevated levels.

"The pullback in prices reflects weak demand as farmers cut back fertiliser field applications due to problems associated with affordability — fertiliser is at its lowest level since 2008-2009.

"High input costs, especially energy, additional sanctions on Belarus and Russia, and extended export restrictions by China pose upside price risks," he noted in the report.

Russia is historically a major exporter of fertilisers such as potash, ammonia, urea and other soil nutrients.

One too many Western sanctions on Russia have severely disrupted shipments of fertilisers around the world, which are a key component to grow crop yield.

However, he further noted, the fertiliser market was already under severe stress even before the war, as nitrogen-based fertilisers are reliant on natural gas.

Natural gas prices, which soared in 2021, had already put fertiliser supply under pressure.

Russia to date has banned exports of more than 200 goods, including telecoms, medical, vehicle, agricultural, electrical equipment and timber products in retaliation against Western sanctions.

Aggressive natural gas purchases

According to the report, European natural gas reached an all-time high in August 2022 due to aggressive actions by several European countries to import liquefied natural gas to rebuild inventories and compensate for reduced flows of gas from Russia.

The report noted European prices subsequently dropped as inventories filled and consumers reduced their consumption in response to higher prices and warmer-than-usual weather.

"Natural gas prices are expected to ease in 2023 as demand weakens. However, the outlook will depend on the severity of the winter in Europe. A colder-than-expected winter could result in very low inventory levels by the end of the winter and would prove difficult to refill in 2023," Baffes added in the report.

Coal markets have been influenced by natural gas prices

Developments in coal markets have been heavily influenced by high natural gas prices, which encourage many countries to switch from natural gas to coal in power generation, the report said.

In addition, the European Union's ban on Russian coal imports in August has altered trade flows.

"Europe has imported more coal from Colombia, South Africa, the United States, and even Australia. Meanwhile, Russia has rerouted cargoes that would typically have gone to the European Union to other countries, including India and Türkiye," stated the report.

These diversions have resulted in a significant increase in transport distances and therefore higher transport costs since coal is bulky and expensive to transport.

Most precious metal prices have fallen since March in response to weak investment and physical demand owing to the strength of the US dollar and higher interest rates.

These factors have outweighed the positive impact of safe-haven demand related to the war in Ukraine and rising inflation.

"As economists, we think precious metals like gold are responding to US Federal Reserve interest rate hikes," said Baffes.

Although precious metals like gold and silver are historically known as safe haven, they appear to have dulled in comparison to US Treasury bonds which rewarded buyers with bigger and better returns for investments due to high interest rates in the country.

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