Research agency Fitch Solutions Country Risk & Industry Research expects commodity prices to ease in 2022, from current levels, and forecasts that most commodity prices will average lower year-on-year.

This is on the back of improving supply and slowing demand; however, commodity prices will remain elevated compared with historical levels, owing to a still-supportive macroeconoimc backdrop and low stocks.

“We project our proprietary Aggregate Commodity Price Index (an equal-weighted index of annual averages of the main commodities we forecast across energy, metals and agriculture) to decrease by 7.9% year-on-year in 2022 in nominal terms, following the impressive 43.8% year-on-year growth expected in 2021,” the agency explains.

Particularly, Fitch Solutions anticipates the prices of 19 of 27 key commodities to average lower year-on-year in 2022, notably iron-ore, steel, natural gas, thermal coal, palm oil and soybean.

Fitch Solutions, however, expects tin, lithium, milk and cocoa prices to average higher in the new year.

GOLD

Fitch Solutions is negative on gold from spot levels and expects prices to average lower in 2022, as the dollar strengthens and bond yields continue to recover.

“We see prices averaging $1 700/oz in 2022, with continued bouts of volatility, compared with our forecast of $1 800/oz for 2021. We note that, while conflicting factors continue to affect the safe-haven asset, bearish momentum is slowly building and will cap gold price strength going forward.

“On the one hand, gold is being supported by still-elevated inflation, rising geopolitical tensions and lingering uncertainties related to Covid-19 and the recent emergence of the new Omicron variant,” Fitch Solutions notes.

On the other hand, the US Federal Reserve's tightening of monetary policy, recovering bond yields and a strengthening dollar will put a lid on gold prices.

Similar to other commodities, while the agency sees prices weakening going forward, it expects gold to remain elevated in the coming years compared with pre-Covid levels.

COMMODITY HEADWINDS

Fitch Solutions forecasts that the global economy will grow by 4.1% in 2022, well above the 3.1% average growth recorded between 2015 and 2019. Developed markets, in particular, will record stronger-than-usual growth.

“However, the pace of growth in global economic activity marks a slowdown from the 5.5% we estimate for 2021, which will put some downward pressure on demand for commodities. In particular, the Chinese economy is facing a number of downside risks, most importantly related to its real estate sector’s financial difficulties.

“We forecast a slowdown in China, where we expect real gross domestic product growth to ease from 7.8% in 2021 to 5.4% in 2022 owing to less favourable base effects,” the agency notes.

These base effects include Beijing’s zero-Covid strategy, which will continue to curb consumption growth, a regulatory crackdown across multiple sectors of the economy and ongoing stress in the property sector.

Meanwhile, the agency forecasts the tightening of monetary policy, which started in emerging markets in 2021, with increases in interest rates in many markets to continue.   

This while most developed market central banks will start ending their quantitative easing programmes in early 2022, and Fitch Solutions anticipates one 25 basis point interest rate hike in the US.

A more hawkish US Fed will bolster the dollar in the coming months, which is another headwind for commodities going into 2022.

On the supply side, Fitch Solutions says strong prices this year are incentivising production in 2022, particularly in agriculture. This while Covid-19-related operational disruptions will continue to lessen as vaccination rates improve and travel restrictions loosen.

There remain downside risks to global economic growth, and thereby commodities, including uncertainty over Covid-19 variants’ severity, and a number of geopolitical risks, particularly between the US and China, and Russia and Ukraine.

ENERGY

The outlook for oil prices is highly uncertain next year, with Fitch Solutions’ $72/bl annual average forecast laden with risks both to the upside and the down.

In 2021, supply curtailments by the Organization of the Petroleum Exporting Countries Plus (OPEC+) coupled with a healthy rebound in demand drove prices sharply higher, with Brent crude oil gaining around 70% from peak to trough.

In 2022, market conditions look generally more challenging, with consumption growth softening, while production is poised to surge. However, high-level uncertainties persist on both the demand and supply sides.

“Our production outlook is strongly bullish, reflecting the unwinding of the OPEC+ production cut deal, the recovery of the US shale sector and, to a lesser degree, the return of sanctioned barrels from Iran.

“As such, while our current forecast is bearish from spot price levels, there is scope for significant price moves in either direction.”

Touching on natural gas and liquid natural gas, Fitch Solutions says natural gas prices look set to remain elevated heading into 2022, owing to lacklustre imports and European gas inventories falling to its lowest levels in ten years, while the outlook is broadly similar for spot liquid natural gas prices across Asia – remaining above pre-pandemic levels.