ING shares a cautious, but ‘constructive’ view of future commodity markets 
 

By Carly Fields
 

It has been a bumpy year for worldwide commodity demand, with some sectors speedily bouncing back from pandemic dents, while others have taken more time to rediscover their ‘normal’.

China has been a lynchpin for the recovery in dry bulk commodities; wet trades have needed the support of OPEC+ to turn fortunes around, although the oil sector is still a long way from finding its normal.

In an analysis of the prospects of key commodities in 2021, ING’s head of commodities strategy, Warren Patterson, and senior commodities strategist, Wenyu Yao, present what they describe as a “constructive view on commodity markets over 2021”, albeit with “plenty of risks” hanging over markets.

Patterson says that this view particularly holds true for oil. “OPEC+ cuts, along with a continued recovery in demand, should mean that the market draws down inventories over 2021,” he said. ING forecasts that ICE Brent will average $55 per barrel over 2021, and likely end 2021 in the region of $60/bbl.

“This year has seen OPEC+ taking extraordinary action to try and stabilise the oil market,” he said. After the unprecedented fall in oil demand earlier this year left the market drowning in supply, the OPEC+ members put aside their differences and agreed historic production cuts. The deal agreed further easing from January 2021, but that has now been revisited to avoid a return to surplus at the beginning of 2021.

“We believe that the changes the group made to the deal will be enough to ensure that the market does not return to surplus in the first quarter of 2021. While for the remainder of the year, we would expect the market to continue drawing down stocks,” says Patterson. However, the biggest uncertainty and risk for the market remains the demand outlook. “We are currently assuming that demand will grow by around 6.7m bpd next year, after having fallen by around 10m bpd this year.”

Patterson warns that a return to pre-Covid-19 demand levels for oil may not happen until 2022 at the earliest.

Products outlook

For products, demand is set to continue recovering over 2021, according to ING, along with a drawdown of the product overhang. Refinery rationalisation will play a big part in the changing supply and trade picture through 2021 though. Refining capacity closures - largely prompted by the pandemic - are being partly replaced with new and more efficient capacity coming online in parts of Asia and the Middle East. This in turn makes it more difficult for older refineries to compete. “This suggests that even as we see demand returning to more normal levels, we will likely continue to see refinery rationalisation through 2021,” says Patterson.

Meanwhile, ING believes the worst is behind the liquified natural gas (LNG) sector after the double whammy of Covid-19 and the ramping up of LNG export capacity weighed heavily on gas markets in 2020. Patterson hopes that recovering demand combined with limited further export capacity coming online over 2021 will support regional gas prices and trade.

On the dry side, any upside for coal in 2021 and beyond is expected to be limited.

While thermal coal prices are expected to strengthen in 2021, China and its policies will control the scale of improvement and longer-term prospects are “still negative”.

Agricultural imports have enjoyed a strong year in 2020, also buoyed by Chinese purchases. ING expects this trend to continue into 2021, which will benefit several key trading routes. “It is not just the US benefiting from China’s increased appetite for agricultural imports,” says Patterson. “Brazil has also seen strong soybean flows to China over the course of the year. Chinese imports of Brazilian beans have remained stronger year-on-year despite the increased purchases we are seeing from the US.

“Brazilian farmers will be hoping that this continues into 2021, given that the country is set to harvest a record soybean crop in their 2020/21 season.”
 

Metal prospects

The metals outlook presents a mixed bag. Copper is predicted to enjoy a “synchronised recovery” in demand from both China and other economies next year, according to Yao. “Energy transition-related copper demand is set to accelerate as the world pivots towards a ‘green recovery’ after the pandemic,” she says. “Given the bullish demand narrative and favourable macros, risks for the market are tilted to the upside.”

Based on existing government plans on renewable energy use, ING expects green investment induced copper demand to achieve double-digit growth over the next five years.

Aluminium demand is also expected to return to growth next year for the market excluding China, while a weaker US dollar will support a recovery, says Yao. However, the unreported inventory overhang (ex-China market) and strong supply growth from China are “cause for concern”.

Iron ore, meanwhile, has enjoyed a bull run of supply tightness which is expected to continue into early next year. But then, as supply improves over 2021 and demand growth slows, ING expects prices to come under pressure. Global steel consumption is expected to only recover to 2019 levels, not beyond, in 2021.

“On balance, we expect an increase of around 80-100mt in iron ore supply next year, while there is still plenty of uncertainty over the demand outlook,” says Yao. The recovery here could well be dependent on the speed of vaccine administration. A quick rollout would support a “more robust recovery in demand”, however a gradual rollout could lead to “more lacklustre demand growth”, which could ultimately push the iron ore market back into surplus, weighing on prices and trade.