While the (Western) stock markets have apparently already overcome the "coronavirus crisis" and in some cases are reaching new all-time highs, the virus-related concerns in the commodity and especially oil markets are likely to persist for a longer period of time. This is because China is simply too important on the commodity markets. This applies especially to its demand on the world oil market. Last year, energy and precious metal prices were up by around 25 percent, while industrial metal prices more or less stagnated. Common to all commodity markets is that demand for them had weakened noticeably due to the economic situation. This is likely to change only very gradually in the current year. We therefore remain slightly underweight in this asset class in our investment strategy.

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There are different reactions from producers of the individual raw materials to the subdued demand. On the oil market, for example, OPEC+ has decided to push the price up again by deliberately cutting its own production and giving up its share of the world market. In addition, the politically tense situation in the Middle East and the fear of supply shortfalls caused additional price jumps until the end of 2019. At the beginning of 2020, this fear receded into the background. Conversely, the concerns and effects of the coronavirus - above all those of China, by far the largest oil importer - have since put oil prices under considerable pressure. Within a few weeks, the price of oil slid from almost USD 70 per barrel (Brent) to currently just under USD 55.

 

Unlike the oil market, China is not only the largest consumer of most industrial metals, but also the largest producer of these metals, so that the effects of the coronavirus on their prices are more or less balanced. For some time now, most industrial metal prices have been treading water, as the trade dispute between the USA and China has led to a slowdown in world trade and thus also to demand for industrial metals. Even if the two largest trading powers, China and the USA, come closer together again, the base metal markets are likely to remain (over)supplied for some time, which will limit their price potential even in 2020. 

 

The rise in precious metal prices in 2019 was largely due to the soaring palladium price, which rose by 80%. At the beginning of the year there was a correction, as palladium - unlike gold - is not so much a value investment as an industrial metal, so that its demand is also burdened by the effects of the coronavirus. This is because one sector in China that has been severely affected by the coronavirus is the automotive industry, which in turn is by far the largest buyer on the palladium market. As the automotive industry is closely interwoven internationally, shortfalls in China's car production will have an impact elsewhere - and not only on the reduced demand for palladium catalysts. Other factors, however, will weigh on the future price of gold. Driven by initially geopolitical, then coronavirus-related fears and a continued strong gold exposure of the financial industry, the price of gold has climbed from 1450 to almost 1600 USD/ounce since the end of 2019. This exaggeration of fears and prices is likely to be reversed - especially as Asia's significant demand for gold in jewellery, coins and bars will continue to be very subdued due to record high local prices. 

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Dr. oec. Susanne Toren

Chief Economist

Assetco Management

susanne@assetco.ch