Global commodity markets are experiencing a “super squeeze” characterized by supply disruptions and inadequate investments, leading to a potential sustained surge in prices, warns HSBC. Chief Economist Paul Bloxham explains that this situation, driven by supply constraints rather than robust demand growth, could persist due to factors like geopolitical uncertainties, climate change, and insufficient investments in green energy transition.
Geopolitical risks, including conflicts like the Israel-Hamas and Ukraine wars, along with climate change impacts, are contributing to the super squeeze by hampering global trade and disrupting supply chains, especially in agriculture. The pursuit of a net-zero carbon future is increasing demand for energy transition metals such as copper and nickel. However, inadequate investments in critical minerals like copper, aluminum, and nickel are exacerbating the supply squeeze.
As the world aims for a net-zero future, a shortage of metals like graphite, cobalt, copper, nickel, and lithium is anticipated in the next decade, warns the Energy Transitions Commission. The recent COP28 conference’s commitment to tripling global renewable energy capacity by 2030 further amplifies the demand for metals essential for energy transition.
Despite the rising demand, there is a lack of investment in exploration and production for key energy transition materials. The Energy Transitions Commission emphasizes the need for annual capital investments to rise from $45 billion to $70 billion by 2030 to ensure an adequate supply.
HSBC’s Bloxham highlights that without increased investment in new capacities, commodity prices will likely stay elevated. The lack of investment in technology for easier extraction of battery metals adds to the challenges.
While Bloxham doesn’t specify when the super squeeze might end, a potential solution—albeit a drastic one—is a global economic downturn that could lower commodity prices. Analysts, including Brian Luke of S&P Dow Jones Indices, note the inherent volatility in commodity markets, influenced by extreme weather events and geopolitics impacting agricultural and energy commodities.
Metal markets, particularly clean energy metals and iron ore, are expected to see the most significant impact. Iron ore prices have surged over 24% in the last year due to falling inventory and insufficient investments in expanding capacity. Despite China’s property crisis, continued steel production has fueled demand for iron ore and coking coal.
While some analysts believe commodity markets are adequately supplied, others emphasize the focus on slumping demand amid a sluggish global economy. Despite risks, hopes for a rebound in Chinese demand linger, with the potential to determine the trajectory of commodities in the coming year.
