To put it mildly, 2022 was a rollercoaster year for energy and commodity markets. A post-pandemic demand surge, a war with catastrophic consequences, supply chain disruptions, food insecurity, an energy supply crisis, and severe environmental threats all led to volatility and price surges across the markets.
Will commodity markets return to “business as usual” in 2023, or have some been transformed in the aftermath of last year’s events? Here, we highlight some of the key themes that emerged in 2022 and look at how they may play out this year.
Political intervention in commodities markets
The Russian invasion of Ukraine in March 2022 led governments across the world to intervene in commodities markets more heavily than in previous years. The G7 group of nations responded to the invasion by imposing financial sanctions on Russia as well as limits on imports of Russian commodities. The conflict also prompted Russia to block natural gas exports to Europe, European authorities to provide extraordinary support to utilities struggling to cope with the sudden withdrawal of Russian gas, and the US to release into the market stocks of oil held in reserve.
Interventions were most noticeable in the EU, where member countries introduced several policies to try to soften the hit from higher natural gas prices. These included lines of credit to help utilities cover the margin requirements on their hedges, a temporary price cap or “market correction mechanism” on front-month TTF gas futures, and the setting up of a new LNG benchmark, which the European Commission believes will be a better reflection of actual prices.
The effectiveness of these measures remains to be seen. Market participants and regulators alike have argued that capping the TTF price will increase the risk of more trades moving to the over-the-counter market, which could reduce liquidity on European natural gas exchanges and reduce transparency in these markets.
Intercontinental Exchange, which operates the most liquid trading venue for TTF gas contracts in the Netherlands, has launched an alternative venue in London to act as an “insurance option” if the market correction mechanism prevents participants from trading and adequately managing their risk exposure.
Another theme that became prominent last year was the political temptation to blame “speculative” investors for rising commodity prices, as seen in debates over reforms to the EU Emissions Trading System. Market participants, regulators and economists have argued that any policy intervention to limit trading by financial entities would inadvertently reduce liquidity in derivative markets and ultimately increase hedging costs for physical market participants.
As the conflict continues in Ukraine, the markets may not yet be at the high-water mark for regulatory response and market intervention.
China’s lifting of Covid restrictions
At the end of 2022, China, the world’s largest consumer of most commodities, relaxed its lockdown restrictions and re-opened international travel. Analysts say the nation’s reopening is almost certain to play a key role in determining how commodities – particularly oil and industrial metals – will perform this year.
In 2022, Chinese oil demand fell for the first time this century, declining by an average of 390,000 barrels per day. This year, Beijing’s decision to abandon its zero-Covid regime has already boosted Chinese consumption according to the International Energy Agency, which advises governments on energy policy.
The IEA forecasts an overall increase of two million barrels a day in global oil demand this year, with China accounting for half of the increase.
China’s demand for natural gas declined by 0.7% in 2022, the first drop since 1982, the agency reported. Imports of liquefied natural gas fell by 21%. The IEA projects that China’s gas demand is expected to grow by 6.5% in 2023.
China also looms large for the metals complex, with traders betting on surges in demand for copper and iron ore. Imports of iron ore in China fell 1.5% in 2022 from 2021, but if the country's steel mills increase production amid the economy reopening then iron ore imports could rise quickly in the coming months.
Drivers for demand in copper this year include a recovery in China's real estate sector and a move towards renewable energy where copper is needed in the building of power grids, solar and wind farms, and electric vehicles.
Any boost in demand from China’s reopening could, however, come with a catch in Europe. The EU’s 2022 success at reaching its natural gas storage targets despite Russian export cuts and the continent’s bans on Russian energy was partly because China remained closed. This reduced demand helped Europe to hoard LNG. China’s reopening could divert LNG trade away from Europe causing prices to spike globally.
War in Ukraine and agricultural commodities
Since Russia invaded Ukraine a year ago, news on agricultural commodity markets has been unable to avoid mentioning the impact of the conflict. The two countries are key global exporters of grain and oilseed products to the Middle East, Africa, Europe and Asia, and together they account for around one-third of global wheat trade.
The conflict greatly reduced Ukraine's crop production last year and contributed to a significant increase in the prices of grains. According to the Ministry of Agrarian Policy and Food of Ukraine, 67 million tonnes of grain and oilseed crops were harvested last year, compared with more than 106 million tonnes for the previous season.
Reduced shipments from Ukraine have been a contributing factor to the global food price crisis, although extreme weather has also played a part. The past 12 months saw unprecedented heat in Europe, extreme heat in the US corn belt, and drought in South America linked to the La Niña phenomenon.
One important factor that could influence food prices this year is whether Ukraine can continue exporting its grain shipments via the Black Sea under an agreement brokered by the United Nations and Turkey.
Reached in July last year, the agreement has played a crucial role in subduing prices in the second half of the year by creating a protected sea transit corridor, allowing exports to resume from three ports in Ukraine. The deal was extended on 17 November for 120 days and will need to be renewed by 19 March at the latest for exports to continue.
Russia, however, is seeking the removal of sanctions affecting its agricultural exports in return for its continued backing of the pact. Any failure to extend the deal could send prices rocketing again.
Climate and energy transition
Last year saw adverse weather phenomena push crop prices higher around the world. In Europe, scorching heat waves hit production of wheat, which was already heavily affected by war-related supply disruptions, while the US Midwest experienced drought throughout the summer.
Argentina and India, both major corn and wheat producers, suffered severe heatwaves and droughts, with India ultimately implementing a wheat export ban to protect domestic food security. As extreme weather patterns become increasingly regular due to climate change, supply risks for some agricultural commodities will likely continue to grow in 2023.
Weather affected energy markets as well, with Europe’s heatwave driving up electricity demand last summer and causing prices to spike. A long drought sapped reservoirs and rivers that provide a vital source of low-carbon power in Europe, while hot, dry weather made it hard to refill hydropower reserves.
“The severity of Europe’s energy crunch also depends largely on how cold temperatures drop over the winter, not just this winter but in 2023/24. Below-normal temperatures will not only raise the spectre of energy rationing but also put upward pressure on prices over the summer as Europe scrambles to refill reserves – this time without any Russian supplies,” said analysts at the Economist Intelligence Unit.
High energy prices, in particular in Europe, are also testing the commitment of governments to find an approach that ensures a secure and reliable energy supply, at an affordable cost, with minimal impact on the environment, known as the energy trilemma.
Last year was marked by difficult choices as some nations loosened restrictions on the operation of coal-fired power plants or extended the lives of coal power plants that were planned to retire to meet short-term energy security.
On 21 February this year, the cost of carbon allowances under the EU’s Emissions Trading System climbed above the €100 a tonne mark for the first time, partly due to increased coal use.
Alongside these short-term measures, however, many governments are taking longer-term steps to increase access to domestically produced renewable energy and accelerate structural changes.
The most notable responses include the raft of clean energy incentives in the US Inflation Reduction Act, the EU’s Fit for 55 package and REPowerEU, Japan’s Green Transformation programme, Korea’s aim to increase the share of nuclear and renewables in its energy mix, and ambitious clean energy targets in China and India.
According to forecasts by the International Energy Agency, the amount of renewable power capacity to be added in Europe in the 2022-27 period will be twice as high as in the previous five-year period, driven by a combination of energy security concerns and climate ambitions.
“Energy markets and policies have changed as a result of Russia’s invasion of Ukraine, not just for the time being, but for decades to come,” said IEA Executive Director Fatih Birol in the agency’s annual energy outlook.
With volatility expected to continue in gas markets, the energy trilemma conundrum will likely continue in 2023.
Challenges in nickel trading
Nickel’s price volatility in March 2022 made headline news as the base metal surpassed the $100,000 per metric tonne level for the first time and the London Metal Exchange suspended nickel trading, leaving the market with no global reference point.
LME's nickel contract is the global benchmark for pricing physical deliveries of the metal required for stainless steel and increasingly for batteries of electric vehicles.
LME halted nickel trading on 8 March after prices spiked 250% in a little over 24 hours after China’s Tsingshan Holdings, a major nickel producer, was caught in a short squeeze. The extraordinary price moves – and the related margin calls – brought several LME member firms to the brink of collapse. LME made an unprecedented call to suspend trading and tear up the morning's trades in order to protect the market.
A year on, the reverberations from the market meltdown continue. At the start of 2023, consultancy Oliver Wyman published an independent review of the events surrounding the March 2022 nickel crisis. It also made a series of recommendations to strengthen the LME’s rules and procedures. These built on measures the LME took shortly after the crisis, including the introduction of a 15% daily price limit and over-the-counter position reporting for all physically delivered metals.
LME said it would publish an action plan in response to the recommendations by the end of March. It will start implementing some changes as soon as the plan is published, with others coming later this year after a consultation period.
Meanwhile, the exchange is defending itself against lawsuits from hedge fund Elliott Investment Management and market maker Jane Street over the cancelled trades. Those cases will likely extend beyond 2023.
In other moves, the exchange recently added four new members to its nickel market committee to widen the range of views on how to improve its nickel contract. It also announced on 23 February that it will reopen nickel trading during Asian trading hours from 20 March, which is likely to provide an important liquidity boost for the market.
Despite the turmoil, rival exchanges have been slow to launch an alternative to the LME nickel contract. However, former LME chief executive Martin Abbott, who now runs Global Commodities Holdings, a trading and logistics services company, plans to launch a spot trading platform for Class 1 nickel at the end of March that could potentially be tied to a rival futures contract on another exchange.
This year could prove to be pivotal for the nickel contract as LME sets out to restore confidence and boost liquidity in its market.
*This article was updated on 23 February to include details of the reopening of nickel trading during Asian trading hours.