KUALA LUMPUR (Dec 10): Fitch Solutions Country Risk & Industry Research expects commodity prices to ease in 2022 from current levels and forecast most commodity prices to average lower on a year-on-year (y-o-y) basis as supply improves and demand growth eases.

In a report on Thursday (Dec 9), the firm, however, said it expects commodities to remain elevated compared to historical levels amid a still-supportive macroeconomic backdrop and low stocks.

It said out of the 27 key commodities included in the analysis, 19 of them (or 70%) averaged lower on a y-o-y basis.

“Most notably, we see ferrous metals (iron ore and steel), natural gas NBP, thermal coal and oil crops (palm oil and soybean) averaging sharply lower, while we expect Asia LNG (liquefied natural gas), the US Henry Hub, tin, lithium, milk and cocoa to average higher.

“Brent will mostly average flat next year,” it said.

Fitch Solutions forecast that the global economy will grow by 4.1% in 2022, well above the 3.1% average recorded between 2015 and 2019.

It said developing markets in particular will record stronger-than-usual growth.

However, it said the pace of growth in global economic activity had marked a slowdown from the 5.5% it estimated 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,” it said.

The firm forecast a slowdown in China, where it expects real gross domestic product growth to ease from 7.8% in 2021 to 5.4% in 2022 due to less favourable base effects, as well as Beijing’s Covid-zero strategy, which will continue to curb consumption growth, a regulatory crackdown across multiple sectors of the economy and ongoing stress in the property sector.

Supply-wise, Fitch Solutions expects strong prices in 2021 to incentivise production in 2022, in particular in agriculture.

It said although the labour market will remain tight with rising salaries across many markets, it also expects improving Covid-19 vaccine access to help loosen travel restrictions, and therefore migrant labour availability.

It said this will also lower Covid-19-related operational disruptions.

“We highlight a number of risks looming over commodities in 2022, including downside risks to global economic growth, continued supply risks from Covid-19 related disruptions, uncertainty surrounding Covid-19 variants’ severity and a number of geopolitical risks, most notable the US-China relationship and the Russia-Ukraine tensions,” it said.