2017 was another strong year for commodity prices.
According to HSBC’s commodity price index, they rose by 7%, adding to the barnstorming 26% gain achieved a year earlier.
However, as seen in the chart below, that headline increase masked a widely divergent performance across individual commodities last year.
“For 2017 as a whole, the best two performing commodities we include in our index were barley and lumber,” says Paul Bloxham and Daniel Smith, economists at HSBC in Australia.
“The recovery in barley prices was driven by large swings in Australian production. Stellar growing conditions in 2016/17 saw output surge, while a return to more normal conditions is projected to lead to a 40% decline in Australian output for 2017/18, according to Australian government estimates.
“Meanwhile, lumber prices have surged on continued growth in Chinese demand, along with new restrictions on domestic production.”
While not to the same degree as gains seen in those commodities, Bloxham and Smith said base metals and most bulk commodities also benefited from Chinese efforts to hold back domestic production across a range of commodities in the second half of the year, both to reduce pollution and supply from inefficient producers.
“This has been true for coal, iron ore, and some of the best performing metals such as zinc and aluminium,” they say, adding that “these themes are likely to continue in 2018.”
While not included in the HSBC index, Bloxham and Smith described battery-related commodities as the “star performers” for the year, driven higher by not only demand-side factors but also supply.
“Lithium and cobalt prices were two of the year’s strongest performers with price gains of 35% and 130% respectively,” they note.
“Demand for these commodities has been supported by rapidly rising forecasts of demand for electric vehicles and energy storage.”
And, despite significant plans for investment in production of lithium, they say the increase in supply has not kept pace with expected demand to this point.
At the other end of the spectrum, rubber — down 27% — was the worst performing commodity of those tracked by HSBC.
“Prices had risen strongly in late 2016/early 2017 after a group of the major producers [including Thailand, Malaysia and Vietnam] agreed to cut exports for a six-month period,” Bloxham and Smith say.
As for what the future holds in 2018, the pair expect most base and bulk commodities will decline from present levels, although they expect gas and crude oil prices to buck the overall trend.
This table shows HSBC’s forecasts for 2018 and over the longer-term.