Hoarding masking recent commodity weakness but rally not over - GS

Quantum Commodity Intelligence - Hoarding by end-users scared of further price rises has masked recent weakness in the commodity market, but there is still likely to be some way to go for prices before any let-up in recent rallies, Goldman Sachs said in a research note Tuesday.

Through April and May, prices continued to rise across commodity markets, even as demand was left "effectively pushed into recession," the report said.  

That was a trend seen across commodity markets, with Goldman estimating global oil demand dropped 2.5% as China imposed strict lockdowns to halt the spread of Covid-19, while copper demand fell as much as 10%.

On the supply side, energy output was higher than first feared in the wake of Russia's attack on Ukraine, with lost barrels far lower than the investment bank had initially anticipated, in a trend that would typically move prices lower.

Driving support in the "pricing paradox" over the past two months, Goldman pointed to a shift in purchasing managers' behaviour, with any spare capacity being booked as a hedge against potential shortage and volatility.

"This creates backwardated markets despite building inventories and signals a strong set up for the next leg higher," said the report led by Jeffrey Currie, Global Head of Commodities Research at Goldman Sachs.

Backup

Covid measures in China and the war in Ukraine have combined to cement trends that were already underway after two years of the pandemic, with procurement shifting from lean, just-in-time supply chains to more resilient just-in-case inventory building.

"We are seeing this across commodities – energy consumers in Europe and China are building precautionary inventories, Chinese manufacturers continue to buy metal to catch up on lost production this summer, while governments look to restrict agricultural exports in the hope of taming domestic inflation," the report said.

Longer-term, structural supply imbalances are likely to persist without significant investment on the supply side.

Any demand destruction that high prices might cause is likely only to be a temporary phenomenon that will rear its head again as soon as prices ease, the report said.