BLACKWATER USA | DAILY BRIEF

Posted by BW Actual on Jan 2nd 2023

BLACKWATER USA | DAILY BRIEF

Coming Up This Week

  • Luiz Inácio Lula da Silva, aka Lula, was re-inaugurated as Brazil's president yesterday. He criticized the "dictatorship" of his predecessor, Jair Bolsonaro, and pledged to fight Amazon deforestation and poverty.
  • Croatia adopted the euro and joined the Schengen zone yesterday - almost 10 years after joining the European Union.
Commodity Prices (parentheses show 1Y price change to recap 2022 trends) The Economist Intelligence Unit's general 2023 outlook for commodities is pasted below.
  • Aluminum: $2,378/ton (-15.2%)
  • Antimony (ingot min. 99.65% fob China): $11,400/ton (-3.3%)
  • Cobalt: $51,955/ton (-25.7%)
  • Copper: $8,372/ton (-13.2%)
  • Gold: $1,826/toz (+1.1%)
  • Lead: $2,293/ton (-1.4%)
  • Natural Gas (Nymex): $4.48/MMbtu (+17.3%)
  • WTI Crude Oil (Nymex): $80.26/barrel (+5.5%)
  • Zinc: $2,973/ton (-17.4%)
Ukraine
  • Russian drone strikes continued to pummel Kyiv after Ukraine rang in the new year, and Ukraine fired back with HIMARS strikes on military targets in Russian-occupied Donetsk.
Afghanistan
  • Former U.S. envoy to Afghanistan Zalmay Khalilzad told AFP that there's a growing rift between Taliban moderates and the hardliners pushing for regressive edicts like bans on women working for NGOs or going to school.
  • Khalilzad said a majority of the Taliban - even at senior levels - is against the conservative direction the government has taken recently, but emir Hibatullah Akhunzada's inner circle won the hardline measures they pushed for - including restrictions on women's rights and the reintroduction of public corporal punishment.
  • A bomb exploded near a checkpoint at Kabul's military airport, killing several. Islamic State was probably responsible but hasn't claimed the attack yet.
Venezuela
  • Pres. Maduro told state television that he's "ready, totally ready" to work towards normalizing relations with the U.S., which were broken off in 2019 when the U.S. recognized then-opposition leader Juan Guaido as Venezuela's rightful president. The U.S. still refuses to recognize Maduro's government, although it has recently engaged it in occasional direct negotiations (e.g. over prisoner swaps).
  • Separately, the border between Colombia and Venezuela reopened to private vehicle traffic yesterday, marking the final stage of a gradual reopening that began after Colombia elected a leftist president (Gustavo Petro) eager for friendlier relations with his socialist neighbor.
Somaliland
  • Somaliland security forces have been clashing with protesters in Laascaanood, and at least 20 demonstrators have died in the clashes. The protesters want Somaliland to give up control of the disputed town, which Puntland also claims.
What to watch in commodities in 2023 (Economist Intelligence Unit)

EIU expects commodity prices to recede in 2023 in the face of slowing demand globally, but an only limited increase in supply means that prices will remain high in level terms. Prices of energy commodities, most base metals and several agricultural commodities surged in 2021, and then again after the onset of the war in Ukraine in February 2022. Although commodities prices will not fuel global inflation in 2023 as they did in 2021-22, upside risks to our baseline price forecasts are increasing and largely centre on China, climate change and continued conflict in Ukraine.

War in Ukraine will still affect agricultural commodities markets in 2023

Global supply-chain disruptions stemming from the covid-19 pandemic will subside in 2023. Along with increasing production volumes of agricultural commodities, this will cause a drop of 8.6% in our food, feedstuffs and beverages index next year. Prices of grains have eased from their recent highs, but their direction in the coming months will continue to be influenced by events in the Black Sea region, in particular by any further extensions of an agreement that allows Ukrainian wheat exports to transit via Black Sea shipping corridors despite the Russian blockade of Ukrainian ports. Black Sea developments will also have an impact on oilseeds and vegetable oil prices, which are set to reach a trough at the end of 2023. The war will also have an indirect impact on coffee, cocoa and tea prices through high fertiliser prices and resulting shortages.
Base metal prices will remain volatile in 2023

We expect our average industrial raw materials price index to fall by 9.5% in 2023 as raw material supply constraints created during the staggered economic recovery in 2021—and then exacerbated by the war—continue to ease. Base metal prices surged in the first half of 2022 as the market scrambled to replace lost supplies of aluminium and nickel from Russia. In 2023 slowing global economic growth will cut demand for base metals; we believe that average prices in 2023 are set to drop by 11%. However, policy-led decisions to boost construction and manufacturing in China—as well as rising demand for Asian production generally as much of European capacity is shuttered amid the energy crunch there—will keep a floor under base metal prices in 2023, with most ending 2023 higher than they ended 2022.
After a dip in December 2022, oil prices will average above US$80/barrel in 2023

Energy prices have fallen sharply from mid-year highs in the second half of 2022, with average prices for all hydrocarbons (except liquefied natural gas, or LNG) set to register double-digit declines in 2023. However, prices will remain elevated at close to current levels. We expect oil prices to average about US$85/b in 2023 as OPEC production (including Russia) falls by about 3m barrels/day from its recent peak in late 2022. OPEC unity and commitment to lower production quotas in the face of pressure from Western countries should be watched in 2023.
We also do not expect a significant easing of European and US natural gas prices from current levels before 2024. Russian gas supplies to the EU will remain cut off, which will have lasting consequences for the European market, despite ongoing efforts to switch to alternative supplies and imports of LNG. This will keep prices elevated in 2023. Increased global demand for LNG will boost US natural gas prices and sustain higher LNG contract prices, which will fall only moderately in 2023.
China’s covid U-turn is a wild card

China will be lifting zero-covid policies in early 2023. China’s zero-covid policy now moves from being a major downside risk to our demand and global price forecasts to an upside risk—much will depend on how quickly China opens up its economy in 2023. Fiscal stimulus, although already incorporated into our baseline forecasts, represents a potential upside for steel and base metals, depending on how much China’s property slump continues to curb construction activity.

Cotton is likely to be a prime beneficiary of China’s reopening. Uncertainty surrounding China’s economic outlook had been set to weigh on cotton consumption in the 2022/23 and 2023/24 seasons. An easing of China’s zero-covid policy will lead to the opening up of its ports and logistics networks, which will boost consumption and textile production.

Energy is another likely winner. Coal was by far the best-performing commodity in 2021-22, with consumption hitting an all-time high as Europe fired up old coal-fired power plants in the face of rocketing gas prices. Most of China’s industrial production runs on coal power. After the easing of zero-covid measures, CNOOC, one of China’s largest national oil companies, raised its growth forecast for gas imports in 2023 to 7%. This has the potential to fuel gas and LNG prices significantly.

Climate remains the big wild card in 2023

Climate played a major role in commodities in 2022 and will probably do so again in 2023. Scorching heatwaves in the northern hemisphere hit production of wheat in the US and Europe in 2022, and climate change means that catastrophic weather is becoming more frequent. This includes extreme weather events such as La Niña, which is stretching into an unprecedented third consecutive year and will be detrimental for maize and soybean production in the first half of 2023, in addition to other crops like sugar and coffee.
Wheat, which was heavily affected by war-related supply disruptions in 2022, faces significant climate risks. In the US large swathes of the southern plains remain under drought conditions, and crops are in unusually poor condition heading into winter dormancy. Extremely dry, occasionally frosty weather in Argentina is causing damage across major producing provinces there, but both Russia and Australia are on course for a second consecutive year of bumper crops, which for the moment is alleviating concerns about production in the western hemisphere.

Weather will loom large in energy markets as well. Europe’s heatwave drove up demand last summer, causing gas and electricity prices to spike, especially as winds died down to levels insufficient to generate enough power and drought affected hydropower generation in many countries. Rising water temperatures and dry conditions also hit nuclear power generation. The severity of Europe’s current energy crunch also depends largely on how cold temperatures drop over the winter, not just in 2022/23 but in 2023/24 as well. The colder the winter, the more countries will have to draw down stockpiles built up over 2022. 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.