Commodities to veer between China hopes, pandemic fears in 2022

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If 2021 was a year of volatility and uneven performances for commodities, then 2022 is shaping up as a rinse and repeat.

Uncertainty over the recovery from the coronavirus pandemic remains the dominant theme.

On the surface, commodities had a strong year, outperforming other asset classes with the S&P Goldman Sachs Commodity Index index jumping 35% this year, beating the U.S. equity index S&P 500 for the first time in a decade.

But that headline figure doesn’t capture just how volatile the year was for major commodities, with several hitting record highs before plummeting back to earth, while others experienced large swings amid countervailing demand and supply narratives.

What wasn’t a surprise in 2021 was the outsized role played by China in many commodity markets, given the world’s second biggest economy’s status as the top importer of crude oil, iron ore, coal, copper and in all likelihood liquefied natural gas (LNG) as well.

The sector where China’s impact was most keenly felt was metals, with spot iron ore surging to an all-time high of $235.55 a tonne in May as its steel mills cranked out record amounts of the construction material.

The same Chinese demand also boosted copper, with London contracts rising to a record $10,747 a tonne in May.

But while copper managed to hold on to much of its gains, iron ore plunged as China changed course on steel output, actually enforcing an official target that 2021’s output would not exceed 2020’s, and the spot price, as assessed by commodity price reporting agency Argus, fell as low as $87 a tonne by November.

It has since recovered, to $122.70 last Monday, but will likely end the year below the close of $159.90 on the last day of 2020.

The recent recovery is premised on a market view that may well end up shaping commodity prices for 2022, namely that China is once again going to open up the stimulus taps to boost a flagging economic recovery.

If this is the case, then iron ore and metals stand to be the major beneficiaries, as well as coking coal used to make steel.

Energy commodities enjoyed a strong year, with Australian benchmark Newcastle thermal coal hitting a record high $252.72 a tonne in mid-October.

Once again, China was the driver, even though it is maintaining an informal ban on imports from Australia as part of a political dispute.

Russell is an Australia-based columnist for Reuters.