Cygnet Commodity Market Update, December 2022

“Steadier as she goes” – Righting the economic ship

Economic forecasts are becalmed.

This is not to say the situation has improved noticeably. Many of the negative economic effects and the drivers behind them persist, but some amount of quietness has settled on many markets. At the very least, this will offer governments, companies and central bankers time to adapt to the problems, if not implement plans to move past them.

Prices for most major commodities are much more manageable than six months ago, when many were two- or three-fold higher than the previous year. Even energy commodities – especially natural gas in Europe, which has been the main driver of inflation – have fallen significantly over the last month and are below last year’s levels.

Present monthly volatility, with the exception of natural gas, should be tolerable to supply-chain professionals. Sourcing material without the fear that prices will be measurably higher or lower in a month’s time should bring relief. However, while these professionals may be sleeping better, the size of their order book is likely to be smaller.

The calmer markets, though, are the sign of an economic negative: weakening demand.  Slowing consumption, even with supply being tampered down almost as quickly, has undermined prices. So, while costs are more stable, less consumption will undermine GDP. 

One issue for 2022 has been the premature arrival of the holidays. A slowdown at this time of the year is to be expected. Typically the arrival of Thanksgiving in the United States or the first weeks of December in much of Europe sees working hours drop sharply, as holidays are taken and outstanding vacation days used up. After the turmoil of the year, it’s no surprise that many have chosen to slacken off early. 

With the high cost of gas, industrial businesses are also running slow. This will help maintain gas supplies through the winter, though will further precipitate and prolong the expected recession.

Unsurprisingly some forecasters have revised expectations downwards for the coming 24 months.

Early holidays and weakening prices will help depress the rampant inflation, with central banks not having to work as hard to contain it. Despite the successive, large base rate rises of the last months, inflation has been steadfast in tracking up in most regions. In the Eurozone and the United Kingdom, it has accelerated over the last month after tracking upwards for much of the last two years.

The good news for the United Kingdom is seen in future expectations. Since the unwinding of the Truss/Kwarteng-budget, expectations for inflation in 2023 and 2024 have stepped down noticeably.

With the current government gaining credibility with financial institutes, it’s possible that a virtuous circle could develop with government borrowing being less expensive, enabling more targeted spending to boost growth. 

Holiday cheer?

Christmas shopping is often a telling time for the coming years. Consumer retailers and many in hospitality rely on December for revenue for the year. One survey points to some pick-up in footfall at British restaurants and bars.

The Coffer CGA Business Tracker shows a 1.5% year-on-year lift in October. A lift, but gauging how much of an improvement is difficult. While October 2021 in the UK had seen many Covid restrictions removed, consumers were still wary of socialising, and the “Eat Out to Help Out” scheme aimed at boosting restaurant going had been wound down. Though, against the swathe of neutral or negative indicators, this is positive.

China’s shifting policy regarding lockdowns in response to social unrest is notable. The Government has a difficult task of balancing growth and health, given the low levels of effective vaccination.

With other ongoing issues, such as the indebtedness of the construction sector, and a lack of semiconductors for automotive production, Chinese economic growth looks susceptible to downward revisions. As the second largest economy and the main source of GDP growth in the coming two years, a weakening China would be felt globally.

A much-needed break

The gloomy economic picture persists, and any improvement looks beyond the horizon. While the holiday season may not bring a lift, it will offer a time for quiet reflection, perhaps. Given the frenetic year, this cannot be overvalued.

Governments and businesses need an opportunity to look objectively at their situation and consider, “Are things as bad as all that?” With breathing room, policies and programmes to overcome the recent weakness can be kicked off. Improvement will be slow. An uptick in 2023 will happen only towards the end of the year, if at all, but by 2024, the problems of inflation, high energy prices and weak demand should be addressed and GDP growth is likely across the board.

Issues such as the Ukraine-Russian conflict and the Chinese construction sector debt, among others, could upset forecasts to the upside or downside, but a period of relative calmness will allow a reset and look to the future. Not the worst way to finish the year.


Director (Special Projects)
Jason Kaplan has been analysing commodity markets and forecasting developments for more than 20 years. He combines a keen understanding of commodities, the commercial drivers of companies along the supply chain, and the effects of macroeconomic factors to predict how markets will develop.