Global Commodities: It costs a lot

Greg Shearer (0:03)

Hello, and welcome to another episode of At Any Rate. I'm your host, Greg Shearer, and I head up base and precious metals research at JPMorgan. This week, attacks on vessels and infrastructure in the Middle East have intensified, dampening total oil flows from 90 to 83 percent of pre-war levels. Discussions also focused on the scale and timing of the IEA's SPR release, especially for diesel where the market is especially tight. While the IEA committed to unlock 100 million barrels of crude and products, there were no updates on the pace of release or how much diesel will actually ultimately be included. The situation in the strait is not exclusively affecting the energy market, as you know. Higher fuel prices, vessel attack, and constrained logistics have contributed to a surge in freight rates for both tankers and trucks, as well as the cost of operating heavy machinery. One sector where all of these converge are agriculture markets. Today, we want to discuss the input cost pressures on ags and the risks ahead for these markets with Tracey Allen who leads our agriculture commodity strategy. Tracey, thank you for joining.

Before jumping into the agriculture markets though, let's first run some updates on the metal side. Next week kicks off LME week here in London.

A busy week full of meetings with producers, consumers and investors across all base metals markets. We think one of the major themes is going to be on the divergence that we think is going to continue between copper and aluminum prices as we look to 2027 On the copper front, as we've been discussing a lot throughout this podcast over the last two years, it's a market in major dislocation, and we think this is set to continue. As we look to the balance of this year in early 2027, we remain bullish, seeing prices rising to above $15,000 per metric tonne. Ultimately, we think China import needs combined with supply risk, which remain elevated into the year end, are going to keep a high floor under this market. There is a lot of debate about what US import demand, which has been influential to this upper price formation over the last two years is going to look like in 2027, but little conviction about that, so expect a lot of discussions and differing viewpoints. Ultimately, we think China stays in this market, and this is a market that outside of the US is running on extremely low inventory coverage, keeping a high floor under prices. On the other side, aluminum is different. Ultimately, oversupply is incoming. This year has been quite dynamic. We've seen large outages and recoveries at Middle Eastern smelters, but as those Middle Eastern supplies begin to more fully recover as we get into 2027, it's entering a market where Indonesia's supply growth has grown immensely, which is quickly flipping the primary aluminum market into oversupply. It's not that the market doesn't need these tons eventually, it's a timing mismatch. What we see developing in 2027 is a very sharp swing. From almost an 800 kmt deficit this year in primary aluminum to over a million metric ton surplus as we go into 2027

Questions will be raised next week about how far aluminum prices can sag if copper does remain supported next year. But we do think the significant surplus outlook suggests lower prices are needed in aluminum. We forecast something around $2,700 per metric ton by the end of 2027 to really begin to slow the taps fueling this coming oversupply in the metal.

That's a quick catch up on the metals. I'm sure we'll have a lot more post LME week in terms of our takeaways from all our discussions. But now let's maybe move over to you, Tracey. Agricultural commodities have quite a few things to juggle here.

If El Nino wasn't enough, we also have this input cost problem driven by these Middle Eastern disruptions. Can you run us through the possible cost factors that you're considering when you're thinking about prices going forward from here?

Tracey Allen (4:28)

That's right, Greg. Farmers, food producers, processors across the world arguably have essentially the kitchen sink thrown at them this year.

Thankfully, much of the extreme volatility across commodity and agri-markets over much of the last six years have hopefully held the industry in good stead managing these bouts of supply-side dislocations. But this time around, it is largely, as you rightly point out, on the input cost front, it does look to us as though farmers could well be experiencing a historically high input cost scenario through the 2027 season now. Would you believe that the outflows from agricultural futures and options markets over the last week have essentially wiped out much of the inflows that we've observed over the last three months? So essentially a lot of this story that had become or had been priced in, particularly across the likes of the row crops, and certainly equally the sugar market there, had been attracting a lot of flows and interest and a lot of that has moved out of the complex, Greg, over the last week. I think some of that has to certainly do with the expectation of improving diesel supplies moving on to the world market. But importantly, as our energy team have been pointing out, that's a question of perhaps when and the political will not just to make the agreement, but to actually deliver on those supply side increases. So in terms of what we're watching here, at the moment, the fertilizer demand globally is at a very weak point. We're looking for that to really ramp up in early first quarter.