Investing in commodities in 2020? Here’s where it is headed.
Commodities have had a difficult year in 2019, amid the global slowdown in growth and some other factors. Investors would probably be wondering where commodities are headed in 2020, and whether it is the right time to invest.
To help investors make a better decision, we spoke with Avtar Sandu, Senior Commodities Manager, to understand where the commodities market is moving from 2019 to 2020.
What happened to commodities in 2019?
According to Sandu, the best performing commodities in 2019 were crude palm oil (CPO) and palladium. The upward rise in CPO prices arose from the downward revision in production as well as dwindling stocks of the biofuel and edible oil.
Palladium surged ahead of other precious metals – including gold – which had appreciated in response to trade tensions and monetary policy shifts.
On the other hand, overall metal prices fell about 5 % in 2019 and agricultural prices fell on increased supply and tariff increases.
To be sure, 2019 was a volatile year for commodities. “Most commodities did not do well in 2019 amid concerns about slowing global growth, and worries about the macroeconomic environment with the slowdown in manufacturing and trade in goods,” said Sandu. “Some commodities were otherwise affected by supply bottlenecks.”
As an example, Sandu noted that iron ore prices had increased sharply following the Vale dam collapse in Brazil in January, and the subsequent reduction in iron ore exports in February. Prices plunged in May as the supply crunch eased up.
In a similar fashion, nickel prices surged in 2019 after Indonesia announced a ban on nickel ore exports.
What was the biggest impact of the trade war on commodities?
A question on many investors’ minds is the impact of the trade war between China and the U.S. on commodities. Sandu believes the biggest impact was the “weakness in demand growth which continues to be revised downwards”.
“China is the world largest importer and consumer of commodities especially base metals,” explained Sandu. “As the trade war dragged on throughout the year, it took a heavy toll on commodity demand.”
The reduced demand further affected oil prices when coupled with the reduction in exports announced by OPEC. The oil-producing group OPEC announced in December that it is considering cutting oil production by another 500,000 barrels per day, bringing the total production cut to 1.7 million barrels per day. The announced cuts exceeded earlier estimates, though markets remained sceptical that the oil producers would comply.
What is the commodities outlook for 2020?
So what can commodity investors expect to see in 2020? According to Sandu, a lot hinges on the trade deal between the U.S. and China.
“The imminent conclusion of the Phase one of the trade deal between the US and China bodes well for commodities like soybeans, as China is expected to buy soybeans from the US in a big way,” he said. “The phase one deal is also expected to help the Chinese economy improve and this would be beneficial for the demand of base metals, and in turn lift sentiment in the commodity circles.
“Overall commodities are expected to do better in 2020 as the macroeconomic environment is expected to do better next year.”
Crude palm oil in focus for 2020
“One commodity that investors should keep an eye on is crude palm oil,” said Sandu. “With the introduction of the B30 mandate in Indonesia in January 2020 and the B20 program in Malaysia, CPO stocks are going to dwindle to historical lows levels and with production shortfalls, CPO prices will stay elevated in 2020.”
Trading commodities on Phillip Nova
Phillip Futures has launched the new Phillip Nova platform that allows investors to trade commodities futures more effectively from their desktops, tablets and mobile phones.
“Phillip Nova is a designed to keep clients up to date on the latest commodity prices and it empowers both the speculators as well as the hedgers, with the right tools to trade opportunities in both Futures and Options markets effectively,” said Sandu. “The platform comes with features that helps traders to view and manage their positions conveniently. It also has demo capabilities that allows novices to start off on a great user experience.”
Investors trading commodities futures can request for a Phillip Nova demo account here.
A word of caution
While the commodities outlook paints a rosy picture for 2020, Sandu warns that situations can change quickly as well.
“With 2020 being a year where the American go the polls to elect a new president, or decide to go with the incumbent who has been impeached by the House of Representatives, investors need to remain vigilant as the events play out. There are also rumours that the US president would be imposing tariffs on Europe next, so investors need to keep their eyes peeled.”