In each of the graphs shown in this article, ChAI’s historic forecast is shown by the purple line and fan charts, which are set to 50% confidence. The white line beneath shows the actual price development since then.
2022 was an unprecedented year in commodities, with record high prices being set across many markets. From Russia’s invasion of Ukraine to extreme weather phenomena, China’s Covid policy to global inflation rates, there was no shortage of factors to drive twelve months of uninterrupted price volatility. Although ChAI is a company focused on what will happen next in raw material markets, we wanted to look back on last year with a selection of forecasts.
In the first quarter of 2022, the world was watching as Russia built up its forces on the border with neighbouring Ukraine before eventually invading on February 24th. The conflict had, and continues to have, a profound impact on raw material prices and global supply chains, and caused uncertainty in markets beyond those commodities sourced from either country. The image below shows ChAI’s forecast, with 50% confidence bounds, for soybean prices on February 25th 2022. Soybean prices had been on an upward trend since late October 2021 due to droughts in South American growing regions and, as noted by Reuters at the time, were liable to be affected by the unavailability of sunflower oil from Russia and Ukraine.
ChAI’s forecast for CME Soybean prices, 25/02/22
ChAI’s short-term forecast was driven by Trend and Currency data, although the price increase over this time horizon would have been predictable for many. In forecasting the downturn in prices from mid-June, however, ChAI’s models were driven bearish by Currency, Inventory and Macroeconomic data, as well as alternative data families including Freight and Satellite.
Corn prices had been on a similar trajectory to soybeans in the early part of 2022, having also been on an upwards surge since October 2021. However, rather than merely being correlated with the Black Sea via the oilseeds market, 19% of global corn exports come directly from Russia and Ukraine so there was even higher risk associated with corn prices.
ChAI’s forecast for CBOT Corn prices, 01/03/22
ChAI’s forecast from the 1st of March, rather than following the steep upwards trajectory corn prices had taken in late February, instead predicted a flattening out followed by a slight bullish movement on the 3 month horizon, driven by data from the Curve and Satellite data families.
Unlike the upward trend of soybeans and corn, sugar prices had been moving sideways since October 2021. Having climbed from less than 10¢ per pound in April 2020 to predominantly trade between 18¢ and 20¢ from Q4 2021 through to Q2 2022, sugar prices were facing uncertainty due to high oil prices. While this may sound unusual, sugar and oil share a pricing relationship through the role that their derivatives, namely ethanol and gasoline, play in biofuels. As oil prices enjoyed a sustained run above the $100 mark in Q2 last year, Brazilian mills focused on increasing ethanol to reduce the cost pressure of gasoline on consumers and simultaneously heaped pressure on sugar supplies.
ChAI’s forecast for ICE Sugar prices, 03/05/22
Against this backdrop of uncertainty, the image above shows ChAI’s forecast for sugar prices on May 3rd. While neutral on a 3 month horizon, the forecast’s bullish outlook on a 6 month horizon was driven by Trend and Currency data within ChAI’s models.
One of the major factors to have impacted commodity prices last year was China’s approach to managing Covid infections. The now-abandoned ‘Zero-Covid’ policy stunted economic growth in the world’s most populous country which in turn undermined demand across many commodity markets. Palladium was one of these commodities. The metal is most commonly used in the automotive industry in catalytic converters and it also plays a crucial role in the semiconductor industry; lockdowns in China dampened demand in both of these markets. Furthermore, on the supply side, over 25% of the world’s palladium is sourced from Russia and palladium prices had spiked following the invasion of Ukraine.
ChAI’s forecast for LBMA Palladium prices, 01/06/22
The image ChAI’s forecast for palladium, made on June 1st, is shown in the image above. The 3 month bullish outlook was driven by data from the Currency, Inventory, Macro and Price influence families. For the subsequent bearish forecast on the 6 month horizon, the most important data inputs were Inventory, Macro, Seasonality and Price. This example provides a clear example of ChAI’s models interpreting the same data to have a different impact on a price forecast depending on the respective time horizon.
Late summer witnessed Europe’s energy prices spiralling out of control in a situation that remains unresolved and continues to impact businesses and consumers alike. Similarly, the threat of an impending recession began to infect many commodity markets. Metals, more than most materials, fell in between these two forces. Sectors which create huge demand for metals, such as construction and automotive manufacturing, flourish in times of economic prosperity, while processing the metal to be used in these industries requires enormous amounts of energy.
ChAI’s forecast for LME Rebar prices, 06/07/22
ChAI’s forecast for LME Steel Rebar prices, made on July 6th and shown above, was relatively neutral on a short-term basis before becoming more bullish on the 6 month horizon due to data in the Position, Trend and Currency families.
While steel is a good indicator for industries such as construction, copper is widely considered to be an indicator of the overall health of the economy, and is commonly referred to as ‘Dr. Copper’ as a result. In the second half of 2022, as Metal Miner noted, the gloomy economic environment was competing with China attempting to revive its ailing property sector with several stimulus packages in late summer. Both the depth of potential economic despair and the speed of China’s revival could have massive impacts on the price of copper, creating a period of uncertainty for the metal.
ChAI’s LME Copper forecast, 09/08/22
In ChAI’s forecast for copper prices of 9th August, shown above, the Macro family was indeed weighing on the 3 month prediction. The return to a bullish forecast on the 6 month time horizon, which correlated with the actual upsurge in copper prices in Q4, was driven by data from the Position and Price families.
For much of 2022, energy prices were the dominant story in commodities. Natural gas prices rocked Europe and remain high, while crude oil prices reached the highest point since 2008 and remained over $100 per barrel for months. When it came to forecasting the crude oil prices for Q4 2022, many analysts thought that the decline $90 barrels that occurred in September would be rectified with another increase. Following the OPEC+ announcement in early October that the group’s production would be reduced by 2 million barrels per day of production, Goldman Sachs increased its Brent price forecast for Q4 2022 and Q1 2023 to $110 and $115 per barrel respectively. Similarly, Morgan Stanley raised their prediction for Brent crude prices for Q1 2023 by $5, forecasting an average for $100 per barrel.
ChAI’s ICE Brent Crude forecast, 17/10/22
ChAI’s forecast for Brent crude prices, made on 17th October indicated a bearish run that was contrary to most contemporary assessments of the market. The 3 month prediction was driven by the Trend influence family along with some input from the Currency and Freight families.
2023 promises to be another year of uncertainty and volatility in commodity markets, with the list of variables that could affect prices only seeming to grow. Those that can quickly identify and respond to the market movements will have a competitive advantage throughout this year.