2024: A Return to Growth

The interest rate hikes introduced to tame inflation have led to a slowdown in global industrial production (graph 1). Output growth for 2023 is expected to come in at 1.1%, following a 2.8% gain in 2022. While most regions experienced a deceleration, the slowdown is particularly acute in Europe, where economic activity has been crimped by the war in Ukraine and the energy crisis. In Germany, 2023 should mark the third consecutive year of declining industrial production. But conditions should improve in the second half of 2024 since interest rates are expected to start coming down and spur growth in most major economies.

This context could create new challenges for commodities. Several economies could see their real GDP stagnate or contract in the first six months of the year. And with interest rates still sitting high, despite the anticipated cuts, demand for many commodities is expected to remain low. For instance, the International Energy Agency (IEA) is expecting demand for oil to fall 0.7% in the first quarter. But as economic activity picks up in the second half of 2024, most commodity prices should improve and end the year in positive territory (graph 2). Gold and iron prices will be the exception. Gold prices will probably come down as easing economic and financial uncertainty offsets the effects of falling bond yields. Meanwhile, iron prices will take a hit as production costs normalize (thanks in large part to lower energy prices) and supply increases.

Commodities will, however, get a boost from China's stimulus measures, which are once again focused primarily on infrastructure and investment projects. That said, economic growth remains fragile in the Middle Kingdom, and the markets tend to overestimate the impact of stimulus measures on prices, especially where industrial metals are concerned. The recent escalation of tensions in the Middle East has also renewed concerns about global supply chains and oil production. Houthi rebel attacks on commercial ships in the Red Sea threaten the flow of goods and oil through the Suez Canal. About 12% of global marine trade External link. This link will open in a new window. passes through this strait. Another potential issue is the growing disagreement between members of the Organization of the Petroleum Exporting Countries and its partners (OPEC+), which could lead to a new crisis within the cartel. So even though commodity prices are expected to go up, they're also expected to remain volatile.

Oil

We expect demand for oil to fall, but mainly during the first quarter. This will follow what was already a significant drop—estimated at 0.7 million barrels per day (MMb/d)—in late 2023, due to reduced demand from the petrochemical sector in the Middle East. It also seems that Chinese demand sagged by nearly 0.3 MMb/d at the end of last year, though it’s expected to pick up in early 2024. What's consistent over both quarters is the weaker demand in advanced economies, which represents more than 50% of the total anticipated decline. In Europe, high interest rates are putting a damper on manufacturing, which has been flat for some time now, further reducing the need for oil. In the US, initial signs of weakness were noted in gas and diesel deliveries. That said, demand is expected to return to positive territory as economic conditions improve in the second half of the year. This anticipated upswing will be largely dependent on China's oil and gas sector, which has surged in recent months, but the Chinese economy is fragile and any setbacks External link. This link will open in a new window. could limit the extent of the gains.

On the supply side, OPEC+ members announced voluntary reductions totalling 2.2 MMb/d for the first quarter of 2024. However, the IEA expects that the cartel will only cut output by 0.5 MMb/d compared to the previous quarter. The weak credibility of this agreement and Angola's recent departure from the group have rekindled fears of another crisis within the organization. With a shrinking market share and Saudi Arabia carrying most of the production cut burden, OPEC+ seems to be headed down the same path that led to the crises of 1985, 2008, 2015 and 2020. For more on how this situation could affect oil prices and North American producers, see our recent Economic Viewpoint External link. This link will open in a new window.. We'll obviously be keeping an eye on future OPEC+ production agreements.

After growing 7.4% in 2022, US oil supply exceeded expectations by adding another 5.6% in 2023, despite falling prices and fewer active drills. In fact, the US increased its market share from 20.3% in 2022 to 21.5% in 2023, to the detriment of OPEC+. This abundant supply has contributed to oil prices falling 22.5% since they peaked in September 2023 (graph 4). Prices should remain relatively low for another few weeks, though we expect them to start climbing by mid-year when economic conditions improve. But if the pull-back in demand is more severe than anticipated, we may see a steeper correction in oil prices.

In Canada, the delayed opening of the Trans Mountain pipeline between Alberta and British Columbia widened the gap between WCS (Western Canadian Select) and WTI. When a pipeline variance permit was denied in December, the difference temporarily reached US$28.32 per barrel, a level not seen since December 2022. Work has since resumed, however, and the new pipeline is now 98% complete External link. This link will open in a new window.. The line fill could start as early as February 1, and once the pipeline is fully operational, it will triple the flow of oil from Alberta to the Pacific Coast. Against this backdrop, the gap between WCS and WTI is expected to narrow over the course of the year, reaching an annual average of US$16 per barrel. Canada will achieve surplus oil export capacity, which should support sustained growth in crude production for a number of years (graph 5). This should help prevent a situation like what happened in 2018, when insufficient export capacity caused oil prices to plummet in Canada.

Gasoline

Since peaking in August 2023, gas prices have retreated 20.4% in the United States and 16.4% in Canada (graph 6). This difference is due to outages at Canadian refineries in the fall, which forced suppliers to purchase gas from international markets at higher prices. This was reflected in the November Canadian trade balance, where imports of refined petroleum products surged 18.8% on a month-over-month basis. The weak Canadian dollar also added to the cost of importing fuel, limiting how much prices could come down across the country. Resumed refinery operations and lower crude prices should spell relief at the pump in the coming weeks, but the reduction will be limited as the Canadian dollar is also expected to sink a little. 

Natural Gas

An extreme cold weather event hit the US in January 2024, causing a spike in energy demand for heating. Henry Hub, the benchmark price for North American natural gas, has soared by 43.4% since December (graph 7). And yet, the increase was tempered by weaker-than-expected demand from Asia and Europe. On the European side, sustained supply, particularly from the US, combined with the addition of new gas terminals, has enabled Old Continent stocks to rise sharply. These are currently at an adequate level to cope with peak winter demand. The Henry Hub price should keep rising, though at a more moderate pace, as economic activity picks up later this year. In Canada, the liquified natural gas terminal in Kitimat, British Columbia External link. This link will open in a new window. is now 85% complete and the company is preparing to begin operations this year. This will give Canadian producers access to the growing Asian natural gas market, with the benchmark price, Japan LNG, around US$15/MMBTU, a differential of around US$10/MMBTU with Henry Hub. Another eight terminal projects have been proposed or are already under construction, which could make Canada the world's 4th biggest exporter, with 14 billion cubic feet per day. We should see more active drills in the coming months, as producers prepare to make use of the new terminal. 

Aluminum

Aluminum prices are expected to rise 4.8% in 2024, adding just over US$100 per tonne (graph 8). This forecast is based on slower production in Guinea and restrictions in Chinese aluminum plants, both of which should hold back supply growth. The clean energy transition and renewed industrial demand in the second half of the year should also be good news for aluminum. However, the pace of price increases will be held back by a rebalancing of supply and demand in 2025. China's plans to revive its economy include massive infrastructure spending, which should push aluminum consumption higher.

Copper

Copper is sitting pretty as the supply side struggles to keep up with strong demand driven by decarbonization initiatives and a resilient construction sector. This is reflected in global copper inventories, which have dwindled by 15% since October 2023 (graph 9). We expect prices to edge down 0.4% this year, but this mainly reflects the arithmetic effect of the annual averages. In addition, the price of copper isn't immune to new periods volatility. We saw this happen when a production stoppage at the Cobre Panama mine pushed prices up in December (graph 9). But given the strong demand, this metal should be one of the first to rebound in 2024. This growth is expected to continue in 2025. Over the medium term, the supply outlook is less certain, since no major mining projects have been announced for 2026–2027. The anticipated market shortfall is already partially reflected in the current price. Any new project announcements could trigger price cuts in the short term. 

Nickel

The price of nickel should stop backsliding soon, after tumbling from US$28,270 per tonne in January 2023 to roughly US$16,000 per tonne in January 2024 (graph 10). This steep decline was caused by a supply glut, primarily from Indonesia, and the volatility of the London Metal Exchange's benchmark contract, which had previously pushed the price abnormally high. While it should gradually start recovering in the next few months, we expect an average annual decline of 12.6% due to arithmetic effects. The demand outlook remains very encouraging as the IEA estimates that the need for nickel could jump anywhere from 9-fold to 16-fold by 2040. However, supply is also rising rapidly and the potential for price gains may be limited in the short term.

Iron Ore

Iron ore prices currently seem to be hovering above what the fundamentals factors would suggest. We expect a 4.5% drop in 2024. The recent momentum stems mainly from optimism surrounding China's latest stimulus measures (graph 11). While these measures are a step in the right direction, economic conditions in China remain fragile and the country's real GDP growth is expected to slow again in 2024. External link. This link will open in a new window. On the global supply side, new mines in Australia and increased production in China should weigh on prices this year. But a steeper decline is expected in 2025, when Guinea's Simandou mine begins operations, which will represent 5% of global supply.

Gold and Silver

For a long time, the inverse relationship between the price of gold and Treasury Inflation-Protected Securities was almost perfectly correlated, meaning that a 1% yield increase triggered a 1% price decline (graph 12). However, this relationship has changed twice since 2023. In light of these divergent relationships, there are two possible scenarios for the price of gold if inflation-adjusted bond yields drop as expected. One possibility is that the relationship could hold and simply follow the new trend. This means the price will rise as yields come down. The other possibility is that the historic relationship could be reestablished, resulting in the price stagnating as yields fall. It's still too early to say which scenario will materialize or if it will be a combination of the two.

Meanwhile, the price of silver should continue to be propped up by increased demand from the electric vehicle sector, despite downward pressure from the financial markets (as uncertainty eases). As a result, we expect some of the gains from the last few months to stick (graph 13).

Platinum and Palladium

Prices went up in December after the British government announced sanctions prohibiting the trade of certain Russian metals, including platinum and palladium. While prices should benefit from upcoming interest rate cuts, uneven demand from the automotive industry could be an issue. Both of these metals are used to make fuel-powered engines, but they're not needed for electric vehicles, where rapid growth is anticipated. Plus, these metals can be used interchangeably, and manufacturers now prefer platinum because it's cheaper. 

Forest Products

After fluctuating in 2021–2022, lumber prices stabilized last year (graph 15). There was a slight uptick in July due to wildfires and the BC Port strike, but it was short-lived. However, the US economy's resilience suggests that lumber prices could firm up as summer approaches. In the second half of the year, falling interest rates in both Canada and the US should gradually stimulate demand from the housing and renovation markets. We'll also carefully monitor how forest fires affect Canadian inventories External link. This link will open in a new window. throughout the year (graph 16). Compared to 2023, there may be less lumber available for summer construction projects because of the delayed impact of reduced stocks.

Agricultural Commodities

Grain supply and demand are expected to be more balanced than in 2023, which should help stabilize prices (graph 17). After a record year for Brazilian soybean production, drought in the last quarter of 2023 damaged soybean harvests and delayed corn harvests. This may nudge soybean prices, which are quite low, up a little. But downside risks, like a good crop in the US, could limit price gains. Both supply and demand are on the rise for corn, including demand for livestock feed and ethanol. This suggests a stable trajectory for prices, which are nevertheless at their lowest level since 2020. And the rebound in US corn production is contributing to subdued price levels. Meanwhile, wheat production is growing on the international market, including in Russia and Ukraine. It remains to be seen whether an escalation in the conflict could hurt export capacity again or cause further damage to transportation infrastructure.

Prices will be influenced by demand from China, the world's leading consumer of wheat and soybeans.[1] While more sluggish economic growth in 2024 compared with 2023 could put a drag on prices, demand remains substantial. For instance, Chinese soybean imports, which account for 58% of global imports,[2] increased by almost 10% in 2023 compared to 2022.[3]

Fertilizer prices are expected to be relatively low in the coming months, which will help bring down food inflation (graph 18). Nitrogen fertilizer prices edged down while potash prices remained stable in early 2024. Only phosphate fertilizers saw a slight uptick due to tighter inventory levels.

Geopolitical issues could pose a risk. Disruptions in the Suez Canal could affect the transportation of foodstuffs and farm inputs, creating price volatility. If conflicts in the Middle East or Ukraine intensify to the point that they spark energy supply fears, natural gas prices could jump. This in turn would push up the price of nitrogen fertilizer since natural gas is one of its main production inputs.

[1] 2021 data from the Food and Agriculture Organization of the United Nations (FAO), based on domestic supply quantity (production + imports – exports + change in inventory)

[2] 2021 data from the Food and Agriculture Organization of the United Nations (FAO)

[3] Monthly Datastream data (December 2023)