What’s happening? Oil prices have staged a remarkable recovery from their nadir last April, and fundamentals have improved as demand continues to normalize and OPEC+ restrains supply, thus creating more balanced markets. However, persistent headwinds to the physical oil markets remain, namely high inventories, weak refining margins and physical differentials below pre-COVID-19 levels. Even so, energy is beginning to catch up and being helped by the general “reflationary trade”, which has lifted financial assets, industrial metals, and other economically sensitive commodity prices.
What’s next? Oil has lagged other assets, most importantly other commodities, which helps demonstrate some of the headwinds the oil market continues to face. On a nominal basis, the recovery seems to be getting ahead of itself a bit, as S&P Global Platts Analytics does not expect the fundamentals to improve materially until the summer. On a relative basis, oil weakness is more apparent, and it will be important to monitor how these relationships play out going forward, in addition to some of the macro underpinnings helping support all assets.
What’s happening? European hot-rolled coil steel to raw materials price spreads rose to a new high in January, while there was also a surge in US HRC to ferrous scrap spreads, on stronger spot steel prices. Higher HRC prices offset a rise in high-grade iron ore and pellet costs, as well as strong scrap prices last month. In China, weaker steel prices and rising coking coal and iron ore costs, after the country reached record steel output volumes in 2020, pushed spreads and steel industry margins down.
What’s next? Potential for slower demand and weaker stimulus in China is anticipated to slow steel production. Lingering COVID-19 restrictions seen globally and shortages of semiconductors and other components are hitting auto demand. This, along with lower-priced steel imports, may lead to a rise in steel deliveries and inventory in future. Steel mills such as Thyssenkrupp on Feb. 10 noted steel sales pricing has lagged the sudden increase in steel spot prices since Q4, leading to weaker realized sales and margins. Efforts from mills to boost contract pricing on new orders since Q4 have narrowed spreads with spot HRC prices, while US markets are looking for steel demand from infrastructure investments under stimulus plans.
What’s happening? Tech giant Amazon procured 3.163 GW of renewable energy capacity in 2020, leading all large buyers, who collectively procured 10.6 GW of contracted capacity despite coronavirus pandemic-related challenges. This highlights corporate commitment to addressing climate change, the Renewable Energy Buyers Alliance said Feb. 10. S&P Global Ratings has said that, over the past year, more and more businesses have shifted focus to address issues closely linked to mitigation of and adaption to climate change.
What’s next? There is significant potential to grow the corporate renewable energy procurement market by improving access to renewable electricity through key federal policy priorities, REBA said. Specifically, addressing capacity market construct issues will be central to improving existing markets and making them work for corporate customers, while expanding US wholesale power markets is an area where the Federal Energy Regulatory Commission can be helpful. Beyond the corporate sector, a drive by dozens of US electricity utility holding companies to provide ESG reports has brought to the forefront numerous new commitments to zero carbon emission goals, and an accompanying surge in plans to install thousands of megawatts of wind and solar generation over the next few decades.
What’s happening? Wheat auctions from China’s state reserves have surged dramatically this year, with 15.8 million mt wheat already sold as of Feb. 10. The pace is sharply higher than in 2020, when 23.23 million mt were sold through the auctions over the entire season. The sudden increase in wheat demand is primarily driven by a surge in China’s domestic corn prices, which is causing more wheat to be used in animal feed. In late January, wheat was selling at 2,554.7 yuan/mt ($395.5/mt), compared with 2,892.9 yuan/mt for corn, government data showed.
What’s next? Use of wheat for feed is likely to increase as China’s domestic corn prices remain on an uptrend. The US Department of Agriculture sees China’s 2020-21 wheat feed and residual use at a record 30 million mt, a nine-year high. Reports already suggest some feed mills have substituted up to 15%-30% wheat for corn. The market is now focusing on Chinese crop conditions. Since December, rainfall in most of the winter wheat area has been 50%-80% below than average, according to the agriculture ministry, and drought has appeared in some areas. The winter wheat area is forecast to see less precipitation and high temperatures in February, which may aggravate dryness.