After a few difficult years after the pandemic caused by COVID-19, the world is still in the process of economic recovery. And it is not only about the pandemic and all the changes it brought, but that we have subsequently faced other events that have marked changes in the prices of raw materials for 2023.

Events such as the Chinese New Year, which this year considerably increased days off, meant a pause in the purchase and distribution of most raw materials, with the exception of natural gas. Furthermore, as China begins to reopen and resume operations, the United States is headed for an inevitable economic recession meaning the world’s two largest economies are going their separate ways, creating a confusing picture for commodity prices.

However, other important factors are added to this list.

What does this mean in the world of logistics and companies? At Chem Fluid we explain!

What Factors Influence the Cost of Raw Materials in 2023?

Recapitulating the events of recent years, most of the prices of raw materials began to rise in the second half of 2021 due to the high and accumulated demand derived from the pandemic. 

• When little by little the measures began to be lifted and the confinement ended, this created a slow return of the supply and therefore a kind of bottleneck in the world of logistics.
• The armed conflict between Russia and Ukraine caused many commodity prices to skyrocket as it disrupted and interfered with their distribution and production. There were concerns that the sanctions would cut supplies from Russia, the raw materials powerhouse. The country is the world’s second-biggest oil exporter after Saudi Arabia and the world’s second-biggest natural gas producer after the United States. It is also the world’s leading exporter of wheat and a major exporter of other commodities, including nickel and lithium. Wheat hit a record high of $13.6 a bushel as the war between Russia and Ukraine cut off deliveries from major Black Sea ports.

For the second quarter, prices began to fall driven by a number of factors, including:

• Developed nations intensified their adjustment cycle to combat inflation.
• The Chinese economy slowed as the country imposed new strict lockdowns in response to rising Covid-19 cases, raising concerns about demand.
• A strengthening US dollar (USD), buoyed by hawkish interest rate hikes from the Federal Reserve, dampened global demand as it made commodities in local currencies more expensive.
• Most commodity prices had fallen from their March highs by the end of 2022 but were still higher than in previous years.

Outlook for commodities in 2023

The Economic Intelligence Unit (EIU – for its acronym in English), indicated that the prices of certain raw materials are expected to decrease during 2023 due to the slowdown in demand in the world market and due to them, a limitation in production or supply is also forecast. For other types of raw materials, on the other hand, there is a risk of increases that are affected by China, climate change, and the conflict between Ukraine and Russia.

Among the main changes in raw materials we can mention:

The Conflict Between Ukraine and Russia Will Continue to affect the Markets of Agricultural Commodities

The interruptions in the global supply chain that have been dragging on since the pandemic, added to the increase in production of basic agricultural products, meaning that a drop of more than 8% is expected in the food and beverage production index in 2023.

However, these prices are directly related to how the conflict in Ukraine continues to unfold and the agreements it reaches to export wheat. This conflict also has an indirect impact on other agricultural products due to the high costs of fertilizers, which, in addition to everything, are currently in scarcity.

Oil Price Estimated at More Than $80/barrel

Oil is estimated to be around $80-85 per barrel due to a drop in production of more than 3 million barrels per day from its peak in late 2022.

Similarly, a significant decrease in the price of gas is not expected either, since the supply of Russian gas to the European Union will continue to be cut off, avoiding the possibility of reducing costs in the global market due to limited supply and high demand.

China Restarts its Operations

The fact that China has adopted a zero COVID policy and is rapidly returning to normal operations becomes a downside risk to demand but an upside risk to global commodity prices. 

For example, in the case of base metals and steel, it is something that could be positive since China currently limits construction activity and fiscal stimulus could be introduced. On the other hand, yes had been established that China’s economic outlook would weigh on cotton consumption, as its main beneficiary. A relaxation of China’s zero covid policy will lead to the opening of its ports and logistics networks, boosting textile consumption and production.

Another big beneficiary was coal, since most of China’s industrial production works with this material, in addition, Europe had to go back to using coal as a measure in the face of the abysmal rise in gas prices.

At this point, special attention must be paid, since although China is in the process of resuming its operations, the worrying increase in COVID cases has delayed some plans.

Climate Change: a subject that everyone talks about but few do anything about it

Weather played a major role in commodities in 2022 and is likely to do so again in 2023. Heatwaves affected wheat production in the Northern Hemisphere and increased extreme weather will be detrimental to crop production in the first half of 2023.

Wheat, which was hit hard by war-related supply disruptions in 2022, faces significant weather risks. On the one hand, the climate that has occurred in America is causing damage in the main producing provinces. However, both Russia and Australia are on track for a second consecutive year of bumper crops, alleviating some production concerns.

Similarly, the weather will also play an important role in energy markets. Europe’s heatwave boosted demand last summer, causing gas and electricity prices to spike sharply. The severity of Europe’s current energy crisis also depends to a large extent on how the temperature drops during the winter, not only in 2023 but also in 2024. Below-normal temperatures will not only increase the specter of energy rationing but will also put upward pressure on prices over the summer as Europe struggles to replenish stocks, this time without any Russian supplies.

Supply and storage channels

The maritime transport, as well as storage capacity, would see consequences of the above factors generating changes in transport freight, inventory level, and demand for commodities worldwide. Thus, the greater the demand for raw materials, there will be less space available on interoceanic routes, generating an increase in freight prices. On the contrary, if the economy slows down there will be less demand for energy and its petrochemical derivatives.

Conclusions

Even though there are trends regarding commodities in 2023, always keep in mind that things can change and algorithms are not always 100% accurate. Today, many factors can change the trends of raw materials, from geopolitical aspects, undoubtedly the climate and the policies that countries adopt to deal with certain situations, which can affect the global economic context.

Companies are responsible for being aware of the news, analysis, trends, and research to be able to make decisions that are for our benefit and that of our clients and, of course, always be prepared for unexpected changes that may occur.