“What On Earth Is Going On In Commodities?”- Morgan Stanley Explains

As the world embarks on its journey towards ‘net zero’, a few implications seem straightforward: coal should be oversupplied, natural gas should stay abundant and the marginal cost of electricity should approach zero as renewables take over. In the fullness of time, these propositions may well turn out to be correct, but the road between here and ‘net zero’ seems to have a few unexpected twists and turns.

Take the current situation: global coal consumption peaked back in 2013, yet the price of thermal coal is currently close to its all-time high, having more than doubled in the last few months to ~US$180/tonne. The same has happened to liquefied natural gas (LNG), which has rallied from ~US$7 to ~US$20/mmbtu over the last few months – also an all-time high. European natural gas prices have risen in tandem, which in turn has driven a sharp spike in electricity prices: day-ahead prices across continental Europe have gone from ~€50 to ~€150/MWh – you guessed it, an all-time high. As a knock-on effect, aluminum prices have soared, from US$2,000/tonne at the start of the year to US$2,900/tonne today.

This is unusual, especially because the global economy has yet to recovery fully from the COVID-19 crisis. So what is going on? A common set of factors ties these rallies together. As often happens, the story starts in China.

The combination of a post-COVID-19 recovery and unusually hot weather has increased consumption of electricity sharply this year. Most of China’s electricity is produced from coal, but domestic coal production is increasingly struggling to keep up – the result of regulatory reforms, under-investment and more stringent HSE inspections. Another important source of electricity generation in China is hydropower, but because of droughts in key parts of the country, hydropower has failed to grow this year too.

















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