The beginning of the year brings the release of many many market, macro and geopolitical outlooks and thus its a good chance to see where consensus lies and to mark down a few of my expectations. There seems to be a general agreement going this year – slowdown, partly coordinated, stronger H2 vs H1 (at least in China?), the end of policy tightening (tho there is still some disagreement about where the peak will come. This post summarizes not-comprehensive list of things I’m watching in the coming months, with a major focus on macro and geopolitical trends relevant to commodity markets. What are you watching? What am I missing?
Chinese macro: What will reopening look like?
China’s exit from “zero covid” policy has come much quicker and sharper than many expected and is leading to a perhaps unsurprising sharp wave of covid illness which is likely to continue to weigh on Chinese economy in the coming weeks. The big question will come later in the spring and summer. How strong will the reopening be? How will the policy mix evolve? Will Chinese demand for energy and commodities rise rapidly? Perhaps not.
Borders are set to reopen despite the new wave of testing requirements which could increase Chinese imports of tourism services (a big factor for Asia and perhaps offsetting the trade surplus), and some increases in commodity imports. However, the drag on private business and consumption wasn’t just due to zero covid, but also structural issues in the property market, technology policy and debt issues. China is likely to do enough stimulus to avoid a sharp collapse in property markets, but nowhere near enough to set off a new supercycle or shift the country into more consumption-driven growth. Chinese commodity demand thus is likely to increase, and its role as a processor of refined energy too will remain critical.
I’m also watching Chinese payment systems and use of RMB outside of China. For now, China has been rather wary, being quite willing to get discounts from Russia (and Iran and Venezuela) and to allow some additional use of RMB by Russia, which they can’t do much with aside from buy Chinese goods. Some market actors are jumping too quickly onto the bandwagon of the petroyuan following the repeated suggestions of pilot projects with the GCC. More GCC imports and energy exports may be financed in RMB, but dollar assets still seem likely to dominate their savings, at least until China either shifts to a deficit and or increases the amount of assets they can buy. I’m particularly watching whether China becomes more comfortable with losing control of the currency, either e-cny or conventional or whether gold becomes more liquid.
Indian policy balances: How will it use its G20 platform and discounts? Will it step up exports?
India has taken the helm of the G20 this year, giving it important convening power on a number of key issues, even as it continues to balance and hedge with both Western and EM allies/adversaries. India continues on from Indonesia’s leadership, but will likely be able to leverage this platform more than its Into-Pacific peer. Note also that India marks the latest in what will be a half decade string of major EM countries leading the G20, which may further challenge G7 and allied efforts to reshape the gatherings.
At home, India has been a relative winner on a few fronts (discounted Russian commodities, beneficiary of some tech supply chains reducing China risk), but faces a number of structural issues including putting its demographics to work, scaling up exports and continuing to attract investment. India’s commodity discounts have mitigated the negative impacts of Russia’s war on energy import bills if not yet on fertilizer, tho it has struggled to turn around and find items to sell to Russia in return, making it less able to participate in channels that weaken Western sanctioning power. Moreover, it has a problematic balancing act with its multi-polarity and with its own energy policy and over reliance on polluting energy sources. Whether it can scale these opportunities, and how it balances a growing deficit with Russia, and its relationships with a range of key actors.
Fed and global central bank cycle: Nearing the end of hikes, easing seems a ways off
The Fed seems set up to err on the side of more tightening rather than rising inflation expectations, suggesting both further tightening (mostly now priced in) and delayed easing. While this trend is more priced in than it was in mid December when markets hoped eternal, the impact will reinforce rising financing costs for many governments and businesses as well as households. those with stronger balance sheets (debt levels and some surpluses will be better positioned. Overall, its hard to see major fiscal expansion fighting this trend though.
Debt burdens and growth challenges: The progress towards debt restructuring under the G20 Common Framework has been going very slowly, to the challenge of the frontier markets who are in phases of default. While these defaults are unlikely to spark waves of economic contagion to broader EM markets, they highlight an inability to address these unsustainable debt burdens. And for larger EM, I continue to worry more about how rising debt service costs restrict fiscal space and domestic demand. Moreover, with interest rates globally and financial conditions likely to remain high or rise, the feed through to corporate balances may be painful. Not all countries of course face these challenges, some surplus economies may be well placed to take advantage of these repricing.
EM political and economic hedging/non-alignment and fragmentation
Some of the increased hedging from large EM countries has been many years in the making, reflecting US shifts in military posture (from the middle east), a shift in trade and investment policy and other factors. Nonetheless, a big takeaway from 2022 was the surprising cohesion of developed economies (around Russian aggression and even Chinese competition), but a divergence with “the global south.” These countries are largely pursuing what they see as their own strategic interests, and are pushing the bounds of new rules, looking to take advantage of discounts, deepen their own supply chains and where possible create new institutions that may limit western dominance. It’s a murky world out there with many countries reluctant to directly cross US/G7 sanctions, but much more willing to operate in a new grey zone including some experimentation with currency and potentially new energy transit channels. This testing is likely to continue into 2023. Full ruptures and development of non-G7 payment, trade and related channels are unlikely, not least as these markets are some of the key consumer markets, but it could highlight some new regionalization trends.
Nearshoring, friend-shoring in critical industries: How much talk versus action?
We are far from full-on deglobalization and decoupling, but critical supply chains are shifting and governments including the US are much more comfortable with industrial policy. 2022 market considerable plans to reshore or near-shore select industries has sparked some new investment, especially in semiconductors and several countries are now putting battery and critical mineral supply chains in focus. To watch next year and beyond, how much will the goals be matched with money? How will major metal producers (Lithium producers in the Americas, South East Asia and beyond) proceed in their efforts to boost domestic value-add? Will incentives like the IRA on EVs remake supply chains to be more resilient or just create more competition among developed allies? Managing these trends and outreach to a new set of energy suppliers will be key not just in 2023 but beyond. Meanwhile I don’t expect much movement in traditional trade agreements. Discussion on new trade standards, including those in the frame of IPEF and bilateral agreements and more government involvement in these supply chains are likely.
Russian energy and sanctions: Will the pressure bring war to an end, or is a long-attrition ahead? What will the costs be of shrinking Russia?
As in 2022, Russian supply and Chinese demand are likely to be major drivers of global commodity markets, with a rising risk that they will reverse in directional impact tightening the market as opposed to loosening it. Russian cuts to gas exports and partial success of the oil price cap so far have cut Russian export revenues, even as imports have regained pre-2022 invasion levels. Russia’s purchasing power has like many barter economies worsened.
Russia’s economy is smarting and is shrinking, while also becoming more consolidated around government and military interests. This suggests that it continues to settle in for a long battle. Strategic interests around energy, as well as newer technologies like hydrogen are being jettisoned in favor of the war effort, suggesting a lengthy lost period as the war of attrition continues on. Recent shifts towards asset seizure by developed economies, even if challenged in local courts reinforce a shift in sanctions goals and reduce the potential of sanctions relief. Many of the decisions being made today (shifts to US/Qatari LNG for example) and shifting supply chains will remain for the foreseeable future. Given Russia’s distorted policy mix, it seems premature to ask these questions about future role, but we need to plan for a future with this large resource rich territory.
Turkish over-reach? Turkey too has been boosting its regional role, mediating the grain initiative and helping bring it back on track and positioning itself as an energy hub serving both Russia and some of the Central Asian, Mediterranean and Caucasian countries looking to avoid Russian transport channels. With elections coming up and a renewed credit boom, consumption boom and high inflation, regional support from the GCC has become more important as it has to Egypt. The Lira weakness is not helping exports, which remain reliant on imports, and raises the risk of a renewal of the bust part of the cycle after next years election. Increased enforcement of export controls on Russia too will be key to watch.
Iran: What’s Plan B or C? With President Biden saying out-loud what many policymakers have been all but admitting, that JCPOA is dead but we haven’t announced it, the focus will pick up on what to do next. That seems far from decided. The Iranian protest crackdowns and support of Russia’s military have paradoxically helped unify the West against a deal with Iran – and led to a steady flow of mostly symbolic sanctions from the US allies that railed against American unilateral actions only a few years ago. However, there’s no easy answer about how to deal with Iran’s nuclear ambitions, its efforts to make common cause with Russia, suggesting the answer will be gradually tightening sanctions, but a continued muddle through. Links with Russia may be second-best for Iran, but no actors in Iran realistically see a chance of sanctions relief. 2023 might bring tougher enforcement on energy sanctions, especially if the Russian sanctions cap becomes effective. One lifeline, China’s reluctance to make EU’s mistake over-reliance on one energy supplier (Russia) suggests that enforcement whackamole will continue unless the US significantly escalates.
Dealing with the no-deal scenario will be complicated for Iran’s regional rivals too, including an increasingly reactionary Israeli government which so far has been ignoring Iran-Russian military links. The new government may prefer political concerns closer to home. As for the GCC Closer economic ties across the Gulf seem likely to be on hold and it might increase GCC political hedging behavior as their sovereign funds reinforces some of their domestic investments.
Venezuela: How far will the thaw go?: The year ended with some modest sanctions relief, mostly to Chevron which gained a general license to resume some joint projects with PDVSA. The degree of further relief will depend on political concessions and power-sharing. Meaningful sanctions relief would likely also require Venezuela reduce the influence of its powerful allies Russia, China and Iran, which it may be reluctant to do. Major investment also will require sequencing around the frozen assets and moribund debt restructuring and efforts to consider the carbon and economic footprint of supplies.
There are many many more key issues to watch, these are just a few of them. What’s on your list?
Ziemba Insights 