Commodity Price Movements Suggest Potential For Divergence Among Latin American Recoveries

  • Following a sharp fall in Q220 amid the onset of the COVID-19 pandemic, commodity prices have experienced a strong rally as rebounding global economic activity has fueled increased demand. However, rallies for several commodities have reversed in recent weeks, reflected in the sharp fall in the Bloomberg Commodities Index. 
  • The US dollar has strengthened in the wake of the US Federal Reserve's June 16 meeting, at the expense of several commodities, which are largely priced in the unit. Similarly, the Chinese government’s decision to release strategic metals reserves, combined with increased production globally as public health restrictions have eased, have weighed on prices for metals such as copper. 
  • Falling metals prices could limit the pace of the economic recovery in Chile and Peru, which rely heavily on copper exports. Fitch’s Commodities team forecasts copper prices to fall to US$9,000/tonne by end-2021, from a peak of US$10,747/tonne in May, averaging US$8,370/tonne for the year. 
  • Slowing Chinese growth has begun to weigh on demand for agricultural goods such as soybeans, which has seen its price decline significantly in recent weeks. Brazil and Argentina are the region’s largest producers, though Uruguay and Paraguay export soybeans as well. Fitch’s Commodities team forecasts the price of soybeans to average US$1,350/bushel in 2021, from an average of US$1,434/bushel in the year to date. 
  • Additionally, aluminum prices have risen by 46.0% to US$2,486/metric tonne since the start of the year, from the average of $1703/mt in 2020. The deceleration in Chinese growth could also cause a falloff in aluminum prices for the rest of the year, but the consensus by the IMF and World Bank is for aluminum prices to rise to $2,004/mt in 2021 relative to 2020, which should still augur well for income growth in the Jamaican mining and processing sector this year.  
  • In comparison, energy prices have continued to climb, and Fitch forecast Brent prices to average US$66.0/bbl and US$64.0/bbl in 2021 and 2022, respectively, up from US$43.2/bbl in 2020. The sustained bump in energy prices could benefit oil producers such as Colombia, Bolivia, Trinidad, and Ecuador, by encouraging increased foreign investment in their extractive sectors.

(Source: Fitch Solutions, NCBCM Research)