Global financial and commodity markets have seen unprecedented levels of disruption as coronavirus sweeps around the world. There is a sharp fall in economic activity due to large-scale lockdowns, a reduction in industrial activities and travel restrictions across the globe. In metals, the economic outlook has impacted the short-term demand, although supply disruptions and government stimulus measures could provide support in the medium term. Regional markets are increasingly at risk of prolonged demand destruction, and there are heightened liquidity fears especially for energy retailers. With restrictions now in place for over half the world’s population, the disruption in the daily lives of consumers and producers has resulted in a high level of volatility in global commodity markets.

Comparisons with earlier episodes of widespread economic weakness or disruption can provide insights into the current episode. Previous major episodes affecting the global commodity market have tended to be either demand or supply shocks. Each of these bears a similarity to some of the channels through which COVID-19 is affecting commodity markets.

During global recessions, oil and metals demand typically fell, with a larger decline for metals than oil, reflecting its higher income elasticity of demand. The largest consecutive decline in oil consumption occurred in 1980-1982 when consumption fell by 9 percent relative to its peak in 1979. A supply-driven spike in oil prices in 1980 resulted in a drop in consumption and contributed to the 1982 global recession, which further depressed oil consumption. In contrast, the two most recent recessions saw much smaller declines in oil and metals demand. For the 2009 global recession, this likely reflects shifts in the composition of commodity demand, specifically the growing importance of China, which was less affected by the global financial crisis. In contrast, growth in agricultural demand slowed more mildly, and typically remained positive during recessions since its demand is more closely linked to population growth than income growth.

What are the potential long-run implications for commodity markets? Moving forward, the impact of COVID-19 may lead to long-term shifts in global commodity markets, which will affect both exporters and importers. Enhanced border checks arising from COVID-19 concerns may permanently increase the cost of transportation, reducing trade flows. Disruption to companies dependent on global supply chains could encourage organizations to move operations back to the home country. These shifts could result in the unwind of global value chains as corporations restructure their supply chains. For commodity markets, such a development could potentially lower freight demand if it reduces the average distance of imports. All else equal, this could result in permanently lower oil demand, as value chains are more transport-intensive than other forms of trade. It could also lead to shifts in the source of commodity demand as manufacturing hubs shift.

Freight increase could induce substitution between domestic and imported goods. If exact replacements are costly or unavailable domestically, the use of substitutes may occur.

Once mitigation measures are lifted, a greater number of workers may continue operating remotely, which would reduce commuter journeys and demand for fuel. The reduction in pollution resulting from the current restrictions on travel may also lead to greater pressure to implement stricter environmental standards, as the benefits of lower fossil fuel consumption and lower pollution become more apparent.

Evolving global supply and demand patterns for commodities present new opportunities for companies to maximize returns through commodity markets. Companies with commodity trading operations are exploring new business models, rationalizing portfolios, accelerating investments in digital technologies and increasing efficiencies, while managing market, credit and operational risks.