El Niño is coming for commodity markets

Declared on July 4 by the World Meteorological Organisation, El Niño is another complication for the commodity markets already dealing with macroeconomic and geopolitical concerns.And it follows just months after three consecutive years of an "unusually stubborn and protracted La Niña," as characterised by the WMO, which also took its toll.Just as the recently faded La Niña had its own set of characteristics, so too will El Niño. No two events are the same. The recent La Niña was just the third triple-dip event since 1950.What is known is that the WMO expects the El Nino will be of "at least moderate strength" and has a 90% probability of continuing during the second half of 2023. Typically, they occur every two to seven years, and episodes generally last nine-to-12 months, the WMO said. This would be the first El Niño in seven years.It should be noted that not all weather bureaus have officially declared El Niño, but it's widely expected to occur.As for its expected effect on commodity markets - it's a mixed bag.It can't be ignored"The event's impact can vary by region and duration, but it can't be ignored," ANZ Research said.While southern South America, the southern US, the Horn of Africa, and central Asia typically see increased rainfall, it's the opposite story for Australia, Indonesia, parts of southern Asia, Central America, and northern South America, which can experience severe droughts and fires.Copper cops itAnalysts point to copper supply from South America as being most exposed to being disrupted by effects relating to El Niño."Chile and Peru, which together account for 35% of global copper mine supply, can be expected to experience heavy rainfall, which can cause flooding in mines and power outages," Capital Economics chief commodities economist Caroline Bain said."Even the risk of flooding at mines can lead to precautionary closures or reduced activity," she added. Of the two South American neighbours, Chile is the larger copper exporter. In 2022, that narrow nation sandwiched between the Andes Mountains and the Pacific Ocean and topped with desert across its northern third accounted for 27.6% of world copper exports, while Peru contributed 13.5%, according to Australia's Department of Industry, Science, and Resources.Chile's geography makes mining during El Niño particularly difficult.Mines in the mountainous regions become hard to access, while those in the Atacama Desert - the world's driest nonpolar desert and second driest overall - must deal with the potential of a lot of rain in a region not used to a lot of rain."The 2014-15 El Niño resulted in heavy rain in the Atacama Desert, triggering mudslides that affected transport and significantly disrupted supply," ANZ said."We estimate around 1.2% of world supply was impacted by weather in that period, significantly above the 2000-20 average of 0.4%. This lifted copper prices more than 15% at the height of the disruption," it said."We expect the copper market to be in a small surplus of 100,000t in 2023. This assumes a disruption allowance of 5%. If that ends up being 8%, this would tip the copper market back into deficit," it added.Meanwhile, over in Asia, El Niño can bring dry weather, which can lead to reduced water levels in rivers and cause problems with the transit of copper for mines in Indonesia and Papua New Guinea, Bain noted."It has also disrupted milling operations at copper mines in Indonesia as mining equipment there typically relies heavily on hydropower," she said.The Australian department said that Indonesia accounted for 5.4% of global copper exports last year.Indonesian nickel lost in transitIndonesia's world-leading nickel production, too, faces transit issues that can affect output."By contrast, El Niño could actually lead to higher production at some other mines in Southeast Asia as it usually results in a shorter monsoon season," Bain said."Nickel ore production and exports from the Philippines typically slump early in the year at the height of the annual monsoon season. Accordingly, a shorter or lighter monsoon associated with El Niño could result in higher annual production from the Philippines."That said, the gain would be quite marginal and will probably not offset lower nickel output from Indonesia," she said.According to the US Geological Survey, in 2022, Indonesian nickel mine production of 1.6Mt made up almost half of the world's total of 3.3Mt. That compares to 330,000t from the Philippines.Bain also noted that the drier and calmer conditions could facilitate higher Indonesian tin output, as many of its mines are offshore.Reprieve for Australian minersThe drier conditions that El Nino can bring to Australia can also be more conducive to mining than the heavy rainfall and more frequent cyclones associated with La Nina. The country's coal producers may also see some increased demand coming from China."We may see less weather-related disruption to Australia's iron ore exports," Bain said.: The same could be true of Australia's other commodities, such as coal and battery metals."On the demand side, northern China, India and Japan could suffer from more severe droughts. As the peak of the event is expected for autumn/winter in the region, this may boost the heating demand and the need for coal-fired generation, as the lack of rain could mean reduced hydropower availability," CRU steel analyst Tiago Vespoli said."This would be a positive combination for coal producers," he said.Energy costs hit to China's aluminiumMeanwhile, the increased energy demand in China could hit its aluminium production."Due to its power-intensive production, aluminium smelters were subject to government restrictions on power usage last year to ease shortages," ANZ said."That slowed output growth at the start of the year. Further restrictions could further constrain growth despite an increase in capacity as new smelters are brought online."Overall, we are expecting China's output of aluminium to grow by only 1% to 39.9Mt in 2023," it said.According to the Australian department's figures, that would compare to Chinese aluminium production in the January-March quarter, rising 4.9% year-on-year to 10Mt.In the June edition of the department's quarterly, it forecasted China's primary aluminium output to rise 4.2% year-on-year to 42Mt.Rain affects to shift in BrazilIn Brazil - the world's second-largest iron ore exporter after Australia - there's a mixed picture as both the north and south of the country see differing effects from El Niño, Bain said."The south-east (Minas Gerais) may struggle with heavy rainfall, whereas the north of the country should benefit from drier conditions," she said.CRU's Vespoli noted that the north of the country suffered a lot from rainfall in the past three years of La Niña, which saw iron ore production performance falling "far below" expectations."Vale's S11D mine has been performing very poorly in recent years, and much of this has been attributed to the rainfall."On the other hand, the mines in the Southeast region of the country, had very interesting quarters in the same period, but now, with El Niño, the positions may be reversed, since the possibility of more intense rains migrates from the north to the south of the country," he said. Wake-up call: rising temperatures, more extreme weather, shifting rain patternsWhile the El Niño and La Niña phenomenon occurs naturally, it takes place against the background of human-induced climate change, which is increasing global temperatures, affecting seasonal rainfall patterns, and making weather more extreme, the WMO said.With record-breaking heat currently scorching many parts of the northern hemisphere, the WMO forecasts a 98% likelihood that at least one of the next five years, and the five-year period as a whole, will be the warmest on record, beating the record set in 2016 when there was an exceptionally strong El Niño."This is not to say that in the next five years we would exceed the 1.5C level specified in the Paris Agreement because that agreement refers to long-term warming over many years," WMO Director of climate service Chris Hewitt said."However, it is yet another wake-up call, or an early warning, that we are not yet going in the right direction to limit the warming to within the targets set in Paris in 2015 designed to substantially reduce the impacts of climate change," he said.

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