The past year in trade has been defined by disruptions to shipping routes, looming concerns over supply and demand, and geopolitical tensions. John Basquill examines four commodity and product supply chains facing growing uncertainty heading into 2025, whether due to production issues, price pressures or escalating conflicts.
Cocoa:
The fundamentals in the cocoa market are “very concerning”, Dutch lender Rabobank said in a May 2024 research note.
Cocoa production is highly concentrated in Ghana and Côte d’Ivoire, but has been hit hard by a cocktail of external shocks. In major growing areas, trees are ageing beyond their fertility period of 25 years, and farmers lack the resources to plant new ones or improve infrastructure. A lack of rain, along with disease and pests, have hit production further.
The International Cocoa Organization found the 2022/23 harvest was 11% lower than the previous season, and is forecasting a further 14% drop in 2023/24. As of August 2024, it is warning of a production deficit of 462,000 tonnes from the coming harvest.
A report by Barchart, Nasdaq’s commodities and futures market data provider, describes the situation as “the worst supply shortage in 40 years”. The state-owned Ghana Cocoa Board (Cocobod), which facilitates the marketing of the country’s output, was in April forced to negotiate with traders to postpone delivery of up to 250,000 tonnes of cocoa, Bloomberg reported.
The supply shortage has prompted a wild rise in cocoa prices. Cocoa reached an all-time high of more than US$10,000 per tonne in April – close to a fourfold increase since the start of 2023.
Though rising prices may generally create an attractive market for commodity traders, when they are coupled with unfulfilled orders the situation is more troubling – particularly where prices had been fixed long in advance, a common practice in the cocoa market.
“For each trader and each producer, the question is how far forward they commit to a purchase,” says Walter Vollebregt, owner of commodity trading consultancy Vollebregt Advisory.
“It’s similar to sugar and coffee in that the producer or exporter often has the option to fix a price, and if the producer or exporter does that, the buyer or trader has to hedge. The problem then is if you don’t receive the cocoa, the margin calls you paid on those hedging positions become your loss. And you’re not getting the higher-priced cocoa to recover those costs.”
The extent to which commodity traders are feeling the pressure is unclear. Some of the largest agricultural commodity trading houses are active in cocoa, but also a range of other goods, and may not be acutely exposed.
Rob Hansen, managing director of cocoa importer Daarnhouwer & Co, told Dutch newspaper De Volkskrant in August that he was “surprised” no trading houses had collapsed.
According to the newspaper, only one company, Switzerland’s Kemofina, is known to have run into difficulties. The company was sued in April by commodity broker R. J. O’Brien & Associates after it failed to make a US$3.75mn collateral payment into its futures trading account, required as a result of that month’s cocoa price spike.
On October 29, a spokesperson for Kemofina told GTR the lawsuit had been dismissed, and said the matter was “of operational and technical nature, not related to cocoa hedging [or] supply chains”. They added that Kemofina is continuing with “business as usual” and is a “well capitalised commercial company in good standing”.
But the situation does appear to have caused upheaval at Ghana’s Cocobod. For the first time since the early 1990s, the organisation has not renewed its annual pre-export facility, which generally closes at well over US$1bn with backing from a syndicate of international banks.
Chief executive Joseph Aidoo said in August that financing “will come locally”, telling reporters: “We are going to be self-financing. Worst case, we will do a cocktail of self-financing and domestic financing.”
After paying a record high of 8% interest on the previous year’s facility, Aidoo said the move would save US$150mn in interest.
However, the country’s opposition party, the National Democratic Congress, has claimed the move was unavoidable after efforts to raise US$1.5bn “did not attract any interest from the international banks”.
An industry source close to the issue refutes that suggestion, however, telling GTR they still expect banks to participate in blended finance facilities if sought out by Cocobod. The organisation did not comment when contacted.
LNG:
Few commodity supply chains have faced as much upheaval in recent years as liquefied natural gas (LNG).
The turmoil began with Russia’s invasion of Ukraine, which prompted the imposition of sanctions across the G7 and EU, forcing Europe to find an alternative to Russian pipeline gas.
In response, EU imports of LNG surged by 63% during 2022; the majority of new supply was from the US, with further volumes coming from Egypt and Qatar.
Then, in the early months of this year, LNG supply chains were upended again. A wave of attacks on commercial vessels carried out by Yemen’s Houthi rebel group led to a dramatic drop in transit through the Suez Canal and Red Sea. The vast majority of vessels carrying goods between Europe and the Middle East or Asia have been forced to take the far longer route around Africa’s Cape of Good Hope.
“Cutting off the Suez Canal adds 10 or 11 days of shipping and well over a million dollars in charges, and that has a knock-on effect because the scheduling you have in the system for two to three years out does not work now,” says Wayne Ackerman, an LNG industry veteran and founder of Ackerman and Associates Global Consulting.
“It leaves gaps in the supply chain, as fleets are dependent on delivery times and routes and so you need more vessels.”
In a paper published by the Middle East Institute in February, Ackerman suggested the conflict was creating a “geo-economic market realignment”, with exporters in the Middle East seeking out buyers in Asia, and those in the US or non-US Atlantic Basin focusing on supplying Europe.
Another February paper by Jack Sharples, senior research fellow at the Oxford Institute for Energy Studies, suggested large traders could manage disruption by reallocating LNG cargoes within their supply portfolios. For those with liquefaction capacity in Qatar and the Atlantic Basin, for example, “it could be possible to reallocate their Qatari cargoes to Asia and Atlantic Basin cargoes to Europe”, he wrote.
But uncertainty lies ahead. Despite the EU’s introduction of sanctions on the transhipment of Russian LNG through its ports, the bloc has not eradicated use of such fuel from its own economies. Campaign group Global Witness estimates that Russia earned profits of US$8bn for LNG exports to the EU last year.
If sanctions are escalated and those volumes are removed from Europe’s gas supply, there are questions about whether other markets can increase their own export capacity sufficiently to meet the additional demand without major cost increases.
“I’m not sure the US can supply that, especially with the current administration blocking new LNG development,” Ackerman says, referring to President Joe Biden’s halt on authorisations for new LNG exports to countries that do not have a free trade agreement with the country.
“You can draw out of the Atlantic Basin, to a degree, but outside of that do you go back to the Middle East? From a supply point of view, that is an issue.”
Although supporters of that decision say there is sufficient capacity from existing and under-construction facilities to meet demand, industry executives believe the move erodes confidence in the viability of long-term investments in the sector.
At the same time, Ackerman points out that the supply of steel required for the US to construct facilities is also under strain.
“Ukrainian steel is off the table, China’s steel has been in the crosshairs of the US for a long time, and Indian steel is becoming more politicised because India is walking a fine line with China and Russia,” he says.
“US and European steel is expensive, so that might mean going back to Korea and Japan. The supply chain for heavy construction goods in OECD countries is at risk, and that affects the physical supply of LNG.”
And if the upcoming European winter is harsher than the previous year’s, demand for additional gas could spike at a time when supply is at its most uncertain.
Lithium:
Demand for lithium is expected to far outstrip supply over the next decade, driven largely by its use in electric vehicle batteries. The International Energy Agency (IEA) reports that lithium demand grew by 30% in 2023 and is expected to soar over the next decade, with supply from existing and newly announced mines accounting for just half of anticipated requirements.
A September report published by McKinsey forecasts a 475% increase in demand by 2035, and although supply has scaled up more quickly than previously projected, it expects the supply-demand gap to reach 30-40% over that time.
As with many crucial commodities, there are also concerns over dependence on China.
The country mines around a quarter of the world’s lithium, and although projects are underway elsewhere to boost supply of raw materials, China currently holds nearly 60% of global market share for refining, the IEA finds.
Though China has not imposed export controls on lithium, targeting other metals used in battery production – specifically gallium, germanium and graphite – the agency warns the market is not well-placed to respond to supply chain disruptions and geopolitical risk.
On the face of it, such a stark imbalance between medium-term supply and demand – and potential concerns over reliance on China – would make lithium a highly attractive commodity. But in reality, after a price boom that started in mid-2021, lithium prices tumbled by more than 80% during 2023 and have remained limp since.
This is partly because the industry had so far managed to cater to near-term growth in demand, says Walter Vollebregt of Vollebregt Advisory.
“But there is an economic slowdown in China, and Europe and the US are not buying as many electric vehicles as might have been expected,” he tells GTR. “If demand is not there now, people will not be likely to invest in the supply chain, securing more raw materials.”
Consultancy giant McKinsey suggested last year that non-traditional market participants such as large commodity traders could provide pre-financing facilities to ensure supply of critical minerals, as well as ancillary services such as increased liquidity and price discovery.
But with little price volatility in the market, such investments are speculative and largely ill-suited to the short-term nature of commodity trading.
There are signs of movement among some large energy companies, particularly in the US. Oil supermajor ExxonMobil last year unveiled plans to become a “leading producer” of lithium, acquiring 120,000 gross acres of land sitting above southwest Arkansas’s mineral-rich saltwater reservoirs, with the aim of beginning production by 2027.
The previous year, US conglomerate Koch Industries acquired a company specialising in direct lithium extraction technology – the same process to be deployed by ExxonMobil – while in 2021, Texas-headquartered oil and gas provider Schlumberger launched a lithium extraction pilot plant in Nevada.
Yet the Washington, DC-based Center for Strategic and International Studies think tank says in a June 2024 report that “as it stands, China dominates the active materials production portion of the lithium battery supply chain”, followed by South Korea and Japan.
The US is a “distant fourth, a position where it is likely to remain for 10 years despite significant investment”, the think tank says.
Another option for the market could be to stockpile lithium now while prices are low and supply remains reliable – but as Vollebregt points out, higher interest rates make that a challenging prospect.
“A lot of industries are still running off inventory and reducing pipelines of long-term contracts, because it is now so expensive to hold onto big stocks,” he says.
“Reports show that the global inventory of lithium is reducing, but I don’t see that reflected in the price yet. Ultimately these are important markets with significant demand growth projected for the coming years, but still of a fairly small size today.”
Semiconductors:
Global sales of semiconductors exceeded more than US$500bn in value in 2022, and as the Center for Strategic and International Studies notes in a paper published last May, the industry is “an irreplaceable enabler of tens of trillions of dollars of annual economic activity worldwide”.
CSIS adds that in the US, semiconductors – or computer chips – are an important production input to 12% of GDP. A chip shortage in 2021 hit the country’s GDP by US$240bn, according to government estimates.
The semiconductor supply chain is highly complex. A 2023 Rabobank report says the various stages of chip production can take up to six months, from research and design through to front and back-end manufacturing, with a highly specialised ecosystem spanning material supply, software and intellectual property.
The result is a high degree of interdependence across supply chains, with China, Taiwan, South Korea, Japan, the US and the EU all playing critical roles.
The concern is that trade tensions between the US and China pose a serious threat to the functioning of that ecosystem. Disputes over technology-related exports have been rumbling on for almost a decade, but highly significant was China’s decision to impose export controls on gallium and germanium, two minerals crucial to chip production, in July last year.
With China supplying 98% of the world’s gallium and 60% of germanium, prices of both minerals have almost doubled since the curbs were introduced.
Gregory Allen, director of the Wadhwani Center for AI and Advanced Technologies at CSIS, says securing alternative supply is not necessarily a huge obstacle to non-Chinese firms, as gallium and germanium are usually found in the same locations as aluminium and zinc.
However, he says China’s advantage lies in selling those materials below cost, and its dominance of refining those metals “is even larger than its dominance of mine ownership”.
“If the US wanted to secure for itself a stockpile sufficient to have two to three years’ worth of gallium and germanium, which would be enough time to bring on some refining capacity, we’re talking hundreds of millions of dollars even before you start building a refinery,” he tells GTR.
“Then, if China starts selling again once you’ve built that refinery, your refinery is not going to be the lowest cost producer. Either it is going to go bankrupt, or you have to force people to buy from it at higher cost. The natural market outcome is not going to solve this problem; the question is whether or not there’s the political will and the degree of fear required to get folks to take those options.”
Allen adds that the US government has signalled its intent to update its own export controls on an annual basis. In October 2022, the Bureau of Industry and Security introduced restrictions on exports of advanced chips and semiconductor manufacturing equipment to China.
A year later, it updated those controls in a bid to limit China’s use of artificial intelligence for military purposes.
“I would expect another update in the near future,” Allen says.
The Financial Times reported in September that the US was seeking to introduce further export controls before the presidential election in November, including requiring foreign companies to obtain a licence to supply goods to China’s technology sector.
The newspaper said the US was nearing an agreement with Japanese officials – who had raised concerns over potential retaliatory measures from China, such as curbs on gallium and graphite exports to Japan – on the proposals.
There are signs that parts of the semiconductor supply chain are moving away from extreme interdependence. A May 2024 report by Boston Consulting Group and the Semiconductor Industry Association says there has been a “renaissance in industrial policy” around chip production, spanning the US and EU as well as mainland China, South Korea, India and Japan.
The report anticipates “meaningful shifts in the global distribution of chip-making capacity”, particularly for the most advanced logic chips.
It says wafer fabrication capacity is expected to diversify markedly beyond Taiwan and South Korea, with the US increasing its market share from almost zero in 2022 to 28% by 2032.
Update: This article was amended on October 29 to include a statement from Kemofina.
