The chances of an El Niño appearing over the next couple months appear to be on the increase. Australia’s Bureau of Meteorology today (Tuesday) raised its estimate of an El Niño occurring to “at least 70 per cent” after temperatures in the tropical Pacific warmed over the past fortnight. Five of the eight international climate models surveyed by the bureau predict El Niño thresholds for sea-surface temperatures will be reached during December.
El Niño typically results in drier conditions across Australia and other parts of south east Asia, Brazil and West Africa but wetter conditions around the southern US states and coastal areas of South America. Despite the potentially adverse weather the impact on commodities is likely to be more muted than previous episodes.
A strong supply outlook for most commodities means any price impact from El Niño is likely to be limited. An improving supply outlook for grains (e.g. Soybeans) in the US and Brazil, high Cotton inventories and lower Crude Oil prices (a competitor to palm oil in the fuel sector) mean commodity prices face a significant headwind even if an El Niño does appear.
The one exception might be Nickel. While the typical El Niño sensitive commodity gains an average of 3.2% during outbreaks of the weather pattern, nickel gains an average of 13.9%. A drought in Indonesia normally impacts nickel production by affecting hydroelectric power generation facilities and lowering the water levels of inland waterways that are vital for ore transportation. The exception this year is that all exports of nickel ore have been halted following the introduction of an export ban at the start of the year.