Commodities supercycle arrives as pandemic recedes

by akoloy

Ten years in the past commodity markets have been reaching peak supercycle exuberance as commodities dealer Glencore readied itself for a blockbuster $60bn itemizing on the London Stock Exchange.

A decade later, a broad upswing within the worth of key uncooked supplies is reviving discuss of a sector-wide “structural bull market” in commodities fanned by sturdy demand from China, authorities spending on post-pandemic restoration programmes and bets on the “greening” of the worldwide financial system.

“If we can hopefully see a relatively quick resolution to the [pandemic] situation in India, then in our lifetime we have not seen a macro economic set-up like this,” mentioned Saad Rahim, chief economist at Trafigura, one of many world’s greatest unbiased commodity merchants.

“We have gone from China being the only story in commodities for the last 10 years to now the rest of the world picking up the baton and being real contributors to the demand side of the equation.”

The previous week has seen iron ore, the important thing ingredient wanted to make metal, palladium, utilized by carmakers to restrict dangerous emissions, and timber all hit report highs. Key agricultural commodities together with grains, oilseeds, sugar and dairy have additionally jumped up, with corn costs above $7 a bushel for the primary time in eight years.

Line chart of MSCI All Country World Commodity Producers Price index showing Global commodity prices experience broad upswing

At the identical time copper, the world’s most vital industrial metallic, traded above $10,000 for the primary time since 2011, whereas soyabeans hit an eight-year excessive. The S&P GSCI spot index, which tracks worth actions for twenty-four uncooked supplies, is now up 21 per cent this 12 months.

After being out of favour for many of the previous decade, sector specialists’ predictions of one other supercycle — a chronic interval of excessive costs as demand outstrips provide — have lured traders. 

The sector has additionally drawn help from fund managers searching for property that may profit as the worldwide financial system picks up velocity after the pandemic, and that may additionally act as a hedge in opposition to rising inflation.

“President Biden has now proposed two additional stimulus plans on top of the one he has already passed. If any of that comes to pass you are just supercharging this whole thing. This is just getting started,” mentioned Rahim.

China’s fast restoration, nonetheless the world’s greatest shopper of uncooked supplies, and more and more Europe and the US, the place the housing market is booming, have fuelled demand. Low inventories and Covid-related provide chain disruptions have added additional gas to the hearth.

“I don’t know if we have seen anything like this before,” mentioned Ulf Larsson, chief government of Swedish pulp and timber firm SCA, which introduced a 66 per cent enhance in first-quarter internet revenue on Friday. “We are in some kind some of perfect storm.”

A set of uncooked supplies wanted for electric-vehicle batteries and electrical motors, from lithium to uncommon earths, has additionally been swept up within the euphoria.

Line chart of 3-month LME copper price ($ per tonne)  showing Copper breaches $10,000 for first time in a decade

China’s urge for food has pushed costs for lithium carbonate and lithium hydroxide to rise by over 100 per cent this 12 months, in response to Benchmark Mineral Intelligence, following nearly three years of decline. The uncommon earth neodymium-praseodymium (NdPr) oxide, utilized in electrical motors, is up by nearly 40 per cent, as is cobalt, a battery metallic.

“You have an EV supercycle and you add a real commodity supercycle on top of that — it’s game on for the miners,” Simon Moores, managing director at Benchmark Mineral Intelligence, mentioned. 

Commodities tied to petrol vehicles are additionally rallying. The worth for palladium, a metallic utilized in catalytic converters to filter exhaust gases, rose to a report above $3,000 an oz on Friday, as Europe and China section in stricter emissions requirements.

That is prone to outweigh a slowdown in international internal-combustion engine automotive gross sales, in response to analysts at Jefferies.

Oil costs have additionally been sturdy, recovering to pre-pandemic ranges above $65 a barrel because the begin of the 12 months. Though demand continues to be depressed by restricted worldwide journey it has picked up as economies have reopened. Opec and allies like Russia are persevering with to limit provides — solely slowly including barrels again to the market to bolster the worth.

Line chart of Dollar per ounce showing Palladium surges to record levels

Goldman Sachs mentioned this week that it anticipated to see oil costs hit $80 a barrel within the second half of this 12 months, warning that there may very well be a big provide deficit this summer season as vaccine rollouts speed up and folks drive to their holidays, boosting demand by greater than 5 per cent globally.

Though the Opec+ group might restore manufacturing if costs go too excessive, some analysts are involved by the longer-term provide outlook as power majors pivot away from fossil fuels.

Christyan Malek, JPMorgan analyst, has argued {that a} severe provide hole might emerge within the subsequent few years, with a few $600bn shortfall predicted in capital expenditure between now and 2030. There is a “risk of oil prices overshooting as non-Opec supply falls short,” Malek mentioned.

How lengthy the commodity frenzy will final, nonetheless, is up for debate. “This is a mini supercycle,” Alex Sanfeliu, the pinnacle of Cargill’s world buying and selling group, mentioned of the rise in agricultural commodities. “I don’t think it is going to last as long as the last one. Supply and demand react faster now.”

A Shekar at Olam International, a number one agricultural dealer primarily based in Singapore, mentioned he didn’t see a steady rise in meals commodities. However, he predicted that underlying demand would stay sturdy within the subsequent six to 12 months as shoppers eat out following a 12 months of lockdowns. “That may drive pricing further,” he mentioned.

Some solid doubt on the notion that we’re coming into a supercycle in any respect. “We think the price rally is likely to continue for a bit, but this is more of a business cycle upswing rather than a supercycle,” mentioned Jumana Saleheen, chief economist at CRU.

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