Is Commodity Super-Cycle Already here?

Needless to say, that COVID19 pandemic has changed the entire world. During the nascent stage of the pandemic, there was an excessive fear about the adverse impact of this pandemic on stocks and commodity. We witnessed the panic selling. Both Stocks and Commodity markets touched its multi-year low price level in Late-March 2020. There were so many unknowns about the pandemic. Policy-makers across the world were clueless about the actual impact of this pandemic. But as time passed and new information was known, we all started embracing this new normal. Both Stocks prices and commodity prices recovered sharply (V-shaped).

You might have heard and read a lot of about the stock market recovery but we didn’t hear much about the commodity products (metal and agro-commodities) price recovery. Commodity recovery was quite different vis-à-vis equity market recovery.

Something unusual has happened with commodity price recovery. Commodity prices have not only returned back to its pre-COVID19 price level but also have exceeded that level by a huge margin.

LME copper Spot price moved up from its multi-year low price level of $4754 (in Mar 2020) to the current level of $9172 (almost 85% return).

LME Aluminium Spot price moved up from its multi-year low price level of $1474 (in May 2020) to the current level of $2102 (almost 45% return).

LME STEEL Scrap spot price (proxy for iron ore price) moved up from its multi-year low price level of $224 (in May 2020) to the current level of $416 (almost 85% return).

Under the Agri-commodity segment, Palm oil’s spot price moved up from its multi-year low price level of $576 (in May 2020) to the current level of $991 (almost 72% return)

Under the Agri-commodity segment, Wheat spot price moved up from its low price-level of $177 (in June 2020) to the current multi-year high price level of $245 (almost 40% return)

Under the Agri-commodity segment, Corn spot price moved up from its low price-level of $3.17 (in June 2020) to the current multi-year high price level of $5.59 (almost 76% return)

Price of 53 out of 63 commodities monitored by the World Bank were up in December 2020 Vs the same month a year earlier. This includes the energy (coal and gas); agricultural products (tea, coconut oil, palm oil, fish meal, rice, citrus fruits, sugar, logs and rubber); fertilizers; and industrial metals (copper, lead, nickel, tin and zinc).

All these spikes in the price level of commodity products indicate that a commodity super cycle is brewing. The previous commodity super cycle ended in 2013-14 for agri-commodity and in 2011-12 for metals. Such cycle is expected to last up to 6-10 years.

As per UN working paper in 2012, a super cycle can be defined as “decades-long, above-trend movements in a wide range of base material prices” deriving from a structural change in demand.

There are several driving factors to this commodity super cycle –

  • Easy monetary policy (because of COVID19) in majority of large sized economy.
  • Because of renewable energy push, demand for metals may peak. We would need metals for building renewable energy infrastructure, EV and electric batteries.
  • Redistribution of capital towards most vulnerable class in various countries (prompted by COVID19)
  • Decline in dollar value (depreciation of dollar Vs other major currencies)
  • Strong La Niña surface cooling in the Pacific Ocean, it is expected to adversely affect agricultural production in tropical and sub-tropical regions. La Niña “puts some countries in Southern Africa, Asia and the Pacific at high risk of incurring agricultural losses”, the UN body Food and Agriculture Organization warned in Jan 2021.
  • One of the biggest drivers is likely to be the resurgence of manufacturing and merchandise consumption around the world (which was held up for extended period of time because of COVID19 restrictions) despite the ongoing coronavirus epidemic.

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Published by Amit

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