What are the reasons for the bullishness? Firstly, as in the last bull cycle, China and its apparent insatiable appetite for all commodities. Other emerging economies such as India are also seen as increasing commodity demand. Secondly, optimism that the world is soon to conquer the Covid virus. Not only will the huge global financial stimulus introduced to combat the pandemic spark economic growth and increasing employment but also cause inflation. Buying raw commodities is the classic hedge against inflation. The widely-predicted further weakening of the USD is also supportive although it has recently strengthened. Finally, climate change policy could increase demand for certain metals.
Are these factors reason enough for a multi-year bull market for commodities to develop? The United Nations food agency reported at the beginning of February that global food prices rose for the eighth consecutive month in January to their highest level since July 2014. The main reason would seem to be stock piling in anticipation of food inflation in certain importing countries, with China the prime example and producing countries also limiting exports such as Russia, who have imposed export taxes on wheat and corn. Whether this is a long-term trend or more a short-term reaction to the pandemic remains to be seen.
The investment funds have certainly made their views clear. They have been building huge long positions across all commodities. During 2020 they bought a record volume of agricultural commodity future contracts and have added more this year although there has been some consolidation recently. Crude prices are back to pre-pandemic levels and copper has reached levels not seen for nearly a decade. Of course, one could argue that the funds, in buying, are self-perpetuating the super- cycle view.
CRUDE PRICES ARE BACK TO PRE- PANDEMIC LEVELS AND COPPER HAS REACHED LEVELS NOT SEEN FOR NEARLY A DECADE.
Recently, there have been some concerns voiced that some caution may be necessary. The UK’s Financial Times commented recently that they see China cutting back on imports over the coming years as they strive to be more self-sufficient. They are also sceptical that the global vaccine roll-out will be the cure-all for the global economy and will not fuel a super cycle. They are also unconvinced regarding the threat of inflation and believe the US Fed will keep it under control. However, they do concede that measures to control climate change could see metals such as copper, nickel, lithium and platinum surge in price but only if concrete policies are agreed at the UN climate meeting in November.
OIL AND METALS ARE, ESSENTIALLY, DIMINISHING COMMODITIES AND THEIR SUPPLY CAN BE EASIER TO CONTROL, IT NOT THE CASE WITH AGRICULTURAL COMMODITIES.
While oil and metals are, essentially, diminishing commodities and their supply can be easier to control, it not the case with agricultural commodities. It is hard to control farmers who often react to higher prices by growing more – the classic boom and bust scenario. Short term fundamental issues have driven many grown commodities higher recently but whether it is a basis to predict a long-term bull cycle developing is not certain.
One factor that has not been mentioned is weather. Regardless of what happens at the UN meeting late this year, climate change will continue to have an impact for many years to come. There are some who are convinced the world is going to suffer huge changes in weather due to solar cycles and shifting jet streams but that is probably a discussion for another time. Nevertheless, the recent very cold weather in Texas and parts of Europe is certainly food for thought. However, weather is likely to be only a peripheral factor as to whether a super cycle develops.
So, the heady mix of post-pandemic global growth, the possible emergence of inflation and rising demand for many commodities suggest the pundits may be right and commodity prices will continue to rise. 2021 certainly looks as if prices will remain volatile. The question is whether it will develop into a full blown super cycle that will last well into the next decade? Too much uncertainty to make any bold predictions by the pragmatists but if it is the case then, at least, it should mean that the virus has been controlled.
Howard Jenkins E:
howard.jenkins@
admisi.com T: +44(0) 20 7716 8598
5 | ADMISI - The Ghost In The Machine | Q1 Edition 2021
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