Ten years ago, commodities markets were at a peak of supercycle exuberance as commodities trader Glencore braced for a successful $ 60 billion listing on the London Stock Exchange.
A decade later, a sharp rise in the price of major commodities reignites discussions of a commodity-wide “structural bull market”, fueled by strong demand from China, government spending on programs. post-pandemic recovery and bets on “greening”. Of the world economy.
“If we can hope to see a relatively quick resolution of the [pandemic] situation in India, so in our lifetime we haven’t seen such a macroeconomic setup, ”said Saad Rahim, chief economist at Trafigura, one of the world’s largest independent commodities traders.
“We’ve gone from China which was the only commodity story for the past 10 years to now, the rest of the world has taken over and has been real contributors on the demand side of the equation. . “
Last week iron ore, the key ingredient needed to make steel, palladium, used by automakers to limit harmful emissions, and wood all hit record highs. Major agricultural products, including grains, oilseeds, sugar and dairy products, also skyrocketed, with corn prices surpassing $ 7 a bushel for the first time in eight years.
At the same time, copper, the world’s most important industrial metal, traded above $ 10,000 for the first time since 2011, while soybeans hit an eight-year high. The S&P GSCI spot index, which tracks price movements for 24 commodities, is now up 21% this year.
After being out of favor for most of the past decade, industry insiders’ predictions of yet another supercycle – an extended period of high prices as demand outstrips supply – have won over investors.
The sector has also benefited from the support of fund managers looking for assets that will benefit as the global economy accelerates after the pandemic, and which can also serve as a hedge against rising inflation.
“President Biden has now proposed two additional stimulus packages in addition to the one he has already passed. If all of this is happening, you are just supercharging it all. It’s only just getting started, ”said Rahim.
The rapid recovery of China, still the world’s largest consumer of raw materials, and increasingly Europe and the United States, where the real estate market is booming, have fueled demand. Low inventories and supply chain disruptions linked to Covid further fueled the blaze.
“I don’t know if we’ve seen anything like this before,” said Ulf Larsson, managing director of Swedish pulp and lumber company SCA, which on Friday reported a 66% increase in first quarter net profit. . “We’re in a sort of perfect storm.”
A set of raw materials needed for electric vehicle batteries and electric motors, from lithium to rare earths, has also been swept up in euphoria.
China’s appetite has driven lithium carbonate and lithium hydroxide prices to rise more than 100% this year, according to Benchmark Mineral Intelligence, after nearly three years of decline. Rare earth neodymium praseodymium oxide (NdPr), used in electric motors, is up almost 40%, as is cobalt, a battery metal.
“You have an EV supercycle and you add a real commodity supercycle on top of that – it’s the game for miners,” said Simon Moores, managing director of Benchmark Mineral Intelligence.
Products related to gasoline cars are also rallying. The price of palladium, a metal used in catalytic converters to filter exhaust gases, hit a record high above $ 3,000 an ounce on Friday as Europe and China adopt more stringent emissions standards.
This will likely offset the slowdown in global sales of internal combustion engine cars, analysts at Jefferies say.
Oil prices have also been high, returning to pre-pandemic levels above $ 65 a barrel since the start of the year. Although demand is still depressed by the limited number of international travel, it has picked up with the reopening of economies. Opec and its allies like Russia continue to restrict supplies – only slowly adding more barrels to the market to raise prices.
Goldman Sachs said this week that it expected oil prices to hit $ 80 a barrel in the second half of this year, warning that there could be a significant supply shortfall this summer as deployments of vaccines would speed up and people were going on vacation, further increasing demand. more than 5% worldwide.
While the Opec + group may restore production if prices rise too high, some analysts are concerned about longer-term supply prospects as energy majors move away from fossil fuels.
JPMorgan analyst Christyan Malek argued that a serious supply gap could emerge in the next few years, with an estimated $ 600 billion shortfall in capital spending by 2030. There is a “risk” oil price overrun due to non-Opec supply. fails, ”Malek said.
The duration of the commodity frenzy, however, is up for debate. “It’s a mini supercycle,” said Alex Sanfeliu, Cargill’s global trading group leader, of the increase in agricultural products. “I don’t think it will last as long as the last one. Supply and demand are reacting faster now. “
A shekar from Olam International, a major Singapore-based agricultural trader, said he did not see a continued increase in food products. However, he predicted that underlying demand would remain strong for the next six to 12 months, with consumers eating out after a year of stalemate. “It can drive up prices,” he said.
Some people question the idea that we are entering a supercycle. “We think the price rally is likely to continue for a bit, but this is more of a recovery in the business cycle than a supercycle,” said Jumana Saleheen, chief economist at CRU.