Commodities in upside pressure push, not supercycle: analysts, economists say

Commodities including metals aren't experiencing a supercycle, but a short period of upside price pressure backed by pandemic-driven government stimulus, analysts and economists said in a series of commodities webinars this week.

Growing demand for renewable energy will nonetheless be a fundamental driver of metals markets in the green industrial revolution now starting, they concurred.

Wall of money

"There's a massive wall of money and momentum in the US economy driving demand for commodities," said Andrew Busch, economist with BPI, speaking on a webinar organized by Commodities People (CTI).

Together with a $1.9 trillion package approved this month by Congress to support economic recovery, a total of $12 trillion has been put up by the US government to speed recovery from the COVID-19 pandemic, of which $4 trillion hasn't moved into the economy yet, according to Busch.

This is set to drive an unusually high level of GDP growth this year, of an expected 6.5%, and a housing boom. "Housing prices are exploding," he said.

The rapidity of China's recovery from COVID-19, backed by stimulus, is the other big driver of commodities markets, Busch said. Elsewhere, the EU approved Eur1.8 trillion ($2.12 trillion) of recovery stimulus late last year.

Inflationary pressures

Eddie Tofpik, senior market analyst at ADM Investor Services, said that 2021 has so far been notable for its inflationary pressures.

The "structurally bullish environment" is leading investors to commodities "as a good way to hedge against inflation amid a bearish view of the US dollar," said Kona Haque, head of research at trader ED&F Man.

The current high prices seen in some commodities "is not a supercycle... but a short period of upside pressure," Haque said. "We don't have the equivalent of the China that we had in 2008... and emerging markets are going to recover slower in this pandemic than the western world and that's a worry."

Still, recent price increases in metals and in steel have been in some cases dramatic. The S&P GSCI Industrial Metals Index, including the market performance of aluminum, copper, lead, nickel and zinc, has risen 58.6% over the past year.

Prices for copper, often considered a barometer of global economic health, and with heavy consumption in China, have virtually doubled over the past year on the back of the global economic recovery, from an LME cash price of $4,617/mt on March 23, 2020 to $8,978/mt March 26, 2021, having fallen just slightly from the $9,000/mt plus level of recent days.

"Dr. Copper's" price has been pushed partly by production disruption at mines but also by the realization that demand for the red metal may double in the foreseeable future because of its applications in electric vehicles' charging infrastructure, wind and solar power installations. The price of lithium – used in EV batteries – has also boomed. Still, the overall upwards movement in commodities is "patchy," said Jonathan Kingsman, founder of Commodity Conversations.

Volatility seen in move to net-zero

Mark Lewis, chief sustainability strategist at BNP Paribas Asset Management, noted on a CTI webinar on commodities and climate change that targets to adopt a net-zero carbon economy by 2050 represent the "biggest industrial revolution the world has faced since the first industrial revolution 250 years ago... and we have to prepare for more regulation and more volatility".

"Demand for decarbonized commodities will increase exponentially over the next decade," Lewis said. At the same time, the deflationary impact of renewable energy – where generation costs should in theory fall after the initial investments in infrastructure are made – may have an important influence on the entire global energy system moving forward, he said.

Energy markets have over the last 200 years been built up on the inflationary use of fossil fuels, according to Lewis.

"Use of fossil fuels in terms of their geology are inherently inflationary" because they're based on a "constant fight between geology and technology," where the better-quality resources are mined or produced first and after that it gets more costly to produce, he told the webinar.

Metals price swings

Tofpik noted in a CTI webinar to discuss bull and bear trends that the volatility seen in some metals markets may in itself be an indication that we are not in a supercycle.

Aluminum has been notably volatile in recent months, with some "wild swings up and down," even though it's maintained prices over $2,000/mt since early February. Nickel prices earlier this month "fell off a cliff" after China's Tsingshan signed a deal to supply lower-quality nickel products for battery production, he noted.

"It's not a runaway move (in metals)," he said, noting that current high freight rates also go counter to a supercycle, as they make it more difficult to move commodities around.

High freights counter-supercycle

Nicolas Tirilly, senior oil analyst with Cargill, noted a "roller coaster movement" in freights, partly due to the strength of demand for steel globally. European prices for hot-rolled coils are currently at record highs, partly due to supply/demand issues. Kingsman noted that higher freight rates tend to push down commodity prices.

"I don't believe in this supercycle theory," Tirilly said, noting that the oil market is still recovering from negative values last year. Oil is not in a supercycle because there is too much supply-side and refining capacity, he said.

Talk of a supercycle is marketing on the part of banks, he said.