Is a new super cycle beginning?
The greatest commodity story of 2020 was a story of decline. When the coronavirus pandemic halted travel, oil prices fell off a cliff and then briefly went underground: in April, a futures contract for West Texas Intermediate was worth less than nothing. Oil began to hold above $ 45 a barrel in November supported by optimism about vaccines. For other commodities, however, 2020 wasn’t all bad. Indeed, the year could have marked the beginning of an extraordinary ascent.
In August, gold topped $ 2,000 an ounce for the first time as low interest rates made the precious metal a more attractive haven than government bonds. The value of other raw materials also rose not only from the depths of virus-related lockdowns in April, but from the beginning of 2020, before the pandemic began (see graphic). Commodity assets under management hit a record $ 640 billion in December, estimates Citigroup, a bank that represents nearly a quarter of annual profits. By January 11th of this year, the oil-heavy S&P GSCI commodity index had even reached the level of one year. The debate now is how quickly oil prices will recover and how high other commodities could go.
This in turn depends on whether the forces that drove certain commodities soaring in 2020 will persist in 2021 or are actually replaced by even stronger growth engines. Last year, China proved to be a voracious importer as it increased investment and replenished strategic inventory. Beneficiaries included iron ore and copper used in steel and electricity projects, as well as soft commodities like wheat, soybeans and pork. This coincided with a limited supply. Covid-19 outbreaks resulted in the closure of some iron ore mines in Brazil. The low rainfall in South America due to La Niña increased the price of grain.
This year has already shown signs of limited supply. On January 11, Argentina lifted a corn export ban, but imposed a cap. Russia plans to tax wheat exports from mid-February. Large mines are still at risk from restrictions. Protests in the Las Bambas copper mine in Peru have aroused fears of supply disruptions.
Meanwhile, the oil has continued its tentative rebound, alternately puffed up by hopes for vaccines and depressed by news of further lockdowns. To stimulate prices, Saudi Arabia announced earlier this month that it would limit production by an additional 1 million barrels per day in February and March.
Two important developments could provide further support. The introduction of vaccines in the world’s largest economies will ultimately lead to increased levels of travel and trade. And a major spending bill by a Democratic American government would stimulate economic activity and thus raw material consumption. It could also weaken the dollar, making oil and other dollar-denominated commodities cheaper for emerging market buyers, boosting demand, and in turn driving up commodity prices.
Commodity bulls, led by Jeff Currie of Goldman Sachs, a bank, argue that longer-term trends will support prices for the next decade. “The pandemic itself is a structural catalyst for a commodities super cycle,” claims Currie. In addition to a weaker dollar and the accompanying rise in commodity prices, the pandemic could cause activities in some of the world’s largest economies to synchronize.
Governments in America, Europe and China are committed to green investments and reducing income inequalities. Currie emphasizes that aid for poor households has an oversized effect on consumption, which in turn supports raw material prices. And environmentally friendly investments – for example in charging stations and wind parks – are resource-intensive. The first few years of environmental spending could even support oil demand through increased employment and economic activity. Goldman estimates that a $ 2 billion stimulus would increase American oil demand by about 200,000 barrels a day, or 1%, over the next two years.
Skeptics expect more subdued growth. In the short term, according to Ed Morse of Citigroup, investors’ bets on copper will not be supported by developments in supply and consumption. The slim majority of Senate Democrats can hardly guarantee that President-elect Joe Biden’s climate plan will be passed. “On the demand side, there is nothing that is almost as resource-intensive as the first decade of the 21st century,” says Morse.
This earlier supercycle was driven by urbanization, investment, and an emerging middle class in emerging economies – and especially China. Governments from Berlin to Beijing are now declaring that they intend to bring about a new kind of transformation. The price of commodities in the coming decade will depend in large part on whether they do what they say.
