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On the cusp of a global commodity super cycle


13 October 2021

2021 has been the year of recovery. The year has been characterized by changes from the fear of the pandemic spreading even further, then moving into a confrontation of the matter with governments making most of the decisions and eventually passing them on to society to deal with. Yet recovery has been the main driver from an economic perspective. The impact on the economy has been severe though seems to have favored various markets from a demand and supply perspective. During the difficult first half of 2021, commodities have seen prices lifted to levels considered multiple year highs. This report aims to focus on the commodity market, its current circumstances, and its potentials for the future.

To start with let’s note some of the commodities that have broken to new yearly high levels so far in 2021. Industrial metals Copper, Platinum, and Palladium have all surpassed previous years high prices. Agriculture commodity prices like Corn, Coffee, Wheat, have also made notable highs in 2021 while energy commodities like WTI, Brent Oil and Natural Gas have made significant movements higher.

The simultaneous price increase for all these commodities is rather suspicious and seems to create a number of questions. First, how did we get to this point? and second what are the main drivers behind the price surge? As an initial reaction we realize that there must have been a drastic increase in demand for prices of these materials to be lifted to these levels in a rather abrupt fashion. By answering questions like the pre mentioned, we can get closer to understanding whether the market is actually in a super cycle. If we can identify such a scenario then market circumstances may be more predictable, as a super cycle tends to carry specific characteristics like keeping commodity prices higher for a prolonged timespan.

According to the Financial Times, major changes around the world seem to be affecting investments at the moment. We are currently moving within a decarbonized industrial movement when some of the largest and dominant economies like the US, China, the EU are taking conscious actions towards bringing CO2 emissions lower. Even though these countries have set standards that will be measured and possibly met in the following decades, bringing down emissions is simply very difficult. In this case building infrastructure to achieve lower emissions tends to push up prices for platinum and copper. Demand for platinum is expected to be on the rise as it is used in automobile anti-pollution systems and specifically exhausts.

Previously, Palladium (XPD/USD) was more suitable for anti-pollution systems, but Platinum (XPT/USD) can also do the job while at the same time reduce costs. On the other hand copper is mostly used in the fast growing electric vehicle (EV) market. Copper is mostly needed when charging an EV but most importantly for EV infrastructure sites.  EV producers are not only seeing demand for automobiles increase year after year but now almost all traditional car makers will in one way or another try to manufacture their own EV. Since demand for EVs has risen significantly in the past 5 years in China, the US the EU and Canada, it is most likely for the demand to be ongoing in coming years.

On a different front, agricultural commodity prices have also gained in the past year. Difficulties in the harvest period with a simultaneous increase in demand seems to be keeping traders on the go. However, it is a rather interesting phenomenon that various uncorrelated commodity prices are on the rise. We can say that the supply disruptions may be creating an extra barrier to both suppliers and buyers. Yet just as in the case of Copper prices, agriculture prices are impacted by demand and economic performance in the largest economies in the world like the US and China. China is the biggest commodities importer on a global scale and its buying power when lifted, can move the markets substantially. However, expectations may be that China’s slowdown could be well continued during the closing of the current year.

Economic performance in China in terms of GDP, Manufacturing, Industrial Output, and Retail Sales lately was evidently down. In these circumstances commodity prices could take a hit and correct lower temporary as demand is equally on the low. If the slowdown is to persist then prices could continue to normalize and even meet previous monthly low levels. Moreover, suppliers from around the world cannot cover for demand then large commodity buying nations like China will have the upper hand when negotiations kick in. This can create a shortage for various markets which can escalate to a global trade war. It remains to be seen if demand for agricultures would also be heightened in the short term yet the Chinese are not the only country with so much influence on global trade.

Thus economic momentum in the US and the Eurozone should also be used as a metric when considering agricultures. On a separate front, agriculture prices are also driven by uncertain variables like the weather. In this case the weather during the previous winter season was not the most favorable as very low temperatures destroyed crops around the world.

Unfavorable low or even high temperatures can definitely destroy crops just like coffee crops in Brazil. At the moment China’s energy crunch is in the epicenter of the market’s attention due to its potential to destabilize the commodities market once again. Energy commodity prices have picked up significantly in the past week especially WTI, as the Chinese government instructed a purchase of energy sources no matter the cost. This is putting extra pressure on the markets and international energy supply. As a conclusion, Industrial activities could continue to attract more demand for industrial metals such as copper or even precious metals such as platinum. Most economies remain supported by fiscal and monetary stimulus which could be a main driver for commodities in the next 4-6 months. Agriculture prices have technically displayed extreme bullish tendencies and as inflation rates and fears over extended supply chain disruption remain elevated we could view these circumstances as a good bet for a supposed steady increase in commodity prices. In our opinion it is not clear if these circumstances can hold up more than the first half of 2022 when the global economy could be expanding even further and overcoming current obstacles. Then again more time may be needed to overcome pandemic driven difficulties.

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