Market Views: Are commodities entering a super-cycle?

The passing of a $1.9 trillion fiscal stimulus package through the US Congress, combined with increasingly rapid rollouts of vaccines in the US, much of Europe and other parts of the world, has sparked a rising sense of optimism in the world.

It has also caused some concerns about the prospect of an economic rebound and, with it, rising asset prices. Commodities, long seen as being lowly valued and struggling amid recessions, could be one area to benefit. 

Talk of large infrastructure spending as another economic fillip in the US and across Asia also supports such optimism, while the desire of more economies to push sustainability and renewable energy could bolster demand for certain metals. 

This has been underlined by strong levels of trading in commodities. The world's 12 largest investment banks saw their commodities-related revenues jump 85% in 2020 over the previous year. Oil and metals trading, in particular, made strong gains, according to consultancy Coalition on March 5. The price of oil has rebounded, with Brend Crude Oil rising from around $43 per barrel in May last year to trade at $68.96 a barrel on Thursday (March 11).

But there is a long way to go. Global economies are still struggling to overcome Covid-19, and manufacturing and air travel remain heavily depleted. While oil prices have risen, Brent Crude saw its price recede slightly after briefly breaking $70 late last week.  

AsianInvestor asked six commodity experts about the chances of commodity prices enjoying a new super-cycle, spanning a number of years. 

Dan Smith, special adviser (commodities)
Oxford Economics

We don’t think that we are on the cusp of a new supercycle. A key starting point is that a supercycle includes a very widespread upturn in demand and prices for commodities. This is very unlikely to happen this time around. Supply for markets like oil, aluminium and iron ore will be abundant over the next few years, which will result in prices moving broadly sideways or lower in real terms.

Oil is a good place to start, as higher oil prices often feed into higher input prices for many other commodities (base metals, steel and so on). We see the upside for oil prices as very limited and estimate spare capacity to be at 9% of global supply. Demand is also weak and will take about four years to get back to where it was in 2019. Plus oil prices face the risk of a peak in oil demand itself. The inherent problem of oversupply may even get worse over the next five years rather than better.

Copper will potentially be an exception. The supply side is very tight and there is the potential for a positive demand shock, resulting in higher prices. While not our base case, it would not be a surprise to see copper prices surge by another 50% over the next five years to record highs, primarily driven by the green energy revolution. Oil prices are likely to remain volatile at a low level. 

Paul Sandhu, head of multi-asset quant solutions and client advisory for Asia Pacific
BNP Paribas Asset Management

Typically, commodities are seen as an inflationary hedge and/or an uncorrelated asset class that can be added to a diversified portfolio. In the past, it has also been known as a risk-off trade in times of volatility.  

These aspects play a key role in this market environment as uncorrelated asset classes are hard to find and, in many ways, commodities have become the only uncorrelated game in town, at least when we look at traditional asset classes. Volatility in commodities, however, is sitting at high levels which starts to negate the whole risk-off trade aspect of the asset class.

What has contributed to the boom in copper prices and other precious metals such as platinum is the supply crunch coming from the Covid-19 crisis coupled with demand accelerating due to the exponential growth in the energy transition and technology sectors. Supply needs to be enhanced to meet the requirements of the energy transition industry. Lithium and platinum demands, for example, could exponentially increase as the batteryelectric and hydrogen fuel cell markets continue to grow. 

Commodities remain a good diversifier in investors’ portfolios. It’s important, however, to understand the correlation of commodity prices with the underlying demand drivers, such as the energy-transition theme so as to not be overly concentrated.

Jason Liu, Asia Pacific head of CIO office 
Deutsche Bank International Private Bank

There are some drivers in place for the recent strong rise of commodities, including the ultra-loose monetary policies and globally synchronised fiscal expansion (government spending); supply chains slow to adjust from last year's disruptions and play catch up to demand; a relatively weak US dollar; and a shift for greener infrastructure and government energy mixes.

Copper, silver, gold, iron ore, uranium and rare metals have all gained over the past months. Unless there is a reversal of the positive trend with vaccinations and a gradual opening of economies, then the demand for commodities will continue and will feed into continual earnings growth momentum. While it could be too early to call it a super-cycle, we think that the current strong trend for commodities could continue in coming quarters.

Given this backdrop, we have turned overweight on commodities in our discretionary portfolio allocation in our recent regional investment meeting in February. We think that a broader-based basket of commodities (for example, energy and industrial metals) could be attractive with the continual demand recovery. We advise investors to increase their tactical allocation in a broad basket of commodities.

James Luke, commodities portfolio manager
Schroders

Commodities have long been out of favour with investors. However, they remain a necessity and are often essential in allowing the global economy to function.

For instance, the supply chain disruptions during the Covid-19 crisis have caused some countries to roll out long-term plans to build food strategic reserves, wheat in particular, in order to lower their import dependency. Demand for other agricultural commodities, such as corn, soya beans and pork are also likely to rise. Combined with other favourable factors such as low valuation, significant supply side discipline, expected inflation and a weaker dollar, we think stars are aligning for commodities.

While some investors may be reluctant to invest in the sector due to concerns over their environmental impact in much the same way that they would not invest in energy stocks, it is worth noting that some commodities such as metals are essential to ensuring the energy transition and the move to a low carbon economy takes place.

Today, the pressure on asset managers to create returns beyond the financial will only grow. By taking an active investment role in commodities, we can engage with companies in the sector and help bring about change on the ESG front. 

Esty Dwek, head of global market strategy for dynamic solutions
Natixis Investment Managers

While it is still too early to know if we are indeed at the start of a commodity super-cycle, our inclination is that we are not.

The rebound in prices reflects reopening expectations following the pandemic, and supply and demand dynamics specific to each segment rather than a broad expectation for a super cycle. In addition, we are unlikely to see Chinese growth on the scale of the past decade (or before) and the focus there remains on balancing manufacturing with services, not a return to manufacturing only.

Some aspects will remain supportive of commodities, such as the pursuit of semiconductors, but growth in demand will not lead to a super cycle. That said, we see further potential upside across most commodity segments for some time. OPEC+ [The Organization of the Petroleum Exporting Countries and its allies] will continue to keep production subdued to support prices even as demand recovers, though overall supply should remain rather ample and cap prices at some point.

Base metals should also see further support from renewables and technology. As such, commodities related to electronics and renewables (copper, aluminium, nickel) should benefit beyond the initial reopening bounce. And in the coming months, energy and materials equity sectors should continue to rally, though at some point a lot of the good news will be priced in. 

Mary Nicola, portfolio manager for global multi-asset
PineBridge Investments

Growth-sensitive commodities have staged a comeback as the wave of unprecedented monetary and fiscal stimulus combined with a robust vaccine rollout has led forecasters to expect a much faster recovery compared to the 2008 financial crisis. As a result, industrial metals prices have climbed to the highest levels in nearly a decade and oil prices have surged back over $60 in the past few months.

Despite more market chatter about another commodity super-cycle, we believe that cyclical and structural drivers are being conflated. We think that the recent rise in commodity prices has maintained its historical lagged relationship with the broad expansion of Chinese credit that we observed in 2020. Policymakers have made it clear that credit growth is set to decelerate by the year-end, and we would therefore caution against chasing this rally.

Looking further out, a structural supply deficiency and growing demand for decarbonisation-based end-use of commodities can create a more sustained environment supportive of commodity prices, especially with more nations pledging to become carbon neutral in the incoming decades.