Commodity Supercycle Theory Will Struggle To Sustain Economic Litmus Test

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The boom in the commodity market is finished as reported by S&P Global.

Prices tumbled 

Energy, metals and agriculture prices have all tumbled from their March peak on inflationary recession fears amid a slew of economic warning signs, but a commodity bust is far from inevitable.

Since early 2020, more and more analysts have been championing the idea of a new commodity supercycle, with an economic recovery turbo-charged by low interest and pandemic-led fiscal stimulus measures, and as an investment into decarbonization projects accelerated to meet net-zero targets.

The S&P GSCI has almost quadrupled since early 2020 and this year has virtually doubled.

Key industrial metals such as steel, aluminium and copper have all led to the collapse from their March peak.

EU hot rolled coil steel is down more than 40% as assessed by S&P Global Platts.

And it’s a similar pattern of inflation risks and monetary tightening seen across Europe.

Commodity-consuming behemoth

Oil and agriculture prices have also come off March highs, with the key Dated Brent crude benchmark and the Russian wheat price falling by close to 20%.

Russia stands alongside Saudi Arabia and the US as one of the three largest crude producers, making up 40% of the EU’s gas needs, while Russia together with Ukraine supply a third of the world’s wheat.

“The correlation will probably only reassert itself when China gets the virus under control.”

Commodity-consuming behemoth China’s subdued demand given its own pandemic-related difficulties may only last so long – and offset some of the weakness being seen elsewhere.

And on the supply side, the EU’s sanctions on Russia’s oil imports kick in early next year, given China and India have been stepping in where European and US customers have already found alternative suppliers.

Own worst enemy

The key debate is how much high prices is leading to demand destruction amid fears of an inflationary recession and how much commodities are trading off their own fundamentals and still tight supply and demand balances.

If oil and wheat stay high despite the economic weakness, even more damage could be inflicted on the global economy and, ultimately, commodity demand, pointing to the urgency of OPEC+ to bring on extra barrels and the US to keep strategic petroleum reserves flowing.

Agriculture doesn’t have the same back-up plans, highlighting the risks around the security of supply.

“The fact that prices remain elevated even as demand has slowed will lead to stagflation until demand falls further, creating a deeper recession versus what investors are expecting,” said Mark Rossano, CEO of C6 Capital Holdings.

Dated Brent remains in triple digits after peaking at close to $140/b in March and well above the $80/b at the start of 2022, while Russian wheat 12.5% FOB Black Sea is also still comfortably above levels seen at the start of the year.

Economics kick in

But while commodities trade off their own balances, it is clear economic warnings are translating to commodity price declines.

But Jeff Currie, head of commodity research at Goldman Sachs, believes recessions are a natural part of a lengthy supercycle, given the reliance on key commodities that are hard to find replacements for.

The ramping up of green initiatives will pull on demand for more commodities, plus the ongoing need to meet current food and energy security needs.

Ultimately, the journey has just begun, and while some parts of the world are in a downward spiral, there are still signs of growth.

“We acknowledge that when the global economy is in recession for a protracted period, commodity demand, and with it, prices, falls… though, we are not yet at this state,” the bank added.

Only one thing is clear: Both sets of protagonists are wondering if they are still playing catch-up.

 

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Source: S&P Global

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