It is hard to say that the commodity market has entered a "super cycle"
Our reporter Jiang Huadong
Recently, the voice on the market regarding the entry of bulk commodities into the "super cycle" has begun to heat up.
However, in the current situation, this judgment still lacks sufficient support.
On the one hand, the foundation is not strong.
From a macro perspective, the entry of bulk commodities into the "super cycle" in history is often closely related to the emergence of new growth drivers in the global economy.
However, the macroeconomic background of this round of rising is more manifested in a rebound from the bottom of last year, rather than the emergence of new driving forces that can support long-term sustainable development.
On the other hand, there are too many variables.
From the perspective of supply and demand, there are uncertainties at both ends.
The "temperature difference" between the expected and actual global economic recovery, the response of the supply side, and the changes in the demand structure will all affect the future trend of commodity prices.
Therefore, it may be more appropriate to call it a "stage rise".
Recently, the commodity market has been booming: oil prices have broken through US$60 per barrel, copper prices have reached their highest levels since April 2012, and zinc ore prices have also risen by about 7%.
Affected by this, the Bloomberg Commodity Index rose from 78.05 at the end of 2020 to 85.3 on February 19, an increase of more than 9%. It not only rebounded strongly from the bottom of 58.87 in April last year, but also exceeded the level at the end of 2019.
There have been more discussions about the commodity market entering the "super cycle".
Is this actually the case?
Multiple factors push up prices
One of the most critical reasons for the booming commodity market is the signs of recovery in the global economy.
Affected by the optimism brought about by the new crown pneumonia vaccination, the market's expectations for China and the United States to support the global economic recovery in 2021 are increasing.
Reuters' survey results show that most economists have greatly increased their confidence in the US economic recovery due to the US$1.9 trillion rescue plan drawn up by the Biden administration.
Economists interviewed generally believe that the expected growth rate of the U.S. economy will reach 4.7% and 3.5% this year and next, which is higher than the previously expected 4.0% and 3.3%.
At the same time, the steady operation of the Chinese economy is also an important factor supporting the prices of basic metals and energy commodities.
Looking back at the history of copper prices, it can be seen that the peak of $9,700 in 2010 was driven by the Chinese economy that took the lead out of the crisis.
In view of China's economic trends in 2021, the International Monetary Fund (IMF) predicts that China is expected to achieve a growth rate of 8.1% this year.
This is also regarded as a key factor in the commodity market.
Supply and demand factors are another key angle to understand this round of rising commodities.
At the level of basic metal demand, as the world’s major economies have introduced policies to deal with global warming, especially China and the European Union announced carbon neutral target nodes, the market expects solar panels, wind turbines, electric vehicles and charging piles, etc. Low-carbon infrastructure will usher in great development, and drive the surge in demand for copper, nickel, lithium and cobalt.
Take copper mine as an example.
According to the International Copper Association report, the average amount of copper used per fuel vehicle is 23 kilograms and that of electric vehicles is 83 kilograms.
If it is fully converted to electric vehicles, the demand for copper in the automotive industry will increase by three to four times.
According to a report released by the World Bureau of Metal Statistics on February 17, the global copper market will have a supply shortage of 1.391 million tons in 2020, compared with a shortage of 383,000 tons in 2019, and the gap has significantly expanded.
At the same time, the reported inventory at the end of December 2020 was 76 thousand tons lower than the level at the end of December 2019.
In terms of the crude oil market, the International Energy Agency stated in its February market report that after the shock caused by the new crown pneumonia epidemic in 2020, the global crude oil supply and demand situation will continue to return to balance.
The International Energy Agency has raised its global oil production forecast, believing that the daily supply increase of key oil-producing countries such as the Organization of Petroleum Exporting Countries and Russia is expected to rise from the previous 540,000 barrels to 830,000 barrels.
At the same time, global oil demand was 96.4 million barrels per day, down 200,000 barrels per day from previous expectations.
Although the International Energy Agency has raised its production forecast and lowered its demand forecast, it still believes that a gradual improvement in the global economy will promote an accelerated decline in global oil inventories.
This means that the demand for crude oil in the second half of this year will exceed the growing output, and the excess inventory accumulated since the outbreak of the epidemic will decline rapidly.
In addition to fundamental factors, investors' investment strategy to deal with "re-inflation" is also an important reason for pushing up commodity prices.
The minutes of the recent Federal Reserve meeting show that the United States is expected to maintain a zero interest rate policy by 2022 while maintaining a balance sheet expansion trend.
Taking into account that the Bank of England may implement a negative interest rate policy in the near future, European Central Bank policymakers are more worried about the strong euro and other trends, and investors' expectations for inflation have begun to change.
It is worth noting that although the U.S. annual inflation rate was only 1.4% in January this year, the 10-year U.S. Treasury yield has begun to rise steadily; the 2-year to 10-year U.S. Treasury yield gap has widened to the highest level since 2017. The U.S. Treasury yield curve gradually steepened.
Investors' focus on "re-inflation" makes commodities an investment target to hedge against inflation expectations.
This is particularly evident in the gold and copper markets.
Too early to conclude
In fact, before this round of commodity price increases, the prices of many types of commodities on the London Metal Exchange have seen rapid growth, especially the LME copper price has increased by 26% in 2020.
Affected by this, the sound of the "super cycle" of commodities in the market began to heat up.
However, under the current situation, this judgment still lacks sufficient support.
At the macroeconomic level, the entry of bulk commodities into the "super cycle" in history is often closely related to the emergence of new growth drivers in the global economy.
However, the macroeconomic background of this round of rising is more manifested in a rebound from the bottom of last year, rather than the emergence of new driving forces that can support the long-term sustainable economic development.
In fact, even though most economists surveyed by Reuters have increased confidence in US economic growth, the expected goal is mostly for the US economy to return to its pre-epidemic level.
At the same time, although the market is optimistic about the development of China and the United States, it may take longer for other economies to return to their pre-epidemic levels.
Therefore, it is still controversial whether there is sufficient macroeconomic foundation for the "super cycle" of the bulk commodity market.
At the level of supply and demand, the uncertainty of production capacity and the selectivity of demand are the main points of contention in judging whether to enter the "super cycle".
Take energy commodities as an example.
From the perspective of supply, the output of non-OPEC oil-producing countries will remain variable in the next few months, especially how oil companies in the United States, Canada and other countries respond to recent oil price increases are worthy of attention.
From a demand perspective, the Secretary-General of the International Energy Forum Joseph McMonigall once said: "The impact of the epidemic on energy demand is unprecedented in the history of the energy market." The report released by the International Energy Forum on February 18 believes that, Although oil demand will rebound in 2021, the strength of the rebound is lower than the decline caused by the epidemic last year.
Therefore, demand rebound is an important factor pushing up short-term crude oil prices, but whether it can support long-term growth remains to be seen.
At the same time, in the metal market, the main factor pushing up the increase in metal demand is the development of the global green economy, which has led to price increases in some metal markets.
The market needs copper mines and lithium mines, which are closely related to emerging industry sectors such as semiconductors and electric vehicles, rather than demand for all metals.
Three factors should not be ignored
Behind the rise in commodity market prices, there are three major factors that cannot be ignored.
One is inflation expectations.
Although it is still controversial whether commodities enter the "super cycle" and whether it will bring continuous imported inflation risks to other countries, it is still controversial, but considering that major economies may further implement fiscal stimulus measures, additional costs faced by economic operations during the epidemic, and vaccination The possible economic acceleration will increase the inflationary pressure of the global economy in the future.
Some analysts believe that the global inflation rate may exceed 2% in the middle of 2021 and will remain high for a period of time.
The second is the future trend of the energy structure.
Both supporters and opponents of the "super cycle" believe that the global economy will be greener, and that carbon neutrality and carbon peaking will change the pattern of the energy industry, which in turn will affect the development prospects of the base metal and crude oil industries.
The main difference between the two parties lies in when this picture will appear, especially whether the impact of new energy vehicles, natural gas power generation and photovoltaic power generation on crude oil demand is close at hand.
This divergence may become one of the key factors affecting future price trends in the bulk commodity sector.
The third is the monetary policies of various countries.
Against the background that the monetary policies of countries around the world have not yet completely turned, speculative activities spawned by inflation expectations and flooding of liquidity are important factors in interpreting copper and oil prices.
If the potential stimulus plans of the developed economies such as the United States, Europe, and the United Kingdom are taken into account, the subsequent bulk commodity market may still see similar short-term rises.