The start of a Commodity Super-Cycle?

Waves of price rallies and record low stockpiles in numerous commodity markets mark the start of a possible commodity crunch in 2022. The combinatory effects of bad weather, lack of investment, supply chain constraints and increasing geopolitical tensions have resulted in diminished supply and waning stockpiles across multiple sectors including agricultural products, industrial metals, and natural resources. Resurgent demand in the recovery of the COVID-19 pandemic has exposed the longer-lasting effects on supply further fuelling concerns over shortages and inflation.

The Bloomberg Commodity Index (BCOM), a diversified commodity price index tracking 23 commodities across 6 sectors, has risen by more than 10% this year reaching record highs of 111.67 points. This relatively consistent upward trend has been present since Q2 of 2020 when the index traded at under 60 points. Furthermore, 9 of the 23 tracked indexes are currently in normal backwardation where the spot price of an asset is above that of the price it is trading at in the futures markets. It is a market structure that indicates that consumers are prepared to pay a premium for the immediate supply of a good, a feature that implies supply shortages.

More extreme weather, in part due to the effects of climate change, has disrupted agricultural markets skyrocketing prices and emptying stockpiles. Major flooding in Belgium and Germany mid-2021 and heatwaves in Canada in July 2021 contributed to price surges of 180% and 85% for Bintje potatoes and Saskatchewan yellow pea prices respectively. According to the Intercontinental Exchange (ICE) Futures, US stocks of arabica coffee are down to 143 million pounds of beans, the lowest since February 2000, duly reflected in their price surge to a 10-year high. Production from Brazil, the world’s largest producer of coffee beans, only accounts for 39% of the current reserve as opposed to 55% a year ago reports media giant BNN Bloomberg. This reflects the poor harvest following the effects of severe frost last year as well as the spiralling costs of shipping, with suppliers increasingly selling their beans domestically in response. Food inflation, which is currently near ten-year highs according to the Food and Agriculture Organization’s (FAO) food price index, significantly affects the everyday cost of living and governments will be under pressure to act.

Industrial metals have fared a similar fate albeit due to low investment throughout the pandemic period rather than bad weather. Prices for many of these metals including copper, lithium and nickel have substantially increased with aluminium experiencing 13-year highs following price surges of over 15% this year alone. The 66 million tonnes per year market currently only holds 1.5 million tonnes in reserves and is yet to face further supply shortages leaving analysts at major investment bank Goldman Sachs to predict an inventory depletion by 2023. Large energy requirements in the production of aluminium, accounting for over a third of total production costs, has proven to be a major problem for EU production amidst the rising energy prices in Europe. Many factories have been forced to cut production citing high energy and carbon prices such as the Slovalco aluminium smelter in Slovakia, primarily owned by Norwegian company Norsk Hydro, who have announced production cuts of 60%. Possible sanctions on Russia, the world’s third-biggest producer of metal, could further hinder global supply if geopolitical tensions over Ukraine continue to rise.

In combination with agricultural and industrial metals the energy sector, especially oil and gas, have also seen drastic price increases. Oil is continuing its rally from the start of the year and may soon break the 100 USD per barrel in line with the International Energy Agency’s warning of further volatility and upward pressure on prices. Limited investment during the pandemic, political instability and time lags has generated the perpetual gaps seen today between actual supply and targets set by OPEC+, the Organization of the Petroleum Exporting Countries along with other large oil producers.

Throughout the pandemic, both public and government focus has been on aiding and promoting the recovery of demand, whilst unintentionally neglecting supply. With demand starting to surge it is now evident that supply has not only been stagnant but, in many cases, shrunk due to underinvestment and inactivity leading to significant shortages. The rush towards commodities, known for being a late-cycle hedge, evidence the real warnings of resource shortages and inflation. Given the significant time lags in increasing production, especially for industrial metals and natural resources, sustained trading of commodities above long-term prices as demand outstrips supply, known as a super-cycle, is a real possibility.

By: Jeremy Toussaint

Sector Head: Eric Hardy

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