According to The Edge Markets article published on January 9, 2023, it feels like a lifetime ago when crude oil prices crashed into negative territory for the first time in history in April 2020, when worldwide demand for the commodity plunged due to the Covid-19 lockdowns and border closures.
Business and production activities came to a halt, leading to a collapse in oil prices. Fast forward to 2022, Brent crude oil has climbed to US$83 per barrel from about -US$37 a barrel in 2020, following the rapid recovery in demand due to the high Covid-19 vaccination rates and the disruption of supply resulting from Russia’s invasion of Ukraine, which caused oil prices to skyrocket.
2022 is said to have been a perfect storm, not only for oil as prices surged but for other commodities as well. Key raw materials such as steel, copper, iron ore and agricultural commodities from wheat to corn catapulted to their highest levels this year.
This begs the question of whether a commodity supercycle has reached its peak or has only just begun.
The last commodity market boom can be traced back to a decade ago (2002-2008), triggered by China’s emergence as an economic powerhouse. It eventually ran out of steam and led to the oil market crash in late 2014. The period also saw sharp rises in the prices of agricultural commodities, which led to the 2007/08 food crisis.
There have only been four supercycles over the past century. The first came between the 1890s and the 1910s during the rapid industrialisation and urbanisation of the US.
The second took place during the Great Depression in the 1930s, which stretched into the 1950s due to the massive rebuilding in Europe and Japan after World War II.
The third was due to the oil price shocks in the 1970s and rapid growth in Japan, while the fourth took place in the 1990s during China’s rise as an economic superpower. This supercycle ended roughly during the 2008 global financial crisis.
This year, the spike in commodity prices was short-lived and peaked between March and May, after the Russian invasion in Ukraine in February. Most of the commodity prices are almost flattish compared with the beginning of the year.
Brent crude is up 3.24% since the beginning of this year, having closed at US$83.63 per barrel on Dec 22, while copper is down 12.6% over the same period after ending at US$8,393.50 per tonne last Thursday. The prices of wheat, corn and crude palm oil have soared more than 3.2%, 10.3% and 1.9% to about about US$773 per bushel (bu), US$663.58 per bu and RM3,898 per tonne respectively.
It is worth noting that most of the commodity prices peaked in March/April, right after the Russian invasion of Ukraine in February. For instance, Brent crude went as high as US$128 per barrel on March 8, copper surged to US$10,674 per tonne on March 4, wheat reached US$1,350 per bu on May 17 and gas peaked at US$9.12 per million British thermal units (MMBtu) in September.
Mixed views on another commodity rally
After years of low prices before the pandemic, the recent commodity rally points to how underinvestment in new projects and expansion is curbing supply.
Goldman Sachs notes in its Dec 14 commodities outlook report that the commodity supercycle is set to continue in 2023, expecting the sector to be the best-performing asset class again. “Despite a near doubling year on year of many commodity prices by May 2022, capital expenditure (capex) across the entire commodity complex disappointed,” says the Wall Street bank.
“This is the single most important revelation of 2022 — even the extraordinarily high prices seen earlier this year cannot create sufficient capital inflows, and hence a supply response, to solve long-term shortages.”
Goldman Sachs forecasts that Brent crude will climb to US$105 a barrel by the end of 2023 and maintain that level in 2024, up from US$80.90 a barrel on Dec 21 this year. It sees copper jumping to US$10,050 a tonne from about US$8,400 and Asian benchmark liquefied natural gas rising to US$53.10 per MMBtu from US$33.
“Without sufficient capex to create spare supply capacity, commodities will remain stuck in a state of long run shortages, with higher and more volatile prices. While investors remain concerned with the 2023 growth outlook — a large driver of the latest sell-off — the global business cycle is far from over,” says the investment bank.
On the other hand, S&P Global Commodity Insights reckons that the commodity boom is over. It says energy, metal and agriculture prices have all pulled back from their March 2022 peaks 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 rates and pandemic-led fiscal stimulus measures, and as investments in decarbonisation projects accelerate to meet net zero targets,” S&P says in an August note to clients.
“The S&P GSCI index has almost quadrupled since early 2020 and has virtually doubled this year. But since June, the key commodity index has been on a downward trajectory, raising questions about the supercycle theory often described as a structural upward shift in commodity demand.”
The S&P GSCI is the most referred to commodity index globally. The GSCI was previously known as the Goldman Sachs Commodity Index before it was purchased by Standard & Poor’s in 2007. The index was down almost 30% to 588.22 points on Dec 21 from its peak of 822.30 on March 8.
Clean and green energy investment
To say commodities are back in vogue could be premature. The world today is different from 40 years ago. The previous commodity bulls were mainly driven by rapid economic growth. Market observers believe that it could be different this time around.
Technological and regulatory shifts towards cleaner and greener energy, including electric vehicle (EV) adoption, renewable energy investments and changing consumption habits could see oil majors being cautious with their capital investments. On the other hand, these developments could see demand for raw materials such as copper, steel and other metals take off, especially in the building of EVs and the infrastructure to support these.
A report by the International Energy Agency (IEA) notes that the world is currently on track for a doubling of the overall mineral requirements for clean energy technologies by 2040. It says a typical electric car requires six times the mineral inputs of a conventional car, while an onshore wind plant requires nine times more mineral resources than a gas-fired one.
“The shift to a clean energy system is set to drive a huge increase in the requirements for these minerals, meaning that the energy sector is emerging as a major force in mineral markets,” it adds.
Presently, fossil fuels generate 85% of the world’s energy while alternative energy produces 15%.
In this regard, the energy transition to a more sustainable energy framework will be resource-intensive for the short to medium term. Unless there is a meaningful supply response, energy prices are expected to remain elevated.
Let’s take a look at how the respective commodities have fared in 2022.
Crude oil
Brent crude oil prices had risen 3.24% this year to US$83.63 per barrel on Dec 22. However, compared to the peak of US$128 per barrel on March 8, it had declined almost 35% due to growing concerns of a global economic slowdown. Brent crude has averaged US$100 per barrel this year.
The Organization of the Petroleum Exporting Countries and its allies (Opec+), which controls more than 40% of global oil production, has taken pre-emptive measures. For instance, in October, the powerful alliance of oil producers decided to cut production by two million barrels per day, the largest since the outbreak of Covid-19 in 2020.
Goldman Sachs forecasts that Brent crude will be above US$108 a barrel at end-2023 and maintain that level in 2024.
Copper
This year has been a roller-coaster ride for copper, which is used in many sectors, as investors endure the challenges of a tightening US monetary policy, China’s strict Covid-19 lockdowns and Russia’s invasion of Ukraine.
Copper prices had declined 14% this year to US$8,302 per tonne on Dec 20. After hitting an all-time high of US$10,730 per tonne in early March on the London Metal Exchange (LME), copper plunged 21% to US$8,450 per tonne in late June.
Goldman Sachs estimates that copper will be one of the beneficiaries of policy shifts in the global energy transition to cleaner energy in the long run.
Aluminium
Aluminium prices had plunged almost 40% below record levels in early March 2022 to US$2,407 per tonne on Dec 21 due to a weak demand outlook for the construction sector. Aluminium had fallen to as low as US$2,092 per tonne at end-September.
Kenanga Research expects aluminium prices to remain elevated in 2023 on the back of supply constraints due to high energy costs. “The recovery in demand on the back of China’s gradual reopening should help to arrest further declines in steel prices,” it says in a Dec 16 report.
Iron ore
The prices of iron ore, which is used to make steel, have been highly volatile this year. In the first half of 2022, it surged as high as US$160 per tonne on March 7. But it slowly lost ground as demand, especially from China, was hampered by the downturn in the real estate sector.
The last few weeks have been good for the commodity, buoyed by expectations that China will relax its strict Covid-19 restrictions. It is worth noting that the country is the largest consumer of iron ore in the world, importing about 80% of its needs.
In the second half of the year, iron ore prices went south to as low as US$74 per tonne on Nov 1 before rebounding more than 50% to US$113 on Dec 22.
China recently began easing its strict zero-Covid policy following mass protests across the country. In mid-December Beijing pledged to step up its policy adjustment to support the economy.
Wheat and corn
Following the Russian invasion of Ukraine in late February, wheat and corn prices surged to one of their all-time highs of US$1,350 per bu and more than US$800 per bu respectively this year.
Fitch Solutions expects the global grains market to tighten in 2023, marking the second consecutive year-on-year contraction in global supply, which will result in average price levels above those seen in the years before the Russia-Ukraine conflict.
“First, we expect the Black Sea Grains Deal, renewed on Nov 17, 2022, to continue facilitating the export of Ukrainian grains to global markets, which will cap any upward price momentum. Second, though we expect the strength of the US dollar to peak in the near term, if not already, we expect the US dollar to remain strong throughout 2023, putting a ceiling on dollar-traded commodity prices,” it says in a Dec 8 report.
