Broad stimulus measures, the reopening of economies after the pandemic and strong demand from China have caused commodity prices to skyrocket this year, with some reaching record highs. Yet they have collapsed over the past two weeks – with some wiped out gains for the year – on a more hawkish US monetary policy tone, China’s attempt to calm inflationary pressures and better weather for crops. .
While this has swept away some of the speculative scum from the market, the big question is whether the latest commodities bull run has passed its peak or is just taking a break.
Regardless, the direction may not be broad, with each market having its own individual pushing and pulling levers. Copper traders need to balance a short-term cooling in China with long-term green energy prospects. The drop in oil could be limited by declining inventories and supply issues, iron ore is truncated by Chinese policies, while gold will be largely at the mercy of the Federal Reserve’s start to cut.
“I still see a lot of inflationary pressures in the supply chain, and the reality is that they are increasing,” said Michael Widmer, head of metals research at Bank of America Merrill Lynch in London. “From a commodity price perspective, I can see the structural argument for prices to stay high or increase in the future. “
The yearlong rally to a record high in May was sparked by the surge in Chinese demand, but there are signs that manufacturer orders are starting to decline.
Bulls is confident the rest of the world will pick up the slack, as investments in renewables and electric vehicles create a dramatic shift in demand in Europe and North America. Still, it could be some time before the expense ends up in factory order books, and weaker demand in the meantime could embolden the bears who say the current high prices are not justified by The fundamentals.
It could be particularly difficult to predict the trajectory of iron ore, the most volatile raw material today. It hit a record high, slumped into a bear market, then rebounded into a bull market within weeks, as traders grappled with the bleak outlook for demand in major Chinese consumers.
Bulls and bears are closely watching China’s simultaneous goals of containing inflationary pressures stemming from high commodity prices and making its vast steel sector greener. The country’s steel production is still on track to break another record this year, which could prompt authorities to take further steps to restrict production and again iron ore.
Showers in the US cornbelt and uncertainty over biofuel policy have helped push crop markets down lately, but it will take a lot more rain to ensure bumper crops at one of the world’s major suppliers. . More than a third of America’s corn and soybean acreage suffers from drought after record heat waves.
It’s a story of China on the demand side, with the country’s huge imports driving crop and pork futures soaring over the past year. Major traders like Cargill Inc. and Viterra say crop markets are in a “mini-supercycle” that could last half a decade, driven by increased demand for biofuels and continued Chinese purchases.
Attention is already focused on the sharp recovery in demand during the summer. While there are signs that the United States is leading the way in reopening Western economies, the spread of the delta variant of the coronavirus, first identified in India, is raising new concerns about the path of the consumption in parts of Asia.
For now, it looks like the market will need additional supply in the second half of the year. The OPEC + group has yet to confirm its production plans beyond July, as U.S. shale producers continue to preach discipline as they earn money again. All the more reason then, that the attention is so intense on when the market will see the return of Iranian supply as talks with the United States continue.
Bullion is more sensitive to Federal Reserve actions than perhaps any other commodity. It fell to its lowest since early May after the US central bank signaled that monetary policy tightening could start sooner than expected and the dollar surged.
Although the precious metal is often bought as an inflation hedge, the Fed signaled this week that higher than expected inflation would not be allowed to persist, opening the door for a faster reduction in stimulus measures. This weighs on the attractiveness of non-interest bearing gold. UBS Group AG is forecasting prices at $ 1,600 an ounce by the end of the year, compared to around $ 1,780 today.
-With help from Annie Lee, Alex Longley, Megan Durisin and Eddie Spence.