14 May 2021

Commodities: Don’t get too carried away

Global commodity prices have risen substantially over the past year as the world starts to recover from the COVID-19 pandemic. They are now up by an average of 80% since the trough in April 2020. Most are back above their pre-pandemic levels and some, like copper and iron ore, have reached new record highs. For context, during the super-cycle between 2002 and 2008 global commodity prices rose 320% and remained high until 2014.

Paul Bloxham, HSBC Chief Economist - Australia, New Zealand and Global Commodities

So, is this another “super-cycle” and what does it mean for Asia? There are similarities this time around as well as key differences. First up, China has again led the upswing and there has also been an extended period of subdued mining investment and low interest rates.

Metal prices have been supported by China ramping up its infrastructure spending. However, this is expected to slow in the coming quarters as policymakers seek to shift growth back towards services. They have also become more concerned about the exuberance of the property sector.

More broadly, China is at a very different stage of its development than it was in the early 2000s. Back then, aggregate debt levels were low and there was scope to increase spending on much-needed infrastructure and housing. Debt levels are now much higher and policymakers acknowledge that a more cautious approach is needed to ensure that capital is allocated appropriately.

Looking beyond China, a shift to demand for services is also a feature of our forecast for Western countries. COVID-19 forced people into their homes and encouraged spending on goods, but the rollout of vaccines is expected to lead to a pivot in demand away from goods back to services. At the same time, a slowdown in manufacturing production is expected to cool demand for some metals.

Although Western countries are ramping up spending on infrastructure, which should support demand for metals, there is a need to temper some of the optimism. Many of these infrastructure plans are focused on repairs and rebuilding – bridges and roads, for example – which tend to be less raw material intensive. And when developed economies boost construction many of the materials used are recycled, rather than raw materials.

There are, of course, some exceptions, particularly those commodities where demand is supported by changes to climate policy. Many of these policy agendas have been accelerated by the COVID-19 shock, with government programmes more focused on green spending. A new US administration, the European Green Deal, and Beijing adopting a net-zero emissions target are other contributing factors.

In particular, climate concerns have spurred demand for materials used in batteries and electricity networks, such as copper, lithium and cobalt. Meanwhile, demand for coal and oil will fall, even if lower investment in coal mines and oil projects limits near-term supply.

Indeed, in terms of comparisons with the earlier super cycle, we expect the direction of oil prices to be one of the key differences. Although prices have recovered from the very low levels of early 2020 and are back above pre-pandemic levels, they are still a long way below the peaks of the early 2000s. In addition, much of the increase in oil prices over the past year has been the result of OPEC+ carefully managing the level of supply.

While demand for oil is gradually recovering it remains well below pre-pandemic levels. The pandemic may also permanently change demand patterns. In particular, working from home will accelerate digitalisation and reduce travel -- implying lower demand for oil. On the supply side, US shale oil is now a much larger part of the global oil market, and these producers are typically nimbler.

Finally, agricultural-product prices have risen strongly, led by cereals, especially soybeans and corn. This partly reflects dry weather in South America reducing yields due to the recent La Niña event. In China, demand for farming products has been strong, particularly for imported grains used as feedstock to rebuild a pork herd that swine fever reduced by one third. That supply loss has reshaped global meat markets, leaving prices at multi-year highs.

For South East Asia, these moves in commodity prices have had differing economic effects. Commodity producers such as Indonesia (nickel) and Australia (iron ore) are benefitting from higher prices. At the same time, the rise in oil prices and recent spike in some food prices is an upside risk for inflation, which could constrain the ability of Asian central banks to provide needed monetary support.

All in all, we see continued support for commodity prices. There are some materials which have already seen a super-cycle upswing in prices, such as copper and iron ore. But because of the differences between now and the 2000s, particularly for oil and metals, we suspect that a new super-cycle is unlikely.

A contribution piece by Paul Bloxham, HSBC Chief Economist - Australia, New Zealand and Global Commodities, was first published in The Business Times on 14th May 2021.