The investment road to ruin is paved with the boasts of commodity price bulls. Acolyte Blythe Masters, former head of JPMorgan’s global commodities, turned tail and moved to a blockchain start-up. Remaining optimists await another multi-decade price supercycle. But even if post-pandemic recovery improves commodity demand, it will not spur another boom.
Over the past 120 years, there have been four extended commodity price booms, according to Capital Economics. Each had a unique driving force — two from war recoveries, one due to the Opec shock and the last from China’s rapid industrialisation. Supercycle adherents believe a combination of rising industrial demand and lack of investment in mines and oil exploration will lead to a reflationary boom in the 2020s.
Metals, agricultural and oil commodity indices have surged up to 40 per cent since last July. This partly follows a surge in green energy projects. The EU, US and China have all promised to spend big. Hydrogen projects alone could receive €30bn from the EU. Copper has rallied to eight-year highs, around $8,375 per tonne, as electric vehicles grow more popular. Glencore expects world copper demand will double by 2050 and that mine investment is insufficient.
Much depends on China. The country represents half or more of demand for many commodities. But Beijing has already begun to wind back some of the stimulus used to restart its post-pandemic economy. This year the central bank has begun withdrawing liquidity from local markets. Already, the $4tn Chinese corporate bond market looks wobbly following record defaults last year. An enforced slowdown should temper commodities demand.
Expecting a long-term surge in renewable energy demand to coincide with much higher oil prices also looks contradictory. More than half of the weighting of commodity benchmark the S&P GSCI is oil related. Opec can control supply to support prices, but a multi-decade jump in oil demand is required. That must come from Asia, responsible for about 37 per cent of world consumption. Most of that comes from China. No prizes for guessing which country has the world’s largest electric vehicle market. As for agriculture, higher prices will only trigger more planting, regardless of where it is best suited.
Almost every commodity, and asset class, has rallied on the back of loose monetary policies. These policies will not last for ever. Nor will the latest surge in commodity prices.