COMMENT – Crystal gazing at 2021 commodities cycle – only bet is on the pace of coronavirus recovery

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The spread of the Covid-19 pandemic led to lockdowns and economic devastation across the world. The story for commodities was far more nuanced, reflecting that the pandemic was not your run-of-the-mill global recession.

The story for 2021 is likely to be dominated by the recovery from the coronavirus, especially since it now seems likely that viable vaccines will be widely distributed over the year.

One commodity that had a stellar coronavirus year run has been iron ore. During 2020, price of iron ore with 62% Fe content, went up a whopping 89% – from $ 79.60 in March to $ 150.15 in December 2020. Iron ore has benefited from both supply issues Brazil, the second largest exporter, and strong demand from China, which buys more than two-thirds of the ore.

The commodity is the most obvious beneficiary of Beijing’s massive stimulus spending as it sought to boost the economy in the wake of the coronavirus lockdowns, with construction and infrastructure projects keeping steel demand red-hot.

In 2021, iron ore may lose some of its steam. Brazil’s ore blues is likely to end, hopefully flushing the world with the red ore. China is likely to continue its stimulus albeit at a slower pace. It’s unlikely that the iron ore price will crash dramatically, but it might stabilize a tad.

Similar to iron ore, copper is also effectively a China story in 2020, with imports of the industrial metal up 38.7% in the first 11 months of the year from the same period in 2019.

While iron ore and copper are the heavyweights of the metal world, China’s influence has also been felt in aluminium and nickel, both of which have had positive years on the back of buying from the world’s biggest consumer of commodities.

Chances are, copper will also lose some steam from its coronavirus-recovery rally. London copper futures have jumped 67% since their low on March 23 to end at $7,723 a tonne on 9 December.

While metals have benefited from the coronavirus stimulus in China and elsewhere in Asia, and are thus at risk of a pullback as the spending moderates, the story for energy commodities appears to be reversed.

Global benchmark Brent crude futures sank to a 17-year low, and U.S. benchmark West Texas Intermediate even went negative at one point this year as market players scrambled to avoid taking physical delivery as a contract neared its end.

While crude prices were rescued by the output cut agreement reached by the OPEC+ group, they have been trapped in a narrow band around $45 a barrel for the past six months.

If the vaccine rollout does prove successful, it stands to reason that crude may recover – especially if aviation picks up – but this may be a second half of 2021 story.

Coal looks increasingly isolated from the rest of the complex. The two major markets of China and India notwithstanding, efforts to end its role as a major source of electricity will continue unabated.  

The trick for coal will be for producers to match supply to declining demand over the coming years, making it challenging to forecast the likely direction of prices based on market fundamentals. Coal is also an example of a trend that has been building momentum in recent years, namely the switch to renewable energy and the de-carbonising of the global economy.

The defeat of U.S. President Donald Trump and his replacement with Joe Biden is likely to boost the cause of action to combat climate change. And that means dirty fuels like coal, and to some extent liquefied natural gas, are going to feel more pressure.

Shekhar Ghosh is a communications consultant and and former journalist, who has edited and written for publications such as like Business India, Business Standard, Business Today and Outlook.

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