COMMENT – A year after pandemic lockdowns, has the commodity cycle turned for good?

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Last March, as the world economy shut down, commodity producers knew they were in for a harrowing time. Demand fell off a cliff and producers scrambled to cut capacity.

Mines shut shop, rolling mills ground to a halt and oil transporters had to pay buyers to take delivery. A year later, the speed of the bounce-back in prices and demand has got the world in a tizzy.

While a part of the surge in prices is on account of a pervasive bullish sentiment that has commodities along with other assets from stocks to bitcoin and gold to oil skyrocketing to new highs, a large part of the increase in demand is on account of inventory restocking as well as anticipated spending on infrastructure.

The obvious inference is that prices look set to stay elevated for an extended period. Already some commodities have hit their past peaks. At $175 per tonne, iron ore costs as much as its 2012 peak. Copper prices are up by 70 per cent in the last year to $9,100 a tonne and oil has doubled in the last year to $70 a barrel.

This sharp swift rise has stoked inflation expectations, which were largely absent from the developed world for the last decade. Commodity bulls are asking whether they could be in for a commodity super cycle—an extended period of prices rising for years, even decades.

Exchange-traded products that track commodities are proving to be popular again. These were popular in the 2000s before falling out of favour after 2014.

However, a structural shift, such as the infrastructure building post World War II, or the rise of Chinese consumption is less pronounced this time. There is also a shift in demand patterns for certain commodities on account of the green economy. Demand for oil could fundamentally decline even as it rises for aluminium, cobalt and lithium that are used in electric vehicles.

Given the quick pullback in demand, the case for a commodity bull market is clear. First, there has been a lack of investment due to climate change concerns. Second, as economies become more green, there would be an increased use of commodities in that transformation. Third, fiscal deficits look here to stay for the foreseeable future. Fourth, in a world with negative interest rates, equities are seen as an asset class with a positive yield.

Commodities have also begun to occupy that position. For instance, the difference between the spot and January 2022 price of iron ore is 38 percent. In other words, owning commodities even for short periods can prove to be beneficial

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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