Oil prices have staged a comeback in the past year, but the prices of a wide range of commodities are experiencing an even more dramatic upswing.
Multiple factors are working in concert to drive up commodities prices, with a growing chorus of analysts predicting a “super-cycle” will unfold over the course of the 2020s.
Commodity prices surge
Commodity prices are rising across the board.
Commodity prices are rising across the board, and there are multiple reasons for the broad rally. Demand in Asia bounced back from the pandemic last year and has remained high, while the U.S. and Europe are now emerging from hibernation, adding to global demand. Energy and commodity markets are also in the midst of a massive shift towards cleaner energy, resulting in capital flowing into a class of metals needed for the energy transition. The investment trend has caught fire. Finally, expansionary fiscal and monetary policy aimed at boosting the economy has also resulted in price increases for commodities.
The Fuse reported on the early signs of a brewing “super-cycle” last November, months ahead of the rally in commodities that really took off this year.
A basket of base metals including copper, aluminum, zinc, tin and lead recently jumped to close to record levels. The Bloomberg Commodity Spot Index is up nearly 22 percent just this year, and is now at a decade high. Steel, lumber, and corn are also surging. The impacts will be felt downstream – higher costs for homebuilding and even food.
Prices for metals have increased to such a degree that the top five iron ore mining companies are now expected to earn a combined $65 billion this year, according to Bloomberg, a sum that would exceed the total earnings of the top five oil majors. “The value right now has shifted from energy to metals,” Mark Hansen, CEO of trading house Concord Resources Ltd., told Bloomberg.
China’s net imports of refined copper spiked by 38 percent in 2020, according to Reuters, a historical annual increase. That offset the decline in copper demand elsewhere as a result of the pandemic. Prices have more than doubled in the past year to over $10,000 per tonne.
The International Energy Agency warned in a recent report that shortages of critical minerals could delay the energy transition and make it more costly. The agency urged governments and markets to focus on new supply.
It can take years to permit new mines.
It can take years to permit new mines. Meanwhile, with prices increases visible across a wide range of commodities, there is growing speculation that the super-cycle could fuel inflation. That prompted a comment from U.S. Treasury Secretary earlier this month that interest rates may need to rise, a statement that spooked financial markets. The position of the Federal Reserve over the past year has been that loose monetary policy would stick around for a while, and any inflation would be temporary. Secretary Yellen later echoed that position, and clarified that she was not predicting rate increases.
Some of the price pressure could indeed be temporary, as they relate to weather-related outages, supply chain disruptions from the pandemic, and the unusual surge in demand as economies come out of pandemic-induced lockdown. The U.S. auto industry, for example, has been forced to temporarily idle production of cars because of semiconductor chip shortages.
But price increases for critical inputs to a long list of manufacturing industries means that prices for an endless number of goods could see upward pressure. Vestas Wind Systems, the world’s largest manufacturer of wind turbines, said recently that it would need to hike its prices because the cost of steel has climbed 25 percent this year. “There’s no way we will and can absorb that,” Vestas CEO Henrik Andersen told Bloomberg on May 5. “Projects that come in now will see a reflection that it has become more expensive to get the turbines.”
Copper in particular has stood out as it will be a crucial metal used in the global shift towards electrification. Copper prices have soared in 2021.
“Copper is the new oil.”
“Copper is the new oil. It’s the strategically most important commodity,” Jeff Currie, global head of commodities at Goldman Sachs, said on Bloomberg TV. When the Bloomberg reporter asked if global markets were prepared for the coming need for copper, Currie responded: “Absolutely not. It’s sleepwalking into this.”
He compared today’s copper market to that of the oil market in 2002 – that is, a commodity on the cusp of a long-term bull market. But the difference with the oil market two decades ago was that there were known oil reserves that could be tapped if prices rose high enough, particularly in U.S. shale. For copper, that is not the case. “We don’t know of any type of technology that can solve this problem,” Currie said.
Prices are already up, but a shift in mindset from miners to focus on cash flow instead of supply growth – which came in response to several down cycles – has sowed the seeds of a shortage, he added. “We’re not seeing a supply response to these higher prices,” Currie said. “We start to look out five, seven years – the deficit becomes unprecedented.”