Investors dump commodities

The last 12 months have been truly remarkable for most commodity investors as vast amounts of stimulus, economies reopening from the pandemic and strong Chinese demand have driven a surge in raw-materials prices recently, some to record highs. Industrial metals, energy, most agricultural commodities and lumber have all enjoyed extraordinary price gains, fueling a debate about whether raw materials are in a new super cycle. Yet they have slumped in the past two weeks, with some wiping out gains for the year on the back of a more hawkish US monetary policy tone and a consequent rise the US dollar, and China’s bid to cool inflation pressures through the release of state reserves for key metals.

While all this has blown away some of the speculative forth from the market, the big question remains whether the latest commodities bull run has passed its peak or is just taking a breather. Either way, the direction may not be broad based, with each commodity complex having its own individual levers pushing and pulling.

For copper, the year-long rally to a record in May was sparked by surging Chinese demand. However, currently there are signs that orders from manufacturers are starting to wane. On their part, bulls are confident that the rest of the world will pick up the slack as renewable energy and electric-vehicle investment creates a step-change in demand in Europe and North America. Copper, because of its conductivity, tends to be used four or five times more in electric cars than in conventional combustion engine cars. Still, it could be a while before that spending makes its way to factory order books, and softer demand in the meantime could embolden bears who think that current high prices are simply not justified by fundamentals.

Iron ore is one of the most volatility commodity right now, making its trajectory particularly hard to predict. The commodity surged to a record, collapsed into a bear market and then rebounded back into a bull market within a matter of weeks as trades grappled with the murky outlook for demand in top consumer China. Both bulls and bears are keeping a close eye on China’s simultaneous goals of containing the inflation pressures stemming from high commodity prices and to make its vast steel sector greener. The country’s steel output is still on track to smash another record this year, which might prompt further actions from authorities to restrict production and whipsaw iron ore yet again.

In the case of oil, focus is already turning to how sharply demand will recover over the summer. While there are signs the US is leading the way as western economies reopen, the spread of the delta variant of the coronavirus, first identified in India, is raising renewed concern about the path for consumption in parts of Asia. For now, it looks as though the market is going to need extra supply in the second half of the year. The OPEC+ group is yet to confirm plans for production beyond July, while US shale producers continue to preach discipline as they are back into the black again. All the more reason then, that the focus is so intense on when the market will see Iranian supply return as talks with the US continue.

Finally, the trajectory for gold is more susceptible to Federal Reserve actions than perhaps any other commodity. It tumbled to the lowest since early May after the US central bank signaled monetary policy tightening could start earlier than expected and the dollar jumped. Although the precious metal is often bought as a hedge against inflation, the Fed signaled last week that higher-than-expected inflation will not be allow to persist, opening up the door for faster stimulus tapering. That weighs on the appeal of non-interest-bearing gold.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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