Tuesday, January 18

The raw materials supercycle comes to an end

The Commodity supercycle is coming to an end. This is the claim that analysts at Citigroup defend, even though there are opinions that argue that precious metals and commodities will outperform energy.

“Some analysts believe that the superior performance of raw materials of the past year and a half (coinciding with the appearance of the coronavirus), will continue, driving a new supercycle that will last for some time. However, we do not agree”, assured the analysts of Citi.

And this is because the boom in demand in the last period of the supercycle will not repeat itself. In fact, the bank forecasts a “radical” drop in energy costs from the end of the first quarter, followed in the second half by lower prices for agricultural products.

As a consequence, this will have negative effects on inflation, as expected by central banks, which will see the CPI fall. Instead, they do admit that industrial metals, especially aluminum and copper, could see a boom in the short to medium term due to decarbonisation.

Uneven behavior of raw materials

The behavior of commodities is subject to different factors, acknowledges Catherine Doyle, investment strategist at BNY Mellon Global Real Return Fund.

Some are relatively generic, like GDP growth, the impact of monetary stimuli or currency movements (especially the US dollar). “Other factors are more idiosyncratic and specifically affect certain raw materials. In the end, all these factors influence supply and demand ”, explains the expert.

In this way, some materials such as copper benefit from a more precarious balance between supply and demand (The economic recovery has boosted demand, but the bottlenecks it was hit means that supply is still not flowing properly.)

In addition, its use in green energy and electric cars will be another catalyst for prices, while oil will also see how demand will recover and be robust for several years, given the fall in production in countries that are not part of the OPEC.

The Fed’s Role in Commodities

The fact that the Fed has been somewhat more aggressive, adds Doyle, it has caused a sharp reaction in some areas of the market such as metals and short-term US Treasuries, as well as a rotation from value to growth.

However, “it is too early to draw conclusions about the path that the different asset classes will follow, as the Fed may recalibrate its comments according to the effect they have on market prices. In the short term, gold will be pressured by both the appreciation of the dollar and the recent spike in real interest rates”, Explains the expert.

Forecast for raw materials for the next few months

So, in the face of these commodity flows, what can you expect in the coming months? WisdomTree has updated its forecasts. Thus, the manager believes that Agricultural produce poised for a higher probability of La Niña during winter.

The probability of a La Niña weather pattern developing this year has been increased to 90 percent, which could provide an upward price for wheat, corn and soybeans.

Conversely, the seasonal normalization of the US inventory has pushed down natural gas prices, dragging the set of energy products down.

However, “natural gas is still trading significantly above its 200-day moving average and the threat of supplier shortages in other parts of the world is likely to keep natural gas prices high in the United States.”

As for industrial metals, their evolution suggests that it will be positive as a consequence of the increase in use thanks to the openings of the economies and with the permission of the omicron variant.

Finally, precious metals will benefit from inflation. Gold finally seems to be finding the inflation support that it has been looking for for several months, as it is an asset that acts as a hedge against rising prices.

According to Invesco, gold is appreciating 15 percent annually with increases in the CPI above 3 percent.