The arrival of an uptrend is contemplated that can last decades
The last year has been a roller coaster ride for raw materials. The Covid-19 crisis wiped out the prices of the main basic resources that are traded on the market, paralyzing demand for several months due to the confinements that were decreed throughout the world.
However, the recovery in commodity prices has been rapid, and in just one year the price of Bloomberg’s basket , the Bloomberg Commodity Index , has risen 44.5%, going from 59.5 points in March 2020, up to 86 that it reached in February 2021. This rise has led many analysts to warn of the possibility of a new bullish supercycle in raw materials , which will last for years.
The possibility of spikes in inflation, a circumstance that may accelerate if the rise in commodity prices continues, has already begun to impact financial markets in recent months, generating spikes in debt yields and a slowdown in the rises that had been taking place in risky assets such as the stock market. However, not all experts have the same opinion and there are those who rule out that a raw materials supercycle will materialize in the near future.
The two major central banks on the planet, the US Federal Reserve (Fed) and the European Central Bank (ECB), forecast that inflationary spikes will occur in the medium term, and rule out significant increases in prices in the coming years, an estimate that it collides with those who do expect a long-term supercycle to occur.
The most recent messages from Christine Lagarde, president of the ECB, and Jerome Powell, her counterpart at the Fed, suggest that inflation will remain weak in the coming years. Furthermore, if this were not the case, and despite the fact that in recent months they have acknowledged that they will allow certain short-term spikes in inflation without raising interest rates, both the Fed and the ECB are determined to avoid a sharp rise in interest rates. inflation.
They are not lacking tools, since they have in their hand the dismantling of debt purchase programs, the withdrawal of refinancing operations for the banks, or even directly an interest rate hike , to avoid the specter of inflation. be a problem for the economy of the euro zone and the United States.
The reasons for the increase
In the last 12 months, the rise in raw materials has been especially significant for resources such as wood or oil. The former rises 249% in this period, while a barrel of European crude, Brent, has practically doubled its price. All industrial metals are in the green in the last year, with aluminum rising almost 100%, and tin and copper rebounding more than 80%.
The hope that vaccines would bring back normality after the Covid crisis, with an associated rise in demand for cyclical assets, is behind the rally. However, it is not the only argument in favor of the increases; The use of maritime transport to move medical supplies has also contributed to progress, multiplying by more than 3 times the price of freight on the main routes used for world trade.
The rebound in prices has led many analysts to try to anticipate the future that holds these assets in the coming years and many of them point to the possibility that in 2020 a new bullish supercycle has begun for commodities. Goldman Sachs gave the first warning in January, with the forecast that everything pointed to repeating what already happened in the first decade of 2000. “Looking at this period, we believe that the same structural forces that drove prices in the years 2000 seems to be at stake, “explained the US bank.
At that time, the industrialization and rapid growth of China, which emerged as a world power in those years, was one of the clearest bullish catalysts, until the onset of the 2008 financial crisis. Now, in Goldman’s view, the arrival The green revolution, with the world joining forces to increase sustainability and reduce carbon emissions in the coming years, suggests that it will lead to an upward commodity supercycle.
This transition “has the potential to generate a capex investment cycle similar to the cycle that brought growth to emerging markets in the 2000s,” the bank explains. They are not the only ones who bet on this scenario for the coming years.
From Schroders they wield the same argument, and also include the impact that the lack of supply of raw materials is having, after years of falling investment in the production of many of these resources. “We see several structural similarities between the early 2020s and early 2000s, the last time that commodities began a long and powerful ascent to record prices,” they explain.
“Now, as then, we have seen a significant reduction in investment in the supply of raw materials with capex in oil and gas and mining companies falling about 40% since 2011. In the early 2000s, China represented an important source of demand for raw materials. Today, we may be about to enter an unprecedented period of coordinated global capital investment to facilitate the energy transition, “explains the British manager, coinciding with Goldman’s forecast.
Not everyone takes it for granted
Although there is a lot of optimism on the part of different investment firms, not everyone is so clear that the latest increases are the start of a new supercycle. The US bank JP Morgan maintains good prospects for materials, but, in the opinion of Ian Hui, the firm’s global market strategist, “it is still too early to call it a new supercycle. There are quite a few positive factors for raw materials, but the most appear to be cyclical, rather than a significant structural change that will impact demand for decades, “he says. But he warns that “the boost to renewables is one of the structural factors of this type, but we still need to see more commitment from politicians.”
Of course, whether or not it is the start of a bullish supercycle, Hui acknowledges that “expectations for commodities continue to be bullish in the medium term due to the current recovery, which will support different cyclical sectors, including energy and commodities. materials”.
British manager Janus Henderson shares this point of view. “Although there have been recent warnings that a new super cycle is taking place, we prefer to characterize the rise in commodity markets as a long-term reversal towards their fair price, relative to global equities,” they note. “Whether or not it is the start of a bullish supercycle is not as relevant, as the fact that, if history is of any use, raw materials should improve the behavior of world stock markets for a few years,” they acknowledge.
From Groupama AM, for its part, they consider that the last bullish supercycle of raw materials is too recent for a new one to be produced now. “The hypothesis of a bullish supercycle, especially in industrial raw materials, is even more dubious given that the factors that precisely triggered the previous bullish cycles are not in place. In fact, there is no prospect of a new industrial power emerging, not even a need for reconstruction after massive infrastructure destruction “, explains the manager, who, like Janus, wants to make it clear that” although the thesis of a supercycle does not seem the most probable to us, this does not contradict the temporary rise in prices of raw materials. In fact, exceptional budgetary impulses,
Central banks do not contemplate it
The European Central Bank is very aware of how events have been developing in the market for basic resources in recent months. “Our contact with businesses has made us aware that there is a perception of higher inflation, in a context of rising raw material prices,” explains the ECB in the minutes of the March meeting, which were published on last Thursday. “The bottlenecks in the supply chains and the increase in production costs make it necessary to closely monitor the development of prices in the future,” they acknowledge.
However, the Governing Council of the entity concludes that, for the moment, “we agree that the upward surprise that the latest inflation data has given, as well as the upward revision of our forecasts for the year 2021, they are mainly due to temporary factors, which we hope will dissipate, “they explain, highlighting how the forecasts made by the entity are still” well below our inflation target. ” This target is set at 2%, and the ECB estimates point to an average inflation of 1.5% for 2021, 1.2% for 2022 and 1.4% for 2023.
The inflation forecasts that the Federal Reserve manages for the US economy are considerably higher, and exceed the 2% threshold, both this year and the following two (in 2022 the forecast remains at 2%). While it is true that Powell has pledged to allow inflation to rise above the 2% barrier (the Fed’s target, as well as the ECB’s) before taking steps to tighten the country’s monetary policy, the levels of The inflation expected by the entity does not seem to fit in a scenario of a bullish super-cycle of raw materials.
In fact, in March Powell stressed that “inflation points to increases, but most likely they will be temporary.” Of course, within the US entity there seems to be more fear than in the ECB of an inflationary rebound that would be related to the rise in materials.
The minutes of the last Fed meeting show a divided entity, between those who believe that bottlenecks in production, together with strong demand, will drive inflation “more than is estimated”, and those who believe that they will be temporary factors. Be that as it may, both the Fed and the ECB have tools at their disposal to try to stem the ghost of inflation.
The ECB has inflation forecasts below its target; in the Fed there is more fear of a rebound