Thursday, March 28, 2024 | Ramadan 17, 1445 H
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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

Rising yields a short-term threat to the commodity bull-run

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Commodities continue to witness increased attention and demand. Following a near decade of trading sideways to lower, it has embarked on a strong rally with individual commodities reaching multi-year highs.


During the past decade we witnessed a period of strength among individual commodities but in recent months it has become noticeably more synchronised across all the three sectors: energy; metals; and agriculture.


However, following the spike in US bond yields this past week, the sectors recent success in attracting record amounts of speculative buying may in the short-term, and despite strong fundamentals, force a correction or at best a period of consolidation. In this update we take a closer look at the reasons behind the rally and why yield moves matter.


There are plenty of reasons why commodities are on the move, but importantly there are expectations for a post-pandemic growth sprint with large amounts of stimulus driving demand for inflation hedges and green transformation themes.


This is against a backdrop of the tightening supply of several key commodities following years of under investment.


These developments increasingly drive expectations that we have entered a new dawn for commodities, raising the prospect for a new super cycle.


A super cycle is characterised by prolonged periods of mismatch between surging demand and inelastic supply.


These supply and demand imbalances take time to correct due to high start-up capex for new projects, alongside the time needed to harness new supply.


For example, in the copper industry it can be ten years from decision to production. Such periods often cause companies to postpone investment decisions awaiting rising prices, at which point it is often too late to avoid further price gains.


Previous demand-driven super cycles included rearmament before WW2, and the reform of the Chinese economy which accelerated following its accession to the WTO in 2001.


Then, the period prior to the 2008 global financial crisis saw the Bloomberg Commodity Total Return index surged by 215 per cent. Super cycles can also be supply driven with the most recent being the Opec oil embargo of the 1970’s.


It is expected that the next commodity super cycle will not only be driven by recovering demand, but also heightened inflation risks at a time when investors will need real assets such as commodities to hedge their portfolios following years of sub-par returns.


In addition, following a decade when investment in technology was preferred over hard assets there has been a lack of new supply lines.


Whereas the early November vaccine news coupled with Joe Biden’s winning of the US presidency helped boost the sector, its current rally is almost ten months old.


Launched last April at the peak of the Covid-19 pandemic, the initial rally was driven by producers cutting supplies while China embarked on a massive stimulus programme to reignite their economy. [The writer is Head of Commodity Strategy at Saxo Bank]


 


Ole S Hansen


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