Furnace of industry
After a torrid year that left oil in negative territory the mood music has changed, writes
Light at the end of tunnel for pandemic forges the beginnings of a new commodities supercycle
Ten months ago futures contracts for US crude oil went negative for the first time as traders rushed to get oil off their hands in a supply glut triggered by lockdown.
Those surreal days look unlikely to be repeated during the pandemic, with Brent crude this week hitting $66 a barrel – the same level as the start of last year. West Texas Intermediate, the North American benchmark, has also added more than $10 this year to $63.
Meanwhile, copper hit $9,000 for the first time in almost a decade, and mining giants BHP and Rio Tinto are handing out bumper dividends on the back of rising iron ore prices. Soya bean prices are also up.
For the metals rally Chinese demand – both for use and for stockpiling – is key, as it has been for the past 20 years. But prices are also being boosted by financial investors worried about inflation, and optimism about massive global spending on green projects and the vaccine rollout.
“Even if we take the microcosm of the UK, you are seeing that [optimism] with all the campsites being booked,” says Chris Midgley, global head of analytics at S&P Global Platts. “Sectors are going to get a huge boost. We can see demand [for oil] growing at 3m barrels a month.”
With spending on new mining projects low even before the pandemic, there is growing optimism about a new long-term commodities price rally, with Goldman Sachs predicting a potential repeat of the heady days of the 2000s, when copper rose from $2,000 to more than $10,000 a ton.
This chatter has given rise to speculation of a new commodities “supercycle”. Such prolonged highs have occurred at times of huge change, such as the rapid economic growth of the 1960s and 1970s in Europe, America in the 1920s, and during the 2000s in China and the other “BRIC” countries before the global financial crisis put the brakes on.
Jeff Currie, global head of commodity research at Goldman Sachs, argues that forces at play today are similar to those in the mid-1960s and 1970s, creating the bull market.
Efforts to cut income inequality akin to Lyndon Johnson’s “war on poverty” in the 1960s should lead to higher consumer spending, while China’s stockpiling of strategic reserves harks back to European and American behaviour in the 1970s, he says.
Efforts to combat climate change, reminiscent of the 1980s fight against acid rain, should trigger a seismic increase in demand in particular for copper and cobalt for wind turbines and electric car batteries. China has announced plans to produce net zero emissions by 2060, while President Biden has recommitted the US to the Paris Agreement on climate.
But Currie does not believe that oil will miss out on the boom in green spending, as it benefits from the stimulus effect even if it is not the intended target. He estimates $2 trillion of green spending in the US over two years will increase oil demand by 200,000 barrels per day
– or 1pc of global demand.
“Let’s remember, what’s unique about this is everyone everywhere in the world is doing the same thing at the same time,” he told S&P Global Platts.
Bernstein analyst Bob Brackett also sees the potential. The China-led commodity boom of the 2000s “involved the pent-up demand of roughly 1bn people wanting an apartment, a car, appliances, and an improved lifestyle”, he notes. “The decarbonisation of the planet involves all 8bn of us (and rising) and a similar recapitalisation of nearly everything if it is achieved.”
The jury is still out, however. Jumana Saleheen, chief economist at CRU Group, is among those more cautious about predictions of a supercycle, noting there is more talk than action about green spending plans. “There might be a multi-year commodity price high – but we just want to manage expectations about a ‘supercycle’,” she says.
Jakob Stausholm, the Rio Tinto chief executive, is also cautious. Miners were caught out during the 2000s commodities boom when they splashed out too heavily.
“There is still a lot of commodityintensive growth but I really just would caution us from concluding anything for the [longer term],” he said this month.
Analysts from BMO do not forecast enough growth to justify calling it a supercycle. But while physical demand for metals is relatively easy to understand, with reliance on China lessening as other economies expand, they note demand from the financial markets could yet change the dial.
Money from exchange-traded funds has helped push gold into a “pricing supercycle”, BMO argues, and financial demand for real assets could also grow.
In a year in which silver has already been driven to eight-year highs by retail investors trying to outdo investment banks, it is a factor that cannot be ignored.