Signs point to commodity boom

Some analysts think commodity-specific factors and overall global macroeconomic trends will drive prices higher in 2021

Could 2021 see a structural commodity bull market beginning to charge through the post-pandemic world?

Goldman Sachs’ chief commodity market analyst thinks so but Morgan Stanley’s strategists don’t agree.

And in the wake of the incredible disruptions of 2020, it’s clear that the future path of commodity values is anything but clear.

“The short-run outlook is very murky,” said Morgan Stanley’s Andrew Sheets in a November 2021 discussion.

Jeff Currie of Goldman Sachs is an unabashed commodity bull. He sees both commodity-specific factors and overall global macroeconomic trends driving commodity prices higher in 2021.

“Every single commodity market, with the exception of coffee, cocoa and iron ore, are in a deficit right now,” said Currie on Oct. 27.

“The hit to supply has been massive despite a wall of worry around demand right now.”

Currie said pandemic-related production cuts have followed years of underinvestment in everything from industrial metals to oil and gas. Investors have preferred to plow their money into more exciting areas, such as tech stocks and bonds. At a certain point, which he thinks is already likely at hand, markets will wake up to the shortfalls.

He calls that “the revenge of the old economy,” something which has happened before, as in the late 1990s “dot-com” stock market rally that set up the 2000s to 2014 commodity bull market.

“Capital has been siphoned out of this sector,” said Currie.

The bull market will be helped by the huge government spending that is taking place around the world. Much is going into infrastructure investment, which will see commodities like copper become scarce.

“This is as big as the BRICs (Brazil, Russia, India, China) story back 20 years ago,” said Currie.

A weakening U.S. dollar and the rekindling of inflation will also drive investment money into commodities, creating a “very robust background for commodities right now.”

That should see commodities soar in 2021 and beyond.

“This thing has legs till 2022,” said Currie.

The only major commodity he isn’t bullish on right now is oil, which he expects to remain weak until the spring.

Morgan Stanley analysts see the situation differently.

Even though they expect 2021 to see global economic growth surge and stock markets rally, along with inflation reborn, they don’t expect to see that feed into commodity values.

“We’re a little more downbeat on commodities compared to the others,” said Sheets in a Nov. 20 outlook.

Most commodities have healthy stockpiles and demand will remain suppressed for a couple more months before strong economic growth begins to lift most of the world out of the pandemic recession.

“Markets are maybe facing their toughest, most uncertain time of the year over the next two months,” said Sheets.

Global growth should be more than six percent in 2021, Sheets thinks, which will spark inflation and should support certain assets, like copper, but the solid supplies of most commodities should restrain their upside potential for most of the year.

Much pre-pandemic demand has been suppressed and that will take a while to restore.

Commodity bull markets are trends that see a general rise in commodity values regardless of category, from precious metals to industrial metals to energy to agriculture. They tend to follow years of strong economic growth that see stockpiles of many commodities diminish. Agricultural commodities were slow to join the last bull market, but in 2006 they began rising to levels never before seen.

If a commodity bull market is beginning now, that would not fit the regular pattern, Currie acknowledged.

“We’re in a very unique time period,” said Currie.

Since the pandemic hit, different commodity classes have seen different impacts on their values.

Agricultural commodity values have escaped all but short-term shocks, remaining strong today despite the global hit to consumers’ incomes.

Oil prices, on the other hand, collapsed as air travel evaporated and tens of millions of commuters stopped driving to offices.

Copper prices first fell but then bounced back as some countries, with China the most notable, responding to the economic slump by pouring money into infrastructure spending.

Agriculture values have remained firm in most parts of the world as people prioritized food purchases and stockpiled supplies at home. Most crop futures have been rallying since early August in one of the most profound rallies in the commodities market.

Most macroeconomic analysts believe inflation will remain restrained in 2021, but that’s where Goldman Sachs and Morgan Stanley share an outlook for surging inflation.

The growth that should come out of the ending of the pandemic combined with huge government spending will see prices of many things rise.

“All of these stories all funnel up into inflationary tail risk,” said Currie.

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