The next supercycle ?
Global commodities have witnessed a bull run over the last 12 months, reviving hopes of the beginning of the next supercycle in commodity prices. It is too premature to predict massive price inflation, reminiscent of the commodities boom of the 2000s. But the present rally seems driven more by easy money than anything else. The current price rise began with the election of Donald Trump as U.S. President, which led to hopes of increased public investment in infrastructure projects.
Signs of a revival of the global economy and curbs on production imposed by the Chinese government to tackle pollution also led speculators to bid up commodities in anticipation of inadequate supply. Aluminium prices hit a record six-year high last month, while commodities such as copper, zinc and nickel recorded multi-year highs recently. Many of these commodities have risen in the range of 30% to 40% over the last year. It is notable that the end of the previous commodities supercycle in 2014, followed by a steep fall in prices in the next two years, coincided with the slowdown in the Chinese economy. Signs of economic recovery, driven substantially by stimulus investment in Chinese infrastructure, have thus had a significantly favourable impact on commodity prices for now. Oil alone has been an outlier to the recent trend, with the U.S. shale industry having destroyed OPEC’s strong control over supply. The recent run-up in commodity prices, however, can only be partially explained by structural changes in demand and supply.
A vital clue to the rest of the story lies in how commodity prices have performed vis-a-vis the U.S. dollar. The dollar strengthened in the last quarter of 2016 even as commodity prices shot up due to market euphoria after the election of Mr. Trump. This was in direct contrast to the historical relationship between the dollar and commodity prices, which saw a stronger dollar associated with weaker commodity prices. The new relationship between the dollar and commodities continued into the first half of 2017; this time around, however, the dollar weakened by as much as 5% while commodity prices dropped in tandem. The earlier market euphoria around a recovery in commodities demand backed by a stronger economy had died out pretty fast. In fact, the first half of 2017 turned out to be a particularly ugly one for commodities with a sharp drop in prices. Consequently, even after the recent boost in prices, the Bloomberg Commodity Index currently continues to trade lower year-to-date. The last few months, however, have witnessed a recovery in the commodity index, along with the historic relationship between the dollar and commodities being restored. In fact, the U.S. dollar index has now dropped by almost 10% since the beginning of the year. This might suggest that the current rally in commodities may be largely driven by a weakening dollar rather than any substantial change in global economic outlook.
Premature: occurring or done before the usual or proper time; too early.
Example: The sun can cause premature aging
Synonyms: untimely, (too) early, unseasonable, before time
Reminiscent: tending to remind one of something.
Example: The sights were reminiscent of my childhood
Revival: an improvement in the condition or strength of something.
Example: A revival in the fortunes of the party
Synonyms: improvement, recovery, rallying, picking up, amelioration, turn for the better
Tackle: make determined efforts to deal with a problem or difficult task.
Example: Police have launched an initiative to tackle rising crime
Synonyms: come to grips with, address, get to work on, set one’s hand to
Anticipation: the action of anticipating something; expectation or prediction.
Example: Her eyes sparkled with anticipation
Synonyms: expectancy, expectation, excitement, suspense
Substantial: considerable importance, size, or worth.
Example: A substantial amount of cash
Synonyms: considerable, real, significant, important, notable, major
Stimulus: a thing or event that evokes a specific functional reaction in an organ or tissue.
Example: Areas of the brain which respond to auditory stimuli
Euphoria: a feeling or state of intense excitement and happiness.
Example: The euphoria of success will fuel your desire to continue training
Synonyms: elation, happiness, joy, delight, glee, excitement, exhilaration
Tandem: a bicycle with seats and pedals for two riders, one behind the other.
Example: However, I did make a road bike, mountain bike and a tandem for this particular customer which did not shimmy.