A kind of déjà vu on the raw materials market


Global commodity markets this year are being rocked by a host of factors. After the Covid-19 pandemic envelops markets in 2020, destroys demand for raw materials and pushes prices down, markets are quickly regaining their mojo.

Since the start of 2021, the prices of many commodities – energy products, various metals and agriculture – have reached stratospheric levels. Governments and central banks around the world are easing their fiscal and monetary policies in an attempt to boost growth. But inflation expectations, in the process, have risen.

Amid it all, commodities across the board saw a pickup in demand, supply constraints, and price increases. All this, thanks to multiple drivers, including economic growth, geopolitics, monetary policy, currency and weather.

Cereal prices rose 30 to 50 percent, while vegetable oils rose nearly 100 percent. Sugar gained 30 percent. Copper has surpassed $ 10,000 per tonne to set a new record. Brent has soared to over $ 75 a barrel and threatens to hit $ 80.

Is there a feeling of already seen? The developments in 2020-2021 undoubtedly resemble the conditions of 2011-12.

The top five market drivers – economic growth, geopolitics, monetary policy, currency and weather – that impacted commodity markets in 2011-12 are also doing so in 2020-2021.

Currently, commodity markets are driven by the prospect of improved economic growth in 2021 and beyond, especially after large-scale vaccination against Covid in many developed countries. Although not at pre-Covid levels, this year’s economic activity is sure to pick up, boosting sentiment and boosting the confidence of market participants.

Without being alarming, geopolitical tensions on the one hand, and improving demand on the other hand, keep the energy market dynamic. OPEC + continues to demonstrate exemplary discipline in keeping crude oil production restricted in accordance with the agreement. Sanctions against Iran for its nuclear program are still in place. The upside risks to the price of crude oil from current levels are real.

Led by the US Federal Reserve, central banks around the world are easing monetary policies, increasing liquidity and lowering interest rates in order to revive their economies. “Lower for longer” is the new credo of most central bankers. Some of the cheap silver ends up in the commodity market. The boom in commodities we are witnessing today is essentially linked to liquidity.

The US dollar has depreciated over the past year, particularly against the euro. A weaker dollar propels commodity prices. The dollar weakened to 1.21 against the euro from 1.12 a year ago. Certainly, the greenback is showing signs of appreciation.

The La Nina weather phenomenon has had an impact on agriculture since the last quarter of 2020. While South Asia and Southeast Asia have received above normal rainfall, South America had to deal with dry weather conditions. With Brazil and Argentina most affected by the dry weather, harvests of sugar cane, soybeans, corn and other crops were in deficit. This caused agricultural markets to skyrocket in the first half of 2021.

Almost identical conditions prevailed in 2011-12. Growth concerns were the same then as they are today. Due to geopolitical tensions, notably due to Iran’s nuclear program and instabilities in the MENA region, Brent crude has exceeded $ 100 a barrel, creating an inflation risk for many import-dependent economies.

Policy flexibility

To overcome the negative fallout from the great financial crisis of 2009, the United States eased its fiscal and monetary policies and resorted to quantitative easing. The injection of enormous liquidity boosted the prices of raw materials. Copper reached historic highs around this time and threatened to hit $ 10,000 a tonne.

The dollar had depreciated sharply and was trading at a low of 1.45 / €. It took about three years of consistent economic performance in the United States for the greenback to regain some of its lost glory.

The weather model was also a repeat. In 2011, South America faced La Nina conditions which affected crops such as soybeans and cane. Sugar hit a decades-long high of 34.8 cents per pound in 2010 and remained above 30 cents in 2011. Not to be outdone, palm oil hit a record 3,800 ringgits. malay per tonne due to a production deficit for the first time in two decades.

For market participants, still traumatized by the global financial crisis two years earlier, regulatory oversight has become stricter. The U.S. commodity derivatives market regulator, the CFTC, has faced challenges due to a wide array of new reforms and regulations imposed under the Dodd-Frank Act. Fortunately, regulators are not faced with such a challenge this time around.

India was growing at 8.5-9% per year at the time, but faced the greatest risk in the form of inflation driven by commodity prices. The period was marked by rising incomes, including rural incomes, strong growth in consumption and continued consumer confidence. The RBI continued to tighten liquidity by steadily raising interest rates. This time it’s different.

The author is a political commentator and an expert on the commodities market. Views are personal


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