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We’ve seen a really strong market for commodities over the past five years, and now markets and investors are in somewhat unusual territory. We however need to get some perspective, and a really good way of doing this is to look at the Bloomberg Commodity Index, which shows a very strong chart even allowing for the recent correction in commodity prices across the board. It shows that whilst the recent pullback in commodity prices has attracted headlines, we saw commodity indices at all-time record highs just recently, so they are coming off a very significant peak.
Ongoing supply-side problems related to covid, the Ukraine war, rising industry costs and declining grades, along with funding taps being turned off, will help provide support for commodity prices. How far commodity prices will fall will be dependent on ongoing economic data, but it is probably reasonable to speculate that the worst has probably been largely factored into commodity prices already.
If prices fall too much further, we will be faced with instances of miners shuttering production due to falling margins. Remember, this boom has been unlike previous booms, where previously miners have boosted production incentivised by high prices. This time around, miners have learnt the mistakes of the past, thus maintaining a significant degree of supply-side discipline.
Supply-side problems are very real, and even with lowered economic growth projections, present an ongoing concern for markets in terms of LME inventories for example.
If we have a look at the 20-year chart of the copper price, we see a metal that has been in an upward growth trend for the past two decades. The recent retracement in copper prices must also be seen in this context. What’s also interesting with copper is that the price bottoms have been trending higher. Back in 2001 the price bottomed at around $0.60, then the next bottom was just under $1.50 in 2008, then we saw prices bottom around $2.05 in 2016, then $2.20 in the early days of covid. Copper prices are still more than 50% higher than those levels.
Markets are effectively grappling with a near-term downturn within the context of a medium to longer-term bull market in commodities. The move to renewable and cleaner energy that was initiated during the post-covid recover era, has not gone away. End-users have pointed to massive investment that needs to take place in order for renewable energy and EVs to become a reality, and that medium to longer-term scenario hasn’t changed. For most commodities we are looking at the need for a 10 to 15-fold increase in production, if it can be achieved, over the next couple of decades. This is in an environment of growing ESG factors, which will hamper the rate of project commissioning.
The current market downturn will only exacerbate the eventual recovery, making the price reaction even more explosive.