By William Watts
Long-suffering commodity markets may have turned a corner after a pandemic-induced collapse in 2020. What happens next may depend on the fate of the U.S. dollar.
“The only way to get commodities moving in an inflationary, buying power way is a weaker dollar,” said Doug King, head of RCMA’s Merchant Commodity Fund and one of the world’s best known commodity traders, in an interview with MarketWatch.
And a glide path to a weaker dollar does indeed appear to be in place, King said.
2020 was a messy and volatile year for commodities, as it was for other assets. But commodities are coming off a long stretch of weakness after a China-fueled commodity boom — part of what some economists and investors labeled a supercycle — appeared to peak in 2011.
The signature event of 2020 came in April when a crash in oil prices saw West Texas Intermediate crude futures traded on the New York Mercantile Exchange trade — and close — in negative territory for the first time ever . In other words, traders were paid to take crude off other traders’ hands.
The debacle underscored the shock that rocked financial markets and the global economy as activity around the world ground to a near halt in an initial effort to contain the COVID-19 pandemic.
It wasn’t just oil that suffered. The Bloomberg Commodity Index /zigman2/quotes/210597940/realtime XX:BCOM +0.35% , which tracks 23 commodity futures markets, traded at an all-time low in April based on data going back to 1991, according to Dow Jones Market Data.
Since then, a broad-based commodity rally has seen the index rise more than 27% from its low, though it remains down more than 7% for the year.
Much of the rebound has come as China, where the novel coronavirus that causes COVID-19 first emerged in late 2019, remains in recovery mode. After being the first major economy to be slammed by the virus, China — and much of the rest of Asia — have appeared to do a better job containing the virus, sparking a resurgence in economic activity and prompting a sharp rise in demand for a range of commodities, including corn, soybeans and industrial metals.
Analysts at Montreal-based Pavilion Global Markets noted that Chinese demand for commodities, including oil, soybeans, and more recently, copper, is outpacing the level seen during the peak of China’s industrialization, which fueled the early 2000s surge in commodity prices.
“It isn’t just copper either; the prices of various industrial metals, from lead and iron ore to nickel and zinc, are rising,” they said in an Oct. 31 note.
The developed world remains the wild card, but ultralow interest rates, high savings rates and governments that appear committed to spending on infrastructure and avoiding austerity fuel optimism both for demand and the potential for an inflationary backdrop that would be a positive for a range of commodities.
Bullish expectations also are being fueled by supply constraints, which have been exacerbated for some commodities, including metals, amid pandemic-related shutdowns of mines and other interruptions to supply chains. What’s more, those constraints come as weak prices for a range of commodities have left investment and productive capacity at low ebb.
Take copper, for example.
S&P Global Market Intelligence, in a June report , described a “dismal decade” of underinvestment in the industry. The report noted that there have been 224 copper deposits discovered between 1990 and 2019. But only 16 were found within in the past 10 years and just one since 2015. And while there are still plenty of undeveloped discoveries, most are smaller or low-grade, the report found, with few high-quality assets available for development.