Commodities surge on hopes for a brighter future
Despite the turmoil of Covid-19, 2020 turned out to be a bullish period for the commodities complex. While demand in many of the world’s major economies suffered due to lockdowns, supply was also restricted by the virus and a strong bounce back in the Chinese economy helped boost demand for the industrial metals.
Iron ore lead the way higher with a 70% price surge, followed by copper, gold and palladium, up 27%, 24% and 22% respectively. Brent was a notable exception and prices fell by over 20% for the year, despite a significant rally in H2.
The economic backdrop was extremely poor, with global GDP estimated to have fallen by around 4% in 2020 – which would be the largest fall since World War II.
Most countries contracted, with China a rare bright spot. Given the economic malaise, the rally in commodity markets (and financial markets more generally) looks odd at first glance. More important though has been the anticipation of a strong bounce back in economic activity, as vaccines become widely available and economic stimulus starts to feed through.
Oxford Economics, for example, is forecasting that global GDP growth will exceed 5% in 2021 – its fastest pace in over 40 years. Fuel for the recovery will come from central banks and governments who unleashed a tidal wave of fiscal and monetary stimulus in 2020 to boost sentiment and get the world back on its feet post-Covid.
Demand turmoil in 2020 was primarily driven by the path of the virus, but also to a large extent by how each commodity was exposed to the transport and travel sector.
Oil had a particularly torrid time and demand is estimated to fall by about 9% for the year. This was mainly because around 60% of oil is consumed by cars, trucks, aeroplanes and ships, where activity was deeply dented. Aluminium and copper, by contrast, had a relatively good year and we estimate modest demand growth in 2020. Aluminium is getting a lift from rapid growth in the Chinese car market. Meanwhile copper was helped by extra government spending on power grids and a green energy rush towards renewable energy sources, such as wind and solar, and electric vehicles.
In 2021 we forecast strong demand growth across the board, reflecting increased investment by companies, a return to more normal conditions for travel and transport and higher government spending on housing/infrastructure. Oil will lead the way higher, with 5% demand growth, closely followed by iron ore and zinc, these latter markets helped by a return to growth in steel. Aluminium and copper demand should both accelerate, building on the expansion that took place in 2020.
Inevitably, a key risk to the recovery comes from setbacks in vaccine production and distribution. The winds appear to be favourable though and it seems likely that by the end of 2021 the world will be producing enough to vaccinate the entire vulnerable population of the world – around 1.6bn people.
AstraZeneca alone should be able to do most of this on current plans (with manufacturing capacity expected to reach 3bn doses next year) and on top of this there are the approved vaccines from Pfizer (1.3bn) and Moderna (0.5-1bn), which should take the manufacturing total towards 5bn. Bottlenecks seem inevitable though, with regard to raw materials, packaging and distribution, meaning that caution is still required.
Overall though the year ahead looks set to be a robust one for commodities demand and companies operating in the extraction sector should be boosted.
Dan Smith, Director – Special Projects