The bull run in commodities is likely to come under pressure with economic growth slowing and the Delta variant of Coronavirus triggering more lockdowns across Asia.

“Global economic growth remained strong over Q2 (second quarter) as lockdown restrictions were eased in several major markets… However, the recovery has now likely peaked, with high frequency data signalling softening growth momentum,” said Fitch Solutions Country Research and Industry Risk (FSCRIR).

Fitch Solutions said it expects growth to decelerate over the coming months, as the base effects from 2020 continue to fade. Furthermore, many sectors are battling with labour and material shortages, supply chain delays and capacity constraints.

Evidence to suggest’

“There is evidence to suggest that these issues worsened over July, which will further drag on the recovery in the near term… However, higher-than-expected inflation could force policymakers to act, raising interest rates and potentially dragging on the recovery,” the agency said.

Many governments could be rolling back Covid-related support packages, and it could also affect growth and dampen investors’ appetite for commodities, it said.

RBI sees rising commodity prices as high systemic risk

Fitch Solutions’ comments come along with a drop in two of the benchmark commodity indices from their peaks seen during July-end. The S&P GSCI Index, which tracks prices of 28 commodities, dropped 4.5 per cent to 518.65 from the peak of 543.34 on July 29. The index has increased 47 per cent year-on-year.

The Dow Jones Commodity Index, on the other hand, has declined about three per cent to 890.55 from a high of 915.91 on July 29. The index is up 44.62 per cent year-on-year.

Fitch Solutions’ views have also got support from Think, the economic and financial analysis of Dutch multinational investment Bank ING, which pointed to data showing speculators reducing their net long positions – an indication that the foot is off the accelerator.

According to ING Think, speculators cut their net long positions in ICE BRent by 30,319 lots last week, while COMEX gold net long positions slipped by 55,649 and copper positions by 7,475 lots.

Commodity traders harvest billions while prices rise for everyone else

Fitch Solutions said prices for a number of commodities have declined, including for gold, base and non-ferrous metals, corn and soyabean. “Oil is the notable exception and we expect ongoing supply-side constraints and continuing improvements in population mobility to spur further price gains once Asia reins in the latest wave of the coronavirus,” the agency said.

According to the TradingEconomics website, prices of precious metals, soyabean, lumber, wool, tea, steel, iron ore, and bitumen have all declined over the past month. On the other hand, prices of palm oil, copper and palladium have slipped over the past week.

Rapid spread in Asia

FSCRIR said the spread of the Delta variant has continued to widen over the past month. “The impacts have been highly varied at the individual market level, although containment measures have generally been less stringent than was the case during previous outbreaks. In many markets, population mobility has continued to rise, despite a spike in infection rates,” it said.

But the variant was spreading rapidly in Asia, where governments have tended to react more forcefully to new infections. Recently, China imposed lockdown restrictions on millions of its population, and the new curbs compounded existing concerns over a slowdown in Chinese economic recovery following a number of disappointing data releases.

Agri-commodity prices set to soften in H2 this year

“China has been critical in catalysing both regional and economic growth and a more severe outbreak of the Coronavirus would pose meaningful risk to commodity prices,” the agency said.

Reports from Beijing on Monday said China’s industrial production and retail sales growth slowed in July as the spread of the Covid pandemic and floods affected business. China’s online sales growth was a moderate four per cent in July.

Fitch Solutions said it sees steel and iron ore prices declining further on increased global supplies and weak Chinese demand. ING Think said copper prices have, perhaps, peaked for now and the US Federal Reserve’s policy, which is increasingly becoming hawkish, will weigh on the metals complex.