Commodity markets to normalise in 2021

G CHANDRASHEKHARDespite sharp slowdown in economic activity and demand destruction caused by Covid-19, global commodity markets ended 2020 higher than at the start of the year. Rebounding growth leading to higher consumption demand, supply disruptions, rising energy prices, massive liquidity boost, weaker US dollar and La Nina weather phenomenon have all combined to push overall commodity prices (energy, metals and agriculture).

Vaccine availability has changed the sentiment from one of gloom to a sense of cautious optimism. China has re-emerged as the most important driver of commodity demand following a revival in economic activity including construction, automobiles and export/ import trade.

This upward momentum in the commodities market is continuing into the current year; but the big question is how long will it last. On current reckoning, 2021 is likely to be the year of two halves — with the second half likely to witness some kind of normalisation of supply and demand, with concomitant effect on prices.

Energy complex

Energy markets (crude oil, natural gas) are likely to stay at elevated levels this year as demand revives with higher industrial and transport activity, while supplies are somewhat constrained. The crude oil market is most likely to remain in deficit this year especially with OPEC+ output cut. The US shale output is likely to pick up rather slowly because of financial constraints and new environmental regulations.

Base metals & China

Industrial metals prices started to surge in the last quarter of 2020, thanks to strong demand growth in China and investor buying. Copper has breached the psychological $8,000 a tonne. Iron ore ($170/t) and steel (HR coil over $1,000/t) have not lagged behind in price rally.

But the surge is unlikely to last long as the positive effects of stimulus begin to fade. Also, tighter lending restrictions for the property sector in China will weigh on steel and copper demand. Mine production, too, should see a rebound in activity.

In the second half of the year, copper may shed 10-12 per cent from the current levels and steel up to 20 per cent.

Gold may lose sheen

Gold and silver had a stellar run in the second half of 2020, boosted by enormous liquidity infusion and surging investor interest. With cheap money, weak dollar and low US real yields, precious metals are unlikely to see any major correction anytime soon. However, if economic activities rapidly return to normal following large-scale vaccination, there is the danger of investors exiting haven asset such as gold.

Agri: Supply to rebound

In case of agriculture, La Nina weather phenomenon has played havoc with the market with supplies tightening and prices surging, exacerbated by supply chain disruptions and flow of speculative capital. However, supply is likely to bounce back strongly in the second half of the year following current high prices which is sure to trigger increased planting in the northern hemisphere in the months ahead. Prospects of improved harvest will begin to weigh on agri-commodity markets sooner than one can imagine.

The author is a policy commentator and commodities market specialist. Views are personal