[Raw Material Supercycle] Liquidity and Eco-Friendliness Accelerate... "30-Year Sustainability Outlook"

Prolonged Low Interest Rates Due to COVID-19... Massive Liquidity Supply
Stimulating Raw Material Demand Amid Expansion of Coal-Free Eco-Friendly Infrastructure
"Only 'Buy' Orders in Every Market"... Expectation of a 30-Year Cycle

[Asia Economy New York=Correspondents Baek Jong-min, Park Byung-hee, Lee Hyun-woo] "This time is different." Diagnoses are emerging that the commodity 'supercycle' returning after more than a decade will accelerate not only due to supply and demand issues but also because of government policies.

◇"Liquidity is a bigger cause than economic growth"

Past commodity supercycles had clear triggers. In the late 19th century, the industrialization of the United States led commodity prices, and in the early 20th century, Germany's economic development was the driving force. After World War II, the reconstruction of Europe, Japan's industrialization, and the economic development and urbanization of Asian countries periodically led to international commodity price increases.

The commodity supercycle in the 2000s was no different. The rapid growth of BRICS countries, including China, drove commodity prices to skyrocket. The peak was in 2008 when international oil prices surged to $140 per barrel.

Since then, commodity prices had been weak following the global financial crisis, but their recent sharp rise is attributed not to the rise of specific economic actors but to the COVID-19 pandemic and policy changes in various countries. While previous commodity supercycles were based on expectations of economic growth, i.e., fundamentals, the current one is underpinned by prolonged low interest rates aimed at overcoming economic crises, resulting in abundant liquidity fueling the commodity supercycle. Governments' fiscal spending to stimulate the economy is also driving commodity price increases.

Michelle Sheldon, Head of Commodity Investment at New York-based Contobel Asset Management, said, "The commodity market's strength is due not only to economic recovery from COVID-19 but also to the weakening of the US dollar and fiscal stimulus and accommodative monetary policies by governments and central banks worldwide." This suggests that the large amount of liquidity injected into the market is stirring up inflation and commodity prices.

There is also analysis that money is flowing into commodities as a hedge against inflation risks. Peter Sainsbury, founder of Materials.com and a commodity trading expert, predicted, "The decline in currency values will stimulate demand for key metals such as iron and copper, as well as precious metals like gold and silver." He also judged that the expansion of the economically active population in emerging countries and the resulting increase in demand for infrastructure, housing, and transportation could be factors driving commodity price increases.

◇Green policies also a factor... "Oil prices lagging"

Chris Midgley, Senior Analyst at S&P Global, evaluated that the commodity market's strength is supported by better-than-expected economic growth in China but also other factors. He noted that the US and UK are engaging in large-scale fiscal spending to recover from the economic damage caused by COVID-19 and are planning investments in green infrastructure, which is expected to stimulate demand for metals and energy.

Midgley said, "Additional demand for green infrastructure construction will cause further increases in copper, nickel, and cobalt prices. Consequently, steel and petrochemical products will also be needed." The British daily The Guardian analyzed that "the fundamental causes lie in the expected economic growth after COVID-19 and the green policies promoted by governments worldwide."

The relatively sluggish trend of oil prices compared to other commodities is also noteworthy. Oil prices provide clear evidence that this supercycle differs from the 2000s supercycle. The current sluggishness of oil prices is seen as a result of green policies. As countries worldwide declare the era of fossil fuel phase-out, crude oil prices have remained stagnant. With President Joe Biden rejoining the climate agreement immediately after taking office, the global trend toward environmentalism is expected to accelerate further.

Under tightening regulations, the rise in prices of fossil fuels such as crude oil is also cited as a reason that could increase demand for commodities related to green policies. Rising fossil fuel prices can create an optical illusion that commodities related to green energy appear relatively cheaper.

Recently, carbon emission allowance prices in Europe have risen to $34.25 per ton. This is due to the European Union (EU) leaders raising the carbon dioxide emission reduction target from the existing 40% to 50-55% by 2030. This has created an unusual situation where both fossil fuel prices and green-related commodity prices can rise simultaneously.

◇"Only buy orders... could last 30 years"

Experts predict that commodity prices will continue to rise for the time being. US investment bank Goldman Sachs recently forecasted in a report that "due to COVID-19, policies reflecting social demands rather than financial stability will be emphasized, highlighting the intensive growth of commodities."

Mark Lewis, Chief Sustainable Strategist at BNP Paribas Asset Management, explained, "I have observed this market for the past 30 years, but I have never seen a situation like this. Investors in every market are only shouting buy orders." He predicted, "A supercycle is expected in all sectors of investment for the transition to green energy over the next 30 years."

Bloomberg also reported that Wall Street is the most optimistic about commodity investments in the past decade, explaining that commodity market participants are maintaining more net long positions than ever before.

This content was produced with the assistance of AI translation services.