OCBC: Commodities on the cusp of super cycle


A COMMODITY supercycle may be building as analysts notice that the upswing in prices of various commodities is driven by rising demand due to lower stockpiles across supply channels and Chinese demand.

OCBC Bank treasury research economist Howie Lee said at this point, the market is seeing the cusp of a major commodity price cycle, and the market may see fresh record high prices for many cyclical commodities — energy, base metals and agriculture.

He thinks 2021 will herald the start of a major commodity price upswing, a move that is expected to last through 2021 and 2022.

“The inability of supply to quickly regulate what we perceive as incoming pent-up demand for raw goods and materials could send prices of many commodity assets above their record highs in this current cycle.

“Factors that support the rise in prices include ample liquidity, prior under-investment, China’s continued buying, attractive valuations relative to other assets, rising inflation expectations and the global green wave of stimulus,” he said.

He noted that supporting factors for commodities to continue rallying include the reluctance of policymakers to cease support even in a recovering global economy.

The under-investment in 2020 due to companies mainly focusing on survival has led to supply issues. The rebuilding of supply chains,

Lee noted, requires time and current diminished stockpiles will be unable to meet the demands of the pent-up demand that OCBC is expecting to come. It will also be naive to assume that supply will recover seamlessly this year, he noted in a release recently.

Lee added that there is little to suggest China will stop its stimulus in the coming year.

“Its voracious appetite for building materials is set to continue, as seen in the trade balance numbers in December 2020.

“Even if the growth in infrastructure project approval peaked in 2020, the long tail of projects are expected to last deep into 2021 and possibly 2022, supporting Chinese demand for construction-related materials,” he stated.

Commodities are yet to clock fresh record highs post-pandemic and the global “green wave” is set to increase demand for raw commodities in the short term following Joe Biden’s appointment as the president of the US.

Lee’s trade recommendations include cross-asset, copper and crude oil despite its unlikeliness to return to US$100 (RM405) a barrel levels.

“High inventory levels mean energy may start its upswing later than metals. However, as the proceedings of early January have shown, Saudi Arabia’s new Energy Minister Crown Prince Mohammed Salman has displayed a detachment from OPEC cooperation and can choose to go alone to prop up prices if the kingdom so wishes to,” he said.

He noted that there is limited upside for agriculture, which may be the first to peak before base metals do.

The price of crude palm oil for instance hit a decade high of RM3,888 this month as production and stockpile eased amid strong demand.

Lee thinks gold is set to retest its highs once more this year.

The precious metal had a rough start to the year but as an increasing proportion of the world gets inoculated, inflationary fears will likely begin to surface.

“That will probably be the turning point for gold, which we expect it to occur by the late first half of 2021,” Lee explained.