Commodities make a comeback

Jack-up oil rigs © iStockphotos
Oil is now nudging $70 a barrel

Raw-materials prices rose sharply in 2017, and they have made a strong start to 2018 too. The Bloomberg Commodity Spot index, a broad gauge of the sector, has jumped to its highest level since 2014, and the outlook remains favourable. Factories across the world are warning that they are struggling to keep up with demand now that the global economy is finally beginning to fire on all cylinders, says Fergal O’ Brien on Bloomberg. Global growth could reach 4% in 2018, reckon analysts at JPMorgan Chase, while its worldwide composite gauge of manufacturing surveys is at its highest level since 2011.

On the supply side, oil and mining groups have cut spending to lower debt and return cash to shareholders; in the oil market, sentiment has turned more bullish now that the pact between oil-cartel Opec and Russia to cut output to mop up the glut appears to be holding. Oil, now nudging $70 a barrel for the first time in three years, is a large part of most commodity indices, reinforcing the growing confidence among commodities investors in general.

The usual cyclical lags are also playing a part, says Jon Yeomans in The Daily Telegraph. Chinese demand is pivotal for metals, and a clampdown on credit there in 2014 squeezed growth and dented miners’ profits. Scarred by that experience, miners have cut back on exploration, so new supplies won’t arrive quickly.

China is again trying to temper debt growth, so its appetite for raw materials will fall this year, while continued US growth could bolster the dollar, always a headwind for commodities as they’re priced in dollars. But these factors are unlikely to outweigh robust global growth and tight supply, so the best guess is that the commodities upswing of the past 18 months will endure in 2018.

disfi.com