“There has rarely been a better time to add commodities to a portfolio as a hedge against inflation, geopolitical risks and potentially hostile market environments,” says Jeffrey Currie of Goldman Sachs. The S&P GSCI index, which tracks a basket of 24 major commodities, has risen 35% over the past year and analysts see more gains ahead.
Bulls such as Goldman point to “extremely tight inventories, underinvestment across the commodity sector and slow-responding supply”, says Alex Gluyas in the Australian Financial Review. The rise of environmental, social and governance (ESG) investing means that while “capital has never been cheaper due to low interest rates, it has never been more expensive to build infrastructure and equipment such as mines, steel mills”, or drill for an oil and gas well.
The shortages are broad based. “Copper stocks at major commodity exchanges sit at just over 400,000 tonnes, representing less than a week of global consumption,” say Neil Hume and Emiko Terazono in the Financial Times. Citigroup analysts think demand for lithium, which is used in electric car batteries, will exceed supply by 6% in 2022. It’s not just metals either. Stockpiles of arabica coffee, “the higher-quality bean loved by espresso aficionados”, are at their lowest level in 22 years. US Soybean prices are up 18% this year already. Wheat prices have also risen on fears that major exporters Russia and Ukraine are about to descend into war.
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Aluminium takes flight
Then there’s aluminium, says Laurence Girard in Le Monde. The metal is used in everything “from coffee capsules to cans to aeroplane cabins”. It also plays a key role in the infrastructure needed to decarbonise the economy. Last week it hit a 13-year high on the London Metal Exchange at $3,236 a tonne. The metal is up 16% already this year and not far off its all-time high of $3,380 a tonne.
The squeeze is a consequence of soaring energy prices that have seen European and Chinese smelters cut production. “On average, producing a ton of aluminium uses the same electricity as an average US family consumes in [a] year,” says Javier Blas on Bloomberg. Aluminium’s extensive presence in our daily lives means that the price rally will be another source of inflation across the economy.
The 67 million tonne a year market ran a deficit of more than one million tonnes last year. That should continue. China accounts for “nearly 58%” of the market, but the industry is under pressure to cut pollution and energy usage. High electricity prices elsewhere mean there are few producers ready to step in, while the electrification of ever more of the economy means a growing number of products contain the metal. Hence Goldman predicts prices could hit $4,000 a tonne within the next 12 months.
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