“Global growth is tepid, but commodity prices remain high,” say Carlos Arteta, Philip Kenworthy and Ayhan Kose in a World Bank blog. Energy, food and base metals prices are predicted to stay close to 40% above 2015-2019 levels over the coming year. Why?
For one thing, oil supplies are tight. As of late June, members of the Opec+ cartel were holding back more than six million barrels of oil a day – nearly 7% of global demand. Second, geopolitical shocks are multiplying – much of the current commodity tension dates from the destabilisation of energy and grain markets caused by Russia’s 2022 invasion of Ukraine.
Third, despite trouble in the local property market, demand from China – the world’s largest consumer of metals and energy – has been stronger than expected. Infrastructure investment and expanding factory capacity in electronics and electric vehicles have buoyed the Middle Kingdom’s appetite for raw materials.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Finally, climate change is proving inflationary, both through disrupted harvests – most recently of cocoa and coffee crops – and because of demand for metals for the energy transition.
Commodity prices shoot up
After surging in 2022, last year was a more tepid one for commodity prices. The S&P GSCI index, which tracks 24 major raw materials, ended 2023 down 12%, but the index has climbed back more than 10% in the first half of 2024.
Copper, the key energy-transition metal, is up 14.5% this year, while gold has gained 13% in dollar terms. Brent crude oil is up 11%, although it has slipped back since a peak in early April. Metals have had an excellent run this year, with gold and copper making new records and silver hitting levels not seen in 13 years, says Ole Hansen of Saxo Bank. The case for holding precious metals remains solid as US rate cuts come into view.
“Energy and grains” could make the running as we enter the third quarter and industrial-metals markets “take a breather” and “consolidate” around their new higher levels. The long-term outlook for copper is encouraging, but another price jump looks “unlikely to emerge in earnest before 2025” when new supply begins to dry up.
The “everything rally” in industrial metals such as copper, aluminium and zinc “will continue to unwind” in the second half of 2024, agree Capital Economics analysts in a note. The market is currently focused on rising demand for green technology, but while that will keep metals prices elevated, it will “not completely offset the drag from the slowdown in China’s property sector”.
Traders may be surprised as a sharp drop off in Chinese construction activity emerges as “the dominant driver” of industrial metals prices later this year. There is still good reason to hold commodities, say Goldman Sachs’ analysts. Over the past 50 years, a 1% rise in US inflation has, on average, led to a real (inflation-adjusted) return of seven percentage points from commodities.
Energy has been the most robust inflation hedge, as prices rise during supply and demand shocks. Gold is particularly useful in scenarios where central banks lose credibility or geopolitical risk rises.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
The evolution of the car industryThe car industry has faced sluggish sales and low levels of demand, which has thrown a spanner in the works of global car makers. But is it short-lived?
-
The end of China’s boomLike the US, China too got fat on fake money. Now, China's doom is not far away.
-
The nobbling of Britain’s nuclear energy sectorThe UK once led the world in atomic power, but now it’s a has-been. The malaise is due to the left’s opposition to the sector and decisions taken by the Blair government.
-
How to make a mint from the next mining boomAvoid the metals producers and invest in companies with the tools and technology to help the sector boost output and reduce its environmental footprint.
-
MoneyWeek’s investment writers' tips for 2024Our writers’ top investment tips for 2024 include a biotech investment trust, a gold miner and a copper ETF.
-
Lithium goes from boom to bustThere are signs of an oversupply of lithium – the metal used for EV batteries.
-
Look to space to fix the energy crisisSolar energy from space and a type of helium on the Moon look promising.
-
Time to invest in the next agricultural revolutionAs the global demand for food increases, food producers are seeking to lower their carbon emissions. Technology will help meet both goals.
