Energy: Why Commodity Prices Are Soaring
By Michel Revol
Driven by the economic recovery, the prices of oil, copper, and palladium are enjoying a strong rally. However, not everyone is likely to benefit from this trend in the long run.
It is often referred to as “Doctor Copper.” Copper is considered an excellent barometer of the global economy because it is used in virtually every sector, from electronic circuits and batteries to construction. When economic activity slows, copper prices fall; when growth returns, they rise. And these days, Doctor Copper is in excellent health: prices are hovering around $10,000 per tonne, not far from the all-time high of $10,190 reached on February 15, 2011.
Goldman Sachs even estimates that copper could climb to $15,000 per tonne by 2025.
Analysts partly attribute this strength to the weakness of the U.S. dollar, which makes copper purchases relatively inexpensive. More broadly, however, expectations of a strong economic recovery are fueling demand not only for copper but also for many other commodities. Aluminum, for example, has gained nearly 20% since the start of the year. Another sign of the trend is that the Bloomberg Commodity Index has returned to its highest level since 2018, after falling to a forty-five-year low last year.
A More Uncertain Outlook for Oil
In recent weeks, investors have had reason to celebrate as prospects for a post-pandemic recovery continue to improve.
The International Monetary Fund recently revised its forecasts upward. The United States is expected to achieve GDP growth of 6.4% in 2021, its strongest performance in roughly four decades. China could grow by 8.4%, while India may reach 12.5%, although the latter figure remains dependent on the evolution of the pandemic.
“The economic recovery is significant, and that is positive for many commodities,” says Vincent Boy, an analyst at IG France.
Oil is also benefiting from the recovery, at least in the short to medium term. While OPEC decided on April 21 not to alter production levels immediately, it maintained plans to gradually increase output beginning in May. Some estimates suggest that global production could reach 99.7 million barrels per day by the end of the year, compared with 92.3 million in January.
Goldman Sachs forecasts that oil could rise to $80 per barrel in the near term, compared with around $60 at present. Yet this outlook remains uncertain. India, the world’s third-largest importer of crude oil, may have to revise its growth projections downward because of renewed pandemic pressures.
Over the longer term, however, the outlook for oil appears less favorable. The Paris Agreement, signed in 2015, commits countries to reducing fossil-fuel consumption in pursuit of carbon neutrality. The pandemic has reinforced these commitments, with many governments adopting even more ambitious emissions-reduction targets than those set in 2015.
Oil is likely to be one of the major casualties of this transition.
Inflation Concerns
By contrast, several commodities are expected to benefit from the shift toward cleaner energy. Materials used in renewable energy infrastructure—such as magnets for wind turbine rotors, turbine towers, and blades—are likely to see sustained demand.
This is particularly true for copper, whose price has doubled over the past year, as well as aluminum, which has gained 20% since January. Palladium, widely used in catalytic converters, has also surged to a record high of nearly $3,000 per ounce.
Even so, the long-term outlook remains uncertain.
One challenge is supply. China alone consumes more than half of the world’s copper production, and its demand grew by 13% in 2020. During the pandemic, however, investment slowed in Chile and Peru, the world’s largest copper-producing countries.
According to Fitch Ratings, unless significant investments are made in new mining projects, the market could face a copper shortage of nearly 6 million tonnes by 2023—roughly equivalent to Chile’s annual production.
Another concern is inflation. Rising inflationary pressures could prompt central banks to tighten monetary policy, which would likely weigh on energy-related commodity prices.
For now, the U.S. Federal Reserve does not expect to raise interest rates before 2023, notes Vincent Boy.
Nevertheless, some commodity markets may already be overheating. Timber provides a striking example: the global lumber price index has increased nearly fivefold in just one year, soaring from approximately $300 to $1,420 per tonne.
Such dramatic increases suggest that parts of the commodity rally may be driven as much by speculation as by economic fundamentals.