Global commodity markets, especially for resource commodities, have entered a super boom cycle, with no signs of breaks anytime soon. This means that Indian industries would have to bear with high raw material prices; users should prepare to pay more even as, in some cases, the impact is felt with some lag.
Kunal Shah, head of research at Nirmal Bang Commodities, said, "Super-cycle in commodities is already under way as from last three years, (there have been) no major investments in the commodities space and global growth is getting stronger... Leading to resource boom.”
Most commodities, including base metals, iron ore, steel, coal, and naphtha, have risen by an average 30-50 per cent in the past one year, or 52 weeks, indicating a strong rally. Indian companies have received some respite because of the stronger rupee, which is almost 4.4 per cent stronger than a year ago.
Oliver Reynolds, an economist with global research house FocusEconomics, said, "The US dollar has dipped by around seven per cent since the start of the year against a broad basket of currencies, with the uncertainty regarding domestic and foreign policy that is emanating from the White House reducing investors’ appetite for the currency. As commodities are priced in dollars, this drop has likely boosted prices for raw materials by reducing the purchasing power of the greenback. However, the inverse relationship between the dollar and commodity prices is far from being a cast-iron rule; there are plenty of moments in history, such as the economic boom in the 1990s, when this link has been tenuous at best."
In fact, the seeds of this rally were sown at the end of last year when Donald Trump promised a $1-trillion push for infrastructure. How long that promise takes to be fulfilled is an issue and, at the end of September, the US will be facing a decision on the debt ceiling, which needs to be revised or some expenditure cuts or tax increases are possible. However, global economies are strengthening and growth is being revised up. As Oliver put it, "Stronger-than-expected global activity so far this year are also at play and have led the 2017 FocusEconomics Global GDP Consensus Forecast to be revised upward by 0.2 percentage points to 3.1 per cent since the start of the year." This reflects the healthier global economic conditions that are fuelling demand for commodities and lighting a fire under the prices.
According to Jean-François Lambert, the founder of Lambert Commodities, the US matters less today because "the super-cycle was triggered by a huge boost in emerging markets, driven by China. This translated to more people reaching a middle-class status." Lambert added, "Today, however, China’s momentum is slowing to more reasonable levels."
For the super-cycle to continue, Lambert said a new catalyst was needed. According to him, India has the potential to be that catalyst but it would take a long time for India to reach the economic significance achieved by China. Therefore, a surge in commodity prices led by demand was unlikely.
Further, Lambert said, "The commodity supply side is getting very effective. Processes and technology have led to better yields in agri and new potential in oil. A boost of commodity process led by supply is also unlikely."
Thus, the road ahead won't necessarily be smooth for the rally. The cloud over demand for oil created by talks about an expected boom in electric cars and the ban on diesel vehicles, for instance, casts a doubt over the ever growing requirement for this commodity. Lambert said, "I think oil demand peaking is still far-fetched... Still very few bet for oil price to pick up and reach the $100 level. Uncertainty on processes and doubts about how the growing demand for electricity will be met temper the speculative positions."
Another challenge is that stocks are still a preferred investment class, while commodities are still not a preferred asset class. "So, there is no real upside besides pure short and violent speculative move," Lambert said. Only a real demand or supply crunch can push commodity prices going ahead.
However, adding the caveat of geopolitical factors, Lambert said, "We live in a much more dangerous world than 20 years ago. Tensions in the Middle East, in the South China Sea, between Europe and Russia, in Venezuela, among other things, could derail the balance between supply and demand." Although this would primarily affect precious metals (safe haven assets), notably gold, this, and not the "normal supply/demand relation", explains why gold has been strengthening over the summer.
However, one should not think that the boom in commodities is over just yet. FocusEconomics panelists expect commodity prices to tick up mildly on average over the next 12 months thanks to solid global growth, although the price increase will be far less spectacular than that observed in the first half of 2017. A 30-50 per cent rally in a year raises the base and, hence, any fresh rise would obviously look smaller.