Investment in commodities persists at increased levels - is it worth pursuing the current surge in prices?
The first half of 2024 has seen a significant resurgence in the world market, with the S&P GSCI index, which tracks 24 major raw materials, climbing more than 10% after ending 2023 down 12%. This rebound is driven by a variety of factors, including increased demand for green technology and the lingering effects of geopolitical tensions.
One of the most notable commodities experiencing a surge is copper, a key energy-transition metal. Its price has risen by 14.5% this year, reflecting the growing demand for metals in the transition to renewable energy sources. However, analysts predict that another significant price jump for copper is unlikely to emerge before 2025, when new supply begins to dry up.
China, the world's largest consumer of metals and energy, is driving this demand due to its robust infrastructure investment and expanding factory capacity in electronics and electric vehicles. Despite a slowdown in its property sector, the demand for industrial metals from China is expected to continue, though it may not completely offset the drag on prices.
Energy has emerged as the most robust inflation hedge, with prices rising during supply and demand shocks. Brent crude oil, for instance, is up 11%, but has slipped back since a peak in early April. The current commodity tension is largely due to the destabilization of energy and grain markets caused by Russia's 2022 invasion of Ukraine.
The Opec+ cartel is holding back more than six million barrels of oil a day, representing nearly 7% of global demand. This deliberate restraint is aimed at maintaining oil prices at elevated levels.
Gold, another popular inflation hedge, has gained 13% in dollar terms this year. Ole Hansen of Saxo Bank states that gold and copper have made new records, and silver has hit levels not seen in 13 years. The case for holding precious metals remains solid, according to Hansen, as US rate cuts come into view.
The "everything rally" in industrial metals such as copper, aluminium, and zinc "will continue to unwind" in the second half of 2024, according to Capital Economics analysts. This prediction is based on the expectation that the global economy will slow down as central banks tighten monetary policies to combat inflation.
Climate change is also contributing to the inflationary pressures in the commodity markets. Disrupted harvests of crops like cocoa and coffee, and increased demand for metals for the energy transition, are driving up prices. The current levels of energy, food, and base metal prices are about 40% higher than 2015-2019 levels due to supply chain disruptions, increased production costs, geopolitical tensions, and higher demand recovery post-pandemic.
Despite these challenges, the stock market today continues to be a focus for investors, with the market currently focused on rising demand for green technology. The question remains whether the current commodity tension will persist or if prices will begin to ease in the second half of 2024.
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