[ANALYSIS] Metal markets see 'supercycle' amid reflation

Structural bull market begins amid post-pandemic recovery, ample global liquidity and weak dollar

By Anna J. Park

Ample liquidity in global markets and expectations of economic recoveries spurred by progress in coronavirus vaccinations have prompted the prices of commodities ― such as food, oil, industrial metals and chemicals ― to display an upswing.

The price of the benchmark West Texas Intermediate (WTI) crude increased 16 percent in February alone, surpassing $60 a barrel earlier this week and reaching the highest level since January last year. Copper prices this week also reached the highest level seen since May 2012, touching $8,437 a ton at the London Metal Exchange (LME). Copper prices rose around 9 percent so far this year due to tight supply and strong demand.

Prices of other metals have also risen.

The price of nickel reached $18,840, the highest since September 2019. Aluminum and zinc also witnessed a jump from the previous year thanks to increased global demand, mainly due to a rise in Chinese exports. Platinum prices also soared to their highest levels since September 2014, reaching $1,312.54 an ounce. It was the first time in six years that the price of the precious metal rose above the $1,300 level.

With the price surges, commodities exporting countries are also seeing rallies in their stock markets. Peru's stock markets rose by around nine percent in February, while Chile and South Africa all jumped by more than seven percent. The global average growth during the month so far is around 6.1 percent. Chile and Peru are the two biggest copper producing countries, together accounting for up to 41 percent of the world's annual output. South Africa has the world's largest platinum reserves.

Fifth supercycle kicks off

Experts say various factors ― inflation expectations because of U.S. stimulus packages, post-pandemic recovery hopes, a weakened dollar as well as increased global demand ― all contributed to the latest upswings in oil and metal prices. In fact, a long-term structural supercycle has begun, according to Goldman Sachs and JPMorgan. The investment banks say the price surges indicate a much longer structural bull market ahead of us which can last for years.

"Looking at the 2020s, we believe that similar structural forces to those which drove commodities in the 2000s could be at play," Goldman Sachs said in its 2021 Commodities Outlook report.

Marko Kolanovic, a quantitative strategist at JPMorgan, said in a recent report that there have been about four commodities supercycles during the past 100 years, and the last rally cycle continued for about 12 years from 1996. The fifth supercycle has already begun, according Kolanovic.

"We believe that the tide on yields and inflation is turning, which will pose a major risk to multiasset portfolios," Kolanovic said in his report. He added that the supercycle is being driven by "ultraloose monetary and fiscal policies."

Moreover, many countries' current focus on renewable energy and technologies have also played a significant part in boosting the prices of certain metals that are necessary to manufacture rechargeable batteries and to build other green-energy-related infrastructure. Goldman Sachs' report also pointed out that the green sector has the potential to boost the prices of metals.

Global reflation in play

Market watchers view the upswings in commodities prices as a natural consequence of a global trend taking place at present. This trend is "reflation" or the combination of intended inflation and fiscal stimulus policies to bring about an economic revival following a recession. Reflation has become one of the most significant themes in the global economic forecasts for this year.

During a period of reflation, prices of precious and industrial metals tend to rise. This is because demand for precious metals grows in order to hedge against inflation, while the need for industrial metals increases to fuel an economic recovery.

"Inflationary pressure is expected to mount as most central banks in developed countries maintain loose monetary policies. This will, in turn, have a positive impact on precious metals as a means of hedging against inflation. Non-ferrous metals will also see a rise in prices with increased trade volumes, as China and emerging markets are expected to log economic recoveries," Shinyoung Securities said in a recent report.

Aside from the metals market, cyclical sectors like energy, maritime and shipbuilding industries are also expected to benefit from reflation. These sectors are the top picks of investors due to their reflationary appeals in global stock markets.

Finance sectors, notably bank stocks, are also recommended to have a higher investment value, as prospects of reflation stoke U.S. Treasury yields higher. On Tuesday, U.S. 10-year Treasury yields reached above 1.26% for the first time since last March during the pandemic shock, reflecting market expectations of reflation.

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