While the global equity trading saw a highly impressive spurt last year following the Covid-19 induced crash in April 2020, the first few weeks of 2021 has rekindled the expectations of a fresh commodity supercycle meaning that a sustained rise could be witnessed in the global commodity prices over coming months and most global investment advisory services are estimating a continued surge in commodities. This is evident in the sense that the crude oil prices hit one year high, Copper hit a decade higher and major agri commodity prices are also ruling near their six-seven year highs. The precious metal prices have eased after a massive record breaking spree last year but the overall backdrop for them remains well supported. What is driving this secular rise in commodity prices and how will such a commodity supercycle impact your equity investments? Here are a few pointers.
The pace of global economic recovery is the prime reason for a sustained spurt in global commodity prices. The International Monetary Fund, in its latest World Economic Outlook report, raised the global growth forecast for this year to 5.5% from 5.2% seen in October 2020. Global economy is set to expand at a faster rate this year than expected earlier as vaccination against the coronavirus could strengthen activity later this year, underpinned by further policy support. The forecast reflects expectations of a vaccine-powered strengthening of activity later in the year. Such an impressive rebound will lead to increased demand for commodities and natural resources of all kind.
Meanwhile, the US dollar index has been sliding consistently over last few months as risk aversion improved in world markets and traders looked at the massive amount of monetary and fiscal policy support unleashed by the US authorities. The US dollar index fell to a two year low mark near 89 at the start of 2021 as an unprecedented surge in money supply weighed down on the value of the currency. Since all major commodities are priced in the US dollar, a tumble in dollar lifts commodity prices by default.
The WTI Crude oil prices surged to 13 month high of $62 per barrel in February 2021 and also led to massive surge in local petrol and diesel prices. This is likely to keep oil marketing companies share prices as well as oil producing and exploration companies share prices in focus in India. The Nifty Energy index is already up around 25% on a year on year basis.
Copper, the primary base metal spiked in last few weeks and soared above $4 per pound in the middle of February 2021, hitting a decade high. The Copper stockpiles in Shanghai have slumped more than 60% over last four months, thereby indicating the strong demand push for the metal as world economy recovers following the Covid-19 induced slump. According to the World Bureau of Metal Statistics (WBMS) data, the world copper market recorded a deficit of 1391 thousand tonnes in January to December 2020 which follows a deficit of 383 thousand tonnes in the whole of 2019. This is keeping metal shares in demand in India. The Nifty Metal index jumped 36% on a year on year basis.
Agricultural commodity prices have also been soaring globally. The Food and Agricultural Organization or FAO Food Price Index (FFPI) averaged 113.3 points in January 2021, 4.7 points (4.3%) higher than in December 2020, not only marking the eighth month of consecutive rise but also registering its highest monthly average since July 2014. The index had surged more than 3% on annual basis in 2020. Globally, the prices of sugar, grains and vegetable oils have been rising which can weigh on the share prices of the companies involved in manufacturing and trading of these commodities.
Generally speaking, for an emerging economy like India, the sustained spurt in commodity prices is considered to be an adverse factor. Such a spurt will lead to increase in the cost of imports and will strain India’s current account balance. It will also trigger a rise in prices and could push up inflationary trends. While most stock brokers in India are projecting a continued surge for local equities in coming months, a spike in commodity prices, primarily crude oil could weigh on the stock market investing in near term. The Reserve Bank Of India (RBI) has noted that crude and other commodity prices are translating into higher inputs costs, especially in an environment in which demand is recovering. Local equity market investors will be keenly focusing on the trends in commodities in such a scenario.
Also Read: Tricks And Tips For Commodity Trading