1) Some prices are high, but the upswing is losing momentum … Over the past six months, the previously strong commodity price upswing has lost some steam. After rising by 55% over the 12 months to March 2021, global commodity prices have risen by only 15% since then. We remain sceptical that the current upswing is a ‘super-cycle’ and our central case is that global commodity prices edge lower in 2022 (see Global Commodities: Don’t get too carried away, 10 March 2021). In nominal terms, global commodity prices have, so far, risen by 98% during this upswing, compared with a 320% rise in the early 2000s ‘super-cycle’ between 2002 and 2008.

2) … as global growth slows and goods demand is set to weaken The loss of momentum in commodity markets partly reflects the impact that the spread of the Delta COVID-19 variant is having on global growth. A pullback in infrastructure investment and a cooling property market in China, as well as direct action by the Chinese authorities to seek to cool some metals markets, have all weighed on key metals prices. We also expect that, as the COVID-19 vaccine rollout continues, there should be a global shift back to spending on services and away from goods, which is set to weaken manufacturing conditions and demand for metals.

3) Western infrastructure not as raw materials-intensive as China’s Western economies are ramping up infrastructure spending, but we see these initiatives as unlikely to sufficiently offset slowing growth in commodity demand from China (which dominates demand for most materials). We expect much of the Western demand for metals to be met by recycled materials, as much of the planned infrastructure is repairs, for example to bridges and roads, rather than new developments. The key exception is the new networks for electric vehicles (EVs), which support demand for copper and the battery commodities, including lithium.

4) EM to get an income boost, but mining investment is tepid The ramp-up in commodity prices has supported mining profits and national income growth in commodity-driven economies, particularly in Latin America, including Brazil (see GEMS Investor: Carry on with caution, 7 July 2021). However, the expected upswing in mining investment is much smaller than occurred during the commodities ‘super-cycle’ earlier this century. An exception is the large investment pipeline for LNG, and the expected ramp-up in spending on renewables, which is, in turn, supporting demand for some materials, including copper, lithium and cobalt.

5) Climate policy is a big focus across commodity markets … Climate change policy shifts by governments, and changing preferences by corporations and investors are having a significant impact on many commodity markets. The European Commission included a proposed carbon border adjustment mechanism in its work programme in July 2021, and following the EU, several other countries such as Canada, Japan and the US are now examining the feasibility of introducing a carbon border tax or similar initiatives. We expect carbon tariffs from different countries to raise prices of global carbon-intensive commodities, both directly and indirectly.