Supporting factors for commodities to continue rallying – OCBC

2021 looks to be the start of a major commodity price upswing – a move that is expected to last possibly through 2021 and 2022. Factors that support the rise in prices include ample liquidity, prior under-investment, China’s continued buying, attractive valuations relative to other assers, rising inflation expectations and the global green wave of stimulus, Howie Lee, Economist at OCBC Bank, briefs.

Key quotes

“Authorities have been quick to act with an unprecedented fiscal and monetary stimulus in the wake of the 2020 pandemic, but are likely to sit on their hands even as economic recovery is underway. We are expecting a sharp, explosive rebound in demand in 2021 and 2022.”

“The rebuilding of supply chains requires time and current diminished stockpiles will be unable to meet the demands of the pent-up demand that we are expecting to come. It will also be naïve to assume that supply will recover seamlessly this year.”

“Even with the vaccine roll-outs, the headwinds on commodities are expected to be minimal, if not a boost. 10-year Treasury breakeven yields are already trading above 2% as a testament to rising inflation expectations.”

“There is little to suggest China will put a stop on its stimulus in the coming year. Its voracious appetite for building materials is set to continue, as seen in the trade balance numbers in December. Aside, a recovering hog count in China is propelling an acceleration of soybean inventory rebuilding after two years of destocking due to the US-China trade war. The restocking is also in-line with its five-year plan for building up strategic commodity reserves, particularly food supplies.”

“With equity valuations already at unprecedented levels and record-low bond yields showing limited downside, the cyclical rotation of funds may flow into commodities next. Commodities remain a viable hedge and is an asset still yet to fully capture the upside movements that equities and bonds already have in 2020.”

“With a democrat back at the helm in the White House, a global ‘green wave’ is set to, somewhat ironically, increase demand for raw commodities in the short-term. While ultimately negative for oil and other base metals in the long run, for now many of these green policies require a large initial outlay of capital to build new infrastructure for the implementation of these projects.”