Whither the Commodities Supercycle?

Global investment bank Goldman Sachs has long been one of the most vociferous cheerleaders of the commodities supercycle – a multi-year bull market of rising prices from energy to metals to food. The bank’s latest research report on the subject reiterates this long-held position as they look to 2024, and forecasts a 21% total return for the coming year on their own GS Commodities Index, with a strong return of 31% in energy (principally oil) and 18% from industrial metals, especially copper and aluminium. On what do they base their analysis?

Commodities, particularly energy and gold, provide an effective hedge against negative supply shocks such as geopolitical developments, when risk assets tend to underperform. Recession fears have eased in the second half of the year as coordinated central bank efforts have unwound post-Covid inflation.

As real disposable incomes rise and the inflationary spike recedes, chances are that the central banks will volte face from their recent disinflationary stance to a more accommodatory one where rate cuts to spur growth are more likely. This easing of the drag of financial conditions on growth supports continued strength in demand for commodities. Industrial commodities, especially natural gas and metals, have struggled to make significant headway over 2023 as finished goods inventories rose sharply over the past two years, driven initially by a rotation of goods to services post-Covid and then worsened by inflation higher interest rates and tightening financial conditions. This destocking phase now appears to be fading: two drivers of finished goods inventories, European consumer major purchases and exports to China, have now halted their y-o-y declines and are set to increase further as European real disposable incomes rise further and China manufacturing continues its recovery. Demand strength in turn flows into a recovery in oil prices, supported by slowing US supply growth, tight OPEC supply and gently declining oil inventories.

China continues to surprise with the resilience of its demand for non-ferrous metals. Despite weakness in global manufacturing and the travails of the Chinese property sector, with demand for aluminium up 5% y-o-y YTD and copper up 10% y-o-y YTD.

The growth of EV and renewable power installations has underpinned this domestic demand, and although Goldman’s does not expect EV to perform as strongly as last year, there is little concern for a slowdown. They forecast global demand for green copper to grow to 3.4Mt in 2024 and 4.0Mt in 2025, with renewable energy installations in China continuing to take up the slack from the traditional sectors. At the same time, the bank has moved to a bearish stance on nickel and zinc, expecting oversupply to prevail in these two metals. For nickel, rising refined metal supply will continue to pressure prices in the battery metals market, and a forecast surplus of 202kT in 2024 of lithium will further dampen any hope of price appreciation.