Commodities outlook

Commodities outlook

Last updated: 04 Jan, 2021 | 03:14 pm

Commodities outlook
  • Commodities including copper, steel, aluminium, lead, nickel as well as precious metals such as gold and silver have seen a sharp surge recently in the international market, driven by favourable factors. 
  • Analysts from global research houses are predicting a ‘Commodities Supercycle,’ as the asset class is expected to benefit from recovering global growth, higher inflation, and the gap between supply and demand propelled by rising global liquidity.

The chart below shows how the MSCI Commodity Index has fared in the last five years.

Factors aiding favourable outlook

  • Manufacturing activities in major economies such as China have now risen to a 2-year high, boosting demand for Industrial Commodities such as Steel, Iron, Copper Aluminium, Lead, Nickel etc. China’s post-virus stimulus has led to more infrastructure investment and increasing demand for metals. 
  • The current boom is comparable to the spike in the early 2000s, when a jump in Chinese orders led to a bull-run for Commodities. 
  • Commodities are cyclical assets, rising and falling in sync with the economic cycle. Dissemination of the vaccine around the world would be another important tailwind for the asset class. 
  • The market for materials such as copper, silver and aluminium has gained on growing demand due to a shift to renewable energy and electric vehicles, according to a report by Nikkei.
  • Central banks and governments around the world are pumping in trillions of dollars into the economy.  With the US administration mulling another mega stimulus, the easy liquidity will support higher precious metals prices. (Read our outlook on Gold)
  • US Dollar Index is likely to remain softer after a rebound in H12021. Moreover, the worldwide currency debasement should favour Gold prices across countries, including India, according to Edelweiss.
  • The research house expects gold prices to touch up to ₹75,000 per 10 gram in the near-term.

Potential drawbacks 

  • Given the above factors, Commodities will continue to do well in New Year 2021. However, with rising commodity prices, there is a risk of higher inflation and increasing raw material cost for many sectors. 
  • In Dec-20,  real estate developers body CREDAI had expressed concerns over spiraling steel and cement prices, asking the government to step in. Similarly, there are concerts that infrastructure projects could become unviable due to the rise in Steel prices. 
  • Auto majors such as Tata Motors, Maruti Suzuki, M&M, Hero MotoCorp, Hyundai, Kia have already announced price hikes for their vehicles due to rising raw material prices.