The Commodity Bull

The price of commodities experienced huge declines at the beginning of the pandemic, however, recently have made a comeback fuelled by the vaccine-driven global economic recovery, aided by fiscal stimulus.

According to S&P Global Market Intelligence, the S&P GSCI index that tracks futures contracts for 24 raw materials rose 6.2% month over month. For example, the price of iron has soared almost 85% over 2020!

Who is set to benefit from these gains and what is driving this growth?

One explanation is the increased appetite in the world economy, specifically that of China. China is the world’s biggest importer of natural resources and its economic recovery is fuelling the bull market we are seeing. Increased spending on infrastructure, not just in China, will further increase the demand for raw materials, and therefore, a continuation of the boom in commodity prices as we transition into a post-Covid economy.

Fiscal and Monetary measures are also driving growth. Increased fiscal spending, growth in the money supply and rock-bottom interest rates have boosted inflation expectations among investors. Since the price of commodities usually rises when inflation is accelerating, investing in this asset class provides investor’s portfolios with a hedge against inflation.

Covid-19 has highlighted the need for societal change, and one of the main propositions is a movement towards greener energy sources. Many appliances within the renewable energy sector require commodities such as iron, copper and steel in their production. Therefore, as more countries choose green energy over traditional energy, we will see an increase in the demand for such commodities, fuelling the increase in their prices.

Companies within the mining sector such as BHP, Glencore and Rio Tinto are a few of the businesses that are set to benefit. The increase in the price of commodities has made these companies more profitable and therefore, has made them more attractive to investors.

With more profits, and greater cash flows, this has allowed these businesses to increase their dividend payouts, and therefore investors are benefiting too. BHP has announced that they will pay an interim dividend of $5.1bn as their profits hit a seven-year high. Furthermore, Glencore has announced it will continue dividend payments after having to scrap them last year.

According to J.P. Morgan, Rio Tinto and BHP could emerge as the two biggest dividend payers in Europe this year if the bull market in commodities perseveres!

The bull market in commodities has been driven by the strong economic recovery of the world’s economies, particularly China, as well as increased fiscal and monetary measures and a greater demand for cleaner energy. Whether we are entering the first leg of a supercycle, only time will tell, however, at the moment, the market for commodities is certainly one to watch.