Commodity prices have been trending higher — but how long the rally lasts depends on China

Energy

SINGAPORE — Commodity prices are going up but whether that continues for an extended period of time — known as a supercycle — depends on China, an economist said Thursday.

The last supercycle happened in the mid-2000s before the global financial crisis and peaked in 2008 as China grew to become a commodity powerhouse.

Prices for commodities like oil and base metals have rebounded strongly from last October on the back of positive news about Covid-19 vaccine trials, Vivek Dhar, a mining and energy economist at the Commonwealth Bank of Australia, said on CNBC’s “Squawk Box Asia.”

“Now, the question that we’re talking about, in terms of supercycle or not, in our view, it still lies in the hands of China,” he said.

“China accounts for about 50% to 60% of commodity demand in the mining space. So, if we’re going to be talking supercycles, I’d say what is China going to do in 2021 is going to be the key question,” Dhar said.

He explained that the rise in commodity prices started on the back of Beijing committing stimulus toward infrastructure in 2020. Whether that momentum carries on into 2021 remains unknown.

“This idea of a supercycle — there’s definitely a case that can be made for it — but in our view, really, China holds the cards. Until we see policy support — and the next five-year plan really prioritizes the commodity-intensive sectors as opposed to service sectors or consumption sectors — we’re just not believers right now of that supercycle story,” Dhar said.

That stands in contrast to investment banks JPMorgan and Goldman Sachs which are bullish about an impending commodity supercycle.

As of Thursday, base metals traded higher on the London Metal Exchange, with copper up 2.57% at $8,606 a tonne, aluminum up 1.23% at $2,141 and zinc higher by 2.17% at $2,877.

Oil rally

Oil prices have been trading higher in recent sessions until an energy crisis and freezing weather hit the U.S.

During Asian trading hours Friday, U.S. crude slipped 1.49% to $59.62 a barrel. But since November, the price has risen almost 69%.

As of Thursday, global benchmark Brent last traded down 1.25% to $63.13. Similarly, Brent has also risen some 68% since November.

Commonwealth Bank has set a price target of $65 per barrel for oil prices by the end of the year, which Dhar said was already looking like a low forecast.

“The expectations of a Covid-19 vaccine is certainly very positive for oil,” he said. “Around two-thirds of oil consumption is tied to mobility and transportation, so, anything which is positive news on the Covid-19 front has an enormous positive impact on oil prices and oil demand expectations.”

He added that the decision made by oil producers to hold supply steady as well as to reduce some supplies has allowed energy prices to rally.

“Demand is certainly pivotal but the supply side has proven very, very structurally supportive. That’s been the reason why this oil price rally could even surpass our forecast and hit $70 by the end of the year,” Dhar said.

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