The Next Commodity Market Driver
1 Min WatchArticle06 Mar 2023
The Next Commodity Market Driver
By Blu PutnamAt a Glance
Broad-based commodity cycles have typically had a major demand driver. In the 1970s, it was a weak U.S. dollar, and in the early 2000s it was Chinese growth
With potential growth in real GDP constrained by demographics, the focus is on supply constraints
Broad-based commodity bull markets in recent decades have typically had a major demand driver. Will supply constraints drive the next bull market?
Looking at the last few commodity bull markets is informative. In the 1970s, the driver was a weak U.S. dollar. In the early 2000s, it was the strong growth of China. More recently, the pandemic stimulus followed by the Russia-Ukraine War shock was the demand driver. But commodities faded in the second half of 2022 as they sought new leadership.
In the short term, the recovery of China from its COVID-zero policy has been a focus. Over the long run though, China, as well as Japan, Europe and North America, face severe demand headwinds from their aging populations, low fertility rates, and lack of growth in their labor forces. With potential growth in real GDP constrained by demographics, we are turning our attention to supply constraints.
Loading...
Over the longer term, the growth in the supply of commodities, from energy to industrial metals to agriculture, is likely to be quite subdued, possibly even stagnant, due to three factors.
First, energy companies are reluctant to invest as much as they once did in fossil fuels. Investment in alternatives continues to grow, yet not necessarily enough to offset expected demand. Second, across all commodities, geopolitical risks seem elevated, and financing is scarcer than it once was due to the reemergence of positive real interest rates (that is, rates adjusted for inflation). Finally, it takes many years from investment to production, so adjustment to even small increases in demand can impact prices.
Stagnant supply growth, even in the face of only modest demand growth, could be the next driver in commodities.
Loading...
About the author
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).
