Is the commodities rally sustainable?

Increasing demand: Even palm oil prices, with buying from India and China, have risen to RM3,400 per tonne from just RM1,800 one-and-a-half to two years ago.

THE good run on commodity prices is expected to continue into next year, but will it be really sustainable?

The high take-up by China is largely from the manufacturing sector that is working on overdrive to produce goods for consumers in lockdown everywhere.

Some manufacturers in China expect its export sector to be running at full capacity until at least the end of next year.

Sales in the first three quarters at Guangdong Xinbao Electrical Appliances have surpassed that for the whole of last year, said the South China Morning Post (SCMP).

The shift in global demand has been towards medical kits, home appliances and laptops that China produces in great quantities.

Global demand for some of these goods has also been spurred by reduced spending on travel and big ticket items due to the pandemic.

Can global demand hold up after the pent-up demand for pandemic-related items wear off?

Growth in global gross domestic product for this year is likely to be better than expected, but the global economy is far from staging a complete rebound, accoridng to the International Monetary Fund (IMF).

For next year, expectations of a “more moderate downturn” and “persistent social distancing” are reflected in IMF’s revision of growth forecast to 5.2% from 5.4%.

Still, there is hope for higher growth.

Optimism over a broader recovery has been fuelled by positive news flow on Covid-19 vaccine developments, while for the fourth quarter, domestic demand growth in China is expected to be healthy, said Fortress Capital CEO Thomas Yong.

Safety regarding vaccines may still be an issue. Pfizer and its partner Biontech have applied for approval for emergency use of the vaccine, but phase three tests have not been completed yet.

Ongoing phase three trials indicate that the vaccine jointly developed by them is 90% effective in preventing Covid-19 infections.

Commodities rally whenever more and more people start thinking that a growth uptick is just ahead.

In this case, commodities are also coming up from their lows, just like in 2001 following the slump in commodity prices in 2000.

Even palm oil prices, with buying from India and China, have risen to RM3,400 per tonne from just RM1,800 one-and-a-half to two yeas ago.

Oil prices

Oil prices have posted a fourth straight week of gains, with Brent crude January futures rising to US$48.18 per barrel, ahead of an Organisation of Petroluem Exporting Countries meeting to discuss the oil production plan for 2021.

Stimulus measures in China have boosted demand for metals to its highest level since 2011, said CNBC.

All economies are relying on debt-fuelled public sector spending, which in the long term can spell trouble, to bring them back from the brink, onto the growth path.

But for now, record stimulus packages and great efforts to combat the pandemic crisis, should support global consumption, said Areca Capital CEO Danny Wong. (pic below)

At the same time, this record government spending has sparked the risk of inflation, for which commodities is also considered a good hedge.

As the demand for goods and services rises during a period of inflation, their prices will also increase, in turn, causing a spike in the prices of those commodities used to produce them.

Commodities are traded in US dollars; a weaker dollar enables people all over the world to buy more of them, leading to higher prices.

The dollar has dropped more than 2% this month, as the rush to safe havens begins to subside on President-elect Joe Biden’s election victory and progress in finding a vaccine.

As long as there is no complete collapse in demand, Goldman Sachs sees increasing demand for metals and agriculture, driven by tightening supply on adverse weather conditions, and buying from China.

Stronger ringgit

Even the ringgit is strengthening, helped by the US dollar weakness, global recovery and strength of China’s rebound.

The ringgit will continue to strengthen while China’s growth looks sustainable; it is basically a normalisation of growth as Covid-19 gets under control, said Hong Leong Bank managing director, global markets Hor Kwok Wai.

But global recovery remains “wildly uneven”, said Bloomberg.

As US business activity powers ahead, some of the ground still looks shaky with incomes declining and more people applying for state unemployment benefits.

Europe is down again as services are impacted by the latest lockdown measures.

Tensions between Australia and China have resulted in the stalled delivery of US$500mil of coal from Australia.

The global economy has been suffering since 2019 as the US-China trade war blew a hole in global trade; in 2020, it landed with a mighty crash on the pandemic crisis.

Will 2021 be the year when US-China relations improve and vaccines are available?

Yap Leng Kuen is the former business editor of StarBiz. The views expressed here are the writer’s own.

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