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In mid-October 2019, the IMF forecasted 3.4 percent global growth in 2020 from 3.0 percent in 2019.
Prior to COVID-19, global economic growth was humming along at a respectable pace.
As a result, financial markets were largely vibrant for most of 2019. A number of commodity markets in particular outperformed benchmark expectations. For example, iron ore prices rose by more than 50 percent from late-2018 levels to US$120.24 per metric ton around mid-2019.
The impact of the COVID-19 pandemic, however, led most financial markets, including stock markets and commodity markets, sharply lower, with the exception of a few agricultural commodities.
Yet, every cloud has a silver lining and COVID-19 is no exception.
COVID-19 Pandemic: An Unprecedented Environment
The COVID-19 outbreak began to take hold on 31st December, 2019, in Wuhan, China, where a novel coronavirus was identified. In one month, COVID-19 cases were reported in Europe, Asia, North America and the United States. In the first half of the year, Spain, France and Italy were the worst-hit in Europe.
Policymakers heeded the advice of the World Health Organization (WHO). In attempt to reduce the economic impact and save lives, policy responses included containment measures, such as lockdown and travel restrictions (travel bans). This effectively shut down global supply chains, triggering an economic slowdown. Supply chain disruptions made it impossible for global supply to meet demand for particular industries. At the same time, aggregate demand for some sectors shrank as consumer spending shriveled, sending energy prices lower.
Impact of COVID-19: Energy Commodities
Crude oil, the de facto leader of energy commodities, plunged 82 percent from the year’s high on January 6th to US$11.26 a barrel on April 21st. Heading into 2021, nonetheless, oil prices are hovering south of US$50 a barrel.
Since consumer mobility is anticipated to remain restricted in 2021, and considering energy prices usually maintain a positive correlation with global economic activity, crude oil prices may continue hovering near current levels for a prolonged period.
Still, energy commodities such as coal may attract investors; coal has less dependence on the consumer sector and could benefit from a recovery in emerging markets’ industrial sectors.
Metals to Ride Emerging Market Recovery?
Weighed by the COVID-19 pandemic, base metals tumbled in early 2020.
A common proxy for economic growth is copper, depreciating 24 percent from January’s high to US$4,789.50 in March. Despite this, copper managed to chalk up fresh highs in December, reaching US$7,968.60.
Similar year-end recovery rallies occurred in other base metals. The high volatility is largely due to expectations of an upturn in emerging markets this year, led by Chinese industrial demand. This can be viewed as a global supply-side recovery. In other words, although the spread of COVID-19 caused global GDP (global economy) to contract in 2020, China is preparing for an eventual rebound in 2021.
Given China’s private sector depends on emerging markets, such as Russia, Brazil, Mexico and India for raw materials and inputs, macroeconomic indicators for these countries may improve beyond market expectations. And as Chinese industrial demand boasts a positive correlation with the pricing of base metals, 2020’s year-end rally could perhaps set the stage for a continuation in 2021.
Agricultural Commodities Unfazed by COVID-19 Crisis
Agricultural commodities are divided into two segments: food and cash crops.
Examples of the latter include coffee and soybean oil. Although agricultural commodity prices assumed a resilient stance last year, longer term evaluations differ between food and cash crops.
Compared to food crops, cash crops are subject to price fluctuations. Food crops are less affected by the vagaries of the market due to the political sensitivity regarding food security. COVID-19 has brought public health care issues to the forefront of the media, pulling food security and food prices into the limelight.
Consequently, although on-going disruptions in the global supply chain ought to put upward pressure on agricultural commodity prices going forward, it may only result in prices of cash crops increasing. Food prices are likely to remain near current levels.
COVID-19 Going Forward
The World Bank produced a working paper on whether coronavirus containment measures work. The paper concluded measures were effective in reducing contagion and death rates but made no mention how long the world would be subject to this virus.
Despite this, with worldwide vaccination projects underway, there is light at the end of the tunnel.
Commodity CFDs (see figure 1.A), therefore, could be financial products worth exploring in 2021.
(Figure 1.A: FP Markets commodity CFDs)
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