Do you want to know what is in store for the price of raw materials in the coming months? Look at what is happening with the price of electricity in Europe, and there you will have the answer.
This is what Goldman Sachs points out in its latest analysis of the basic resources market. The increase in demand at the end of the pandemic has generated bottlenecks in the physical market for raw materials, which have led to sharp price rises.
Now, after a rally that has led the Bloomberg commodity index to rebound 64% from the lows seen in 2020, everything points to continued gains, at least in the coming months.
If the price forecasts that the market consensus manages for the end of 2022 are taken into account, everything points to the fact that by then the raw materials will have given a breather to the increases that they have been experiencing since 2020. In general, for almost all the main basic resources listed on the market, falls are expected between now and the end of next year.
However, down the road it still seems that we will have to deal with further price rises and there are analysts and large investment banks, such as Goldman Sachs, who believe that the market is being complacent with its expectations since the rises in prices will be extended longer than anticipated.
Physical market and futures
At this moment there is a significant mismatch between the supply and demand of physical raw materials in the short term, but the futures market, and consensus estimates, discount that there will be falls over the months. This nuance is important: the basket of raw materials that includes futures prices still has a run of 143% to the highest levels ever seen, in July 2008; however, the same indicator, but which only includes spot commodity prices, is about to reach all-time highs, just 3% away from reaching them.
This is a reflection that the market is overwhelmed at the moment, but not so much for the next few months, and for now he is confident that this tense situation in raw materials will eventually be resolved over time.
Javier Santacruz, professor of Economics, explains how “in the raw materials market, the problems are very short-term in the immediate supply of any type of material. Now there is an alarming shortage. Months ago it was suggested that, due to certain cuts in the supply chains, we would have to wait a while for the situation to normalize, for these chains to recover, and the Asian demand that was growing to calm down a bit, but the opposite has happened: the Covid left the inventories of most of raw materials, and at the moment in which the economy has begun to recover, it has not been possible to recover the cuts in the supply chains and return to normalize the situation,” he explains.
“The spot market is the one that has the greatest stress now, never seen in the last 40 years,” he acknowledges, and highlights how the futures market “lives in part in a certain complacency”, which explains why futures trade anticipating falls for the next few months.
“Right now there is nervousness in the short term, but a certain calm in the medium and long term, thinking that this is going to happen, that it will not be very worrying. I am of the opposite thesis: the trend is clearly bullish and this is hardly recoverable”, warns Santacruz.
The Goldman Notice
Goldman Sachs is one of the firms that has been warning of the rises that were coming in raw materials for some time, and has even highlighted that we are at the beginning of (uptrends that continue for a long time, lasting decades), it is emphasizing at this moment in the rises that await us this autumn, and explains the reasons that have led us to this situation.
“There is an increasing scarcity in the physical markets for raw materials,” they point out. “Since last October, the focus of investors and politicians has been on the recovery in demand, thanks to vaccination, since the greatest recession in living memory. Demand for physical goods has reached such high levels, already above those that existed before the pandemic, in all cases except oil, to the point that the system is becoming increasingly tight to cover this demand,” explains Goldman.
The increase in demand that has occurred has not been reflected in supply. And it is not a phenomenon derived from the Covid-19 pandemic: this shortage of supply had already been brewing for years, with the market focusing on investment in the sectors of the so-called new economy, leaving aside investment in new production capacity in sectors producing physical goods.
Goldman corroborates this: “Most of this shortage, aside from problems related to the workforce, has very little to do with Covid. The seeds of the problem began to be planted after the 2008 crisis, when investment in the The old economy, typical of the long term, collapsed and gave way to investment in the new, more short-term economy,” they point out.
“As commodity markets are not able to react quickly with increased supply, once inventories are depleted, as in the European gas market today, the only alternative to clear this market is destruction of demand due to high prices,” they point out.
According to the latest report published on the matter, if investors want to know what awaits the commodity market in the coming months, all they have to do is analyze what is happening with energy prices in Europe to get their conclusions.
The most bullish commodities of the year
In 2021 there is a raw material that stands out for having broken all records and having generated the highest prices ever seen in the history of the European electricity market: natural gas. It has risen more than 114% since the first day of the year, and since last year’s lows its price has multiplied by five.
In Europe, having to deal with a longer-than-normal winter has meant that inventory refilling season started later than usual, and at the moment they remain below historical levels for this time of year.
In addition, Russia’s turning off the tap has forced utilities to turn to liquefied natural gas, which is transported by ships, and which forces buyers to have to compete with others in all parts of the world. Now, in addition, the arrival of storm Ida has paralyzed shipments of US gas, contributing to worsen the production deficit that was already consolidating in the market.
In addition to gas, the energy resource that has also positioned itself as one of the most bullish commodities of the year is oil. Brent rises by more than 43% in the year, even despite the increase in supply that the Organization of the Petroleum Exporting Countries (OPEC) and its allies have begun to make.
With a barrel above 70 dollars, Citi now expects prices to remain above 72 dollars for the next few months, and they explain how the crude oil market is experiencing a situation similar to that of natural gas: “The Recovery in Asian demand is beginning, at a time when Hurricane Ida has deteriorated production in the United States and the growth of refined products (gasoline, diesel… etc.), reducing the probability that they will fill the inventories before the end of 2021, and even during the first quarter of next year,” they explain from Citi.
Industrial metals are not escaping the rises, with tin increasing its price by more than 65% in the year; aluminum accounts for 42%, driven, in addition to geopolitical instability in Guinea, the world’s largest producer of bauxite (an essential component for the alloy), by the cutback in aluminum production that is taking place in China, which it is closing factories to try to reduce pollution in the country.
Other industrial metals, such as copper, nickel, lead or zinc, appreciate approximately 22%, 19%, 15% and 11% on the London Metal Exchange, in that order, while on the market Of the metals, it is the precious metals that are avoiding increases, and have fallen in price so far this year: gold falls 5%, silver almost 10%, platinum 14% and palladium almost 20%
Regarding agricultural resources, in general it is being a year of increases, of different magnitude. Coffee is the one that rises the most in the year, with an advance of 43%, while sugar does so by almost 24%. Rice, wheat, corn and cocoa become more expensive, but at a rate that does not reach double digits, while soybeans fall slightly in the year (close to 2%), and wood sinks more than one 40%, in a year in which its price has been a roller coaster.
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