Commodity prices are rising to multi-year highs, with several variables supporting this surge. Many markets look to be in structural deficit as the economic recovery gains steam following the epidemic. The index is near 5-year highs, with a strong pull this year, while the MSCI Emerging Markets Index is behind. A few months ago, present market conditions could lead to a period of elevated raw material costs, particularly metals. Moreover, the commodity boom is frequently excellent news for emerging markets. When commodities rise, so do emerging markets, suggesting that now is a good time to invest.
Among the elements influencing this structural deficit is a lack of investment, exacerbated by political factors (such as Venezuela, Argentina, and Cuba), ESG factors, and COVID-19, resulting in a significant constraint in capital investment plans. Oil and gas firms and mining corporations are under constant pressure from investors to maintain capital discipline. It is hurting investment decision delays and, as a result, reducing exploitation and supply capacity.
According to the Main first Emergentes team, numerous agricultural products, traditional ones like soybeans, corn, and wheat, and other raw materials like coffee, sugar, and vegetable oils, are currently trading at multi-year highs. World food prices jumped 4.8 percent in May alone, the fastest rate in ten years. This price increase was driven by tight supply due, among other things, to drought and delayed harvests, but also by supply chain interruptions, increased demand – particularly from China – and the US dollar’s depreciation. On the other hand, global cereal production predicts reaching a new high of roughly 2% in 2021.
Commodity exports remain major growth engines for many emerging markets. Growth in these countries expects to surprise the upside in the second half of 2021 and beyond. It is especially true in Latin America, where raw resources make up more than two-thirds of several countries’ exports.
It is important to emphasize that the revival of commodity prices in 2020 is why many emerging markets wait a good decade. Because the market dynamics for each raw material are so diverse, diversification is the key to success.