What’s Driving Commodity Prices’ Crazy Rally?

Bulls cite the rising metals prices as proof that a supercycle is still alive and strong. Nobody, not even a snake oil salesperson, would say that what we are witnessing is healthy.

The early this century’s 10-year commodities boom, for example, was powered by rapid industrialization in China. This long-term expansion lifted hundreds of millions out of poverty. However, the recent price increase is the product of energy markets pushing supply-side constraints.

Aside from the current global energy market upheaval, China’s energy dilemma primarily drives upward metals prices.

However, China is not alone in experiencing an energy crisis. Several other clouds are forming. Some, like coal and natural gas supplies, are only available for a limited time.

Property Market Challenges in China

According to the Financial Times, China’s property sector still accounts for an estimated 30% of the country’s near $15 trillion GDP. Construction alone accounts for roughly half of China’s steel consumption.

Some metals, such as copper, cobalt, nickel, and lithium, show long-term promise due to the rising demand from electrification. There is an indication that this will replace demand from the construction sector, which is declining.

According to William Jackson, chief emerging markets economist at Capital Economics, “China’s property sector is right at the end of a boom period. Commodities such as agricultural items will continue to see increased demand as the global population and living standards rise. However, a reduced Chinese property sector will impact global GDP growth in the coming years.

According to the IMF, China accounted for 28 percent of global economic growth between 2013 and 2018, according to the Financial Times. If China’s real estate sector accounted for one-third of that, the industry was responsible for more than 9% of global growth during that period.

The Road Ahead

While the current logistical and supply-side bottlenecks are excruciating, they will be temporary.

Steel prices have already begun to fall. While nonferrous metals have seen a surge in bullish gains this month, these should fade next year as well.

A dramatic recession in China’s building sector will have a more profound and far-reaching impact. It would have implications and harm several industries, including iron ore, for the rest of the decade. It would also affect economies like Brazil, South Africa, and Australia, relying heavily on the Chinese construction market.