The next wave of global economic recovery could lead to a sharp rise in commodity prices

Expert Answers: Will the Global Economy Recover in 2021?

The next wave of global economic recovery could lead to a sharp rise in commodity prices

According to analysts, the next phase of economic recovery is likely to be driven by infrastructure investments that require significant volumes of commodities, potentially creating the basis for further growth in the industrial sector in the coming months..

The forecast comes out as market participants closely monitor the strength of the global economic recovery as many countries grapple with rising Covid-19 cases..

The coronavirus pandemic prompted forecasters to publish gloomy economic forecasts this year, and the OECD warned on Wednesday that the outlook remains «extremely vague».

The next wave of global economic recovery could lead to a sharp rise in commodity prices

However, one of the signs that the recovery could still gain momentum was the report that the world’s second largest economy in August increased industrial production in eight months..

China, which has been in recovery mode for several months, released data on Tuesday that showed industrial production growth accelerated to 5.6% in August from a year earlier. This confirms the view that demand recovery in Beijing continues to pick up steam and government stimulus is helping to recover..

«We have already witnessed a response to metal consumption in China, very high metal consumption», – told CNBC on the phone Max Layton, Head of Commodity Research EMEA (Europe, Middle East and Africa) at Citi.

«It’s amazing how much China has recovered in construction.», – he continued, reflecting on «impressive» the rally observed as a result in the industrial goods sector.

Leighton identified «three large catalysts», commodity investors to track by year-end: news on coronavirus vaccines, strength of China’s economic recovery and scale of U.S. stimulus package.

«I really think most of the incentives will be infrastructure driven. We already know that there are serious infrastructure deficits in many developed countries, and this is something that could be addressed during this period.», – told CNBC on the phone Nitesh Shah, Research Director of New York WisdomTree Investments.

The next wave of global economic recovery could lead to a sharp rise in commodity prices

«Why waste a good crisis? You can actually go through a lot of infrastructure programs that you have waited decades to actually go through during this time, Shah continued.. «I’m not so optimistic about big «V-shaped» vigorous recovery, but even some kind of recovery is useful for the industrial sphere».

«Ultimately, if you look at the economy’s response to the (coronavirus crisis), we have a fiscal response, we have central banks cutting interest rates, we have central banks pumping more money into the economy. The next stage is a large investment in infrastructure, and this will happen all over the world.», – said last month on CNBC’s program «Squawk Box Europe» Andy Critchlow, Head of News EMEA at S&P Global Platts.

The next wave of global economic recovery could lead to a sharp rise in commodity prices

«We saw this back in 2008-2009 in response to the financial crisis, and what did we get from it? We had a rally in some industrial commodity markets – it was a super cycle», – he said.

«I’m watching things like iron ore very closely right now because these types of manufactured goods will skyrocket if we actually get this infrastructure recovery and then it turns into oil.».

Iron ore spot prices climb to new six-and-a-half-year highs on Monday at around $ 129 a dry metric ton amid China’s construction boom.

The steelmaking ingredient has since dropped to $ 126.59 as a result of trading on Friday. Iron ore prices have risen by more than 37% since the beginning of the year.

Along with zero interest rates globally, the demand to hedge against perceived inflationary risk has helped spot gold futures jump more than 28% this year, while silver is up about 50% over the same period..

Looking ahead to 2021, Critchlow suggested that some of the world’s largest economies may soon announce «big» infrastructure development.

He argued that these projects are likely to be led by China, India and the United States, noting that both candidates for the upcoming US presidential election have pledged to spend «awful lot of money» on infrastructure. «This should be good for oil demand and should be good for commodities across the board.».

The president Donald Trump At the beginning of the year, he was preparing a plan for the development of infrastructure in the amount of $ 1 trillion, according to Reuters, citing an unnamed source. However, his stance on future infrastructure investment remained uncertain ahead of the November 3 presidential election..

Last month, Trump’s campaign headquarters announced an agenda for a second presidential term, promising «build the world’s greatest infrastructure system». The press release did not detail how Trump planned to deliver on that promise if re-elected. It is known that in 2016 the Republican promised to spend $ 1 trillion on infrastructure, but since then nothing special has happened..

By comparison, the Democratic presidential candidate Joe Biden promised to spend $ 2 trillion «to create a modern sustainable infrastructure and a fair future for clean energy». Biden said that if elected, he plans to rehabilitate roads, bridges, green spaces and water systems, as well as provide universal broadband..

«To the extent that the market thinks that they are going to carry out infrastructure weakening, then yes, this is good news anyway for the goods that will be put on the proposals of both candidates.», – said Leighton of Citi.

Leighton suggested that Trump’s previous commitments to infrastructure projects «old school», such as roads and bridges are likely to be «demanding on steel».

Biden’s commitment to solar and wind technology is likely to benefit copper and, to a lesser extent, silver, he added..

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