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If there is an asset class that has a knack for igniting Shakesperean passions, it is definitely commodities. Every time the price cycle breaks above multiyear averages, talk of a supercycle starts raging around the markets with supply doom scenarios adding spice to a hypothetical risk/reward menu. The narratives and reactions tend to be so strong that one can only wonder if the 1634 Tulip mania is as old as it seems. Nowadays, tulips have been replaced by copper, cobalt, lithium, and any other material which is expected to take the world into the ‘New Energy Age’ whatever that means.

Fast forward to the final third of 2023 and we are looking at depressed commodity prices all over the place. Yes, there have been spikes here and there. It would be wrong to assume that every commodity is underperforming but the promise of an eternal bull run has not materialised. Surprising? Not at all. Any seasoned commodity observer has seen this happen before and anyone trying to convince you that this time is different is probably trying to sell you something expensive to buy it back at a much lower price later.

Moralists will call that cynical. I call it logical. Who wants to buy high and sell low?

The main reason why commodities make people go crazy is because absolutely everyone is exposed to them in one way or another. You might not want to have anything to do with equities and bonds. That’s fine. If these two crash, you can go on minding your own business. But if commodities go bonkers, you will experience it whether you are ready for it or not. This can be in the best or worst possible way. The Covid-19 pandemic and the Russo-Ukrainian conflict are hard evidence of how major disruptions on commodity markets can cause prices to go wild. Energy bills are obviously the most notorious example but a more elegant one is the Parisian breakfast. The combination of coffee, orange juice, bread, jam, butter, and croissant provide a fairly good reflection of price variations in the sub-category called Soft Commodities. Whatever you eat, whatever you consume, whatever you live in, commodities are the de facto portfolio that sustains your life.

Back to the subject at hand though, why is the commodity supercycle not happening as expected? Where did the projection models go wrong? Well, there is this thing called the economic cycle and its symbiotic relationship with commodities. You see, the equation is very simple: when the global economy expands, the demand for commodities increases with the reverse being true when contraction occurs. Is that all? Pretty much. The months which followed the end of ‘The Great Lockdown’ caused such exuberance on the consumption front that the world temporarily forgot that normalisation is inevitable. The supply of commodities shrunk to unnatural levels during the pandemic and was met with…unnatural demand. Add the Electric Vehicles fashion to the mix with Green-Energy-this and Green-Energy-that and you have commodity prices skyrocketing. The rockets from war completed the picture. Nowadays though, the issue is less about supply and more about demand since recession risk has made a tragic comeback. The word ‘tragic’ is meant to highlight how bad it can turn out to be with several economic engines slowly suffocating under the weight of high interest rates.

It is worth noting that commodities are essentially an industrial affair. When industrial activity is booming, you can rightfully expect commodity prices to reflect that. On the other hand, when weaknesses start to become apparent in several key industrial sectors, prices will go down. We will add that it is a grave mistake to expect ‘new sectors’ to compensate for this trend. The idea that an expanding Electric Vehicles and energy transition sector can buffer the drop in older highly established and strategic industrial fields is wrong on many levels. Strictly speaking and to sum things up, we do not yet know how well EVs will take hold by the end of the present decade; even if all active vehicles are replaced by EVs, they are still big-ticket items that are dependent on the purchasing power of consumers, which in turn depends on economic conditions. Fighting climate change is a laudable effort provided that the associated products are affordable. Last time I checked, most people were thinking of making it through next month’s mortgage payment than the latest EV catalogue.

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