Is the raw materials boom well and truly over, or is it merely on pause?

Since the start of the pandemic in early 2020, base metals, iron ore, lumber and cotton have all experienced massive price surges followed by deep slumps, only to rally and then decline once again.

While the prices of raw materials have gone south again amid fears of bank losses and defaults and a global recession, commodity market analysts and traders feel that prices will continue to be highly volatile in the coming months.

The price of copper – the bellwether of base metals – could fall by around 30 per cent to between US$6,000 to $6,500 a tonne, from its current level of US$8,775 a tonne, said Simon Hunt, the chief executive of Simon Hunt Strategic Services, which monitors the macro-economic impact on commodity markets.

Base metals are correlated with the stock market, with the prices moving closely in tandem with equities, said Hunt.

Analysts say that the extent of the boom and bust of basic raw materials over the last three years has been extraordinary.

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The price of nickel, for instance, went on a rollercoaster ride for much of 2022. In March last year, nickel prices reached US$48,201 per tonne, the highest in over a decade. In February this year, the price was US$26,728. In comparison, the price of nickel was below US$10,000 per tonne in December 2016.

From 2020 to 2022, zinc, aluminium and copper – all of which are much more liquid markets – soared by 181 per cent, 175 per cent and 141 per cent respectively. They then saw slumps of between 36 per cent and 49 per cent, rallied by about 30 per cent, and are now on the way down again.

To gauge the potential market scenarios for the rest of the year, observers say it is necessary to understand why there was a virulent commodity boom and slump with the attendant wide gyrations.

The basic reason was, and still is, unsound money policies of the Fed and other central banks around the world, said Brendan Brown, a London-based economist and financial analyst.

The global financial system was already flush with cash but central banks eased money further to help the US and other governments borrow extensively to ease the burden from the pandemic, he said.

Demand for raw materials surged and boosted prices. The pandemic caused delays in shipments, while the Ukraine war brought about further shortages and squeezes that sent prices even higher.

According to analysts at Morgan Stanley, there is an acute steel shortage in Europe and other parts of the world. Turkey, which is still busy with reconstruction after last month’s massive earthquake, shipped an average of about 20 million tonnes of finished steel overseas over the past five years. It’s clear that a significant portion of this will be taken out of the global supply chain.

A report published by Euromonitor International in February noted that the prices of key basic metals are expected to increase in the first quarter of 2023, thanks to China’s reopening and the faster-than-expected industrial sector growth in Europe.

The depreciation of the US dollar also helps to boost demand for industrial metals as it is cheaper for international customers to buy commodities, the report said.

“Prices of key metals are forecast to remain stable throughout 2023 as weaker global economic and investment growth, as well as the slowdown in the construction sector, are expected to outweigh positive effects on the global demand side for metals and cap the prices,” it added.