Vijay Kumar Gaba

 Prices of industrial metals and base metals have risen rather sharply in past few months. Most prices are now ruling at multiyear high levels. Though it is not clear whether this trend continues to be driven by the “supply shock” or a “demand shock” is driving the prices of higher.

Actually, it could be a mix of both the factors. For example, growth of electric mobility and accelerated adoption of reviewable (solar & wind) energy could be driving the demand of copper faster than the supply; where China’s curbs on steel production to control emission levels may have extended a supply shock to global trade. Similarly, the massive Covid stimulus by developed countries (e.g., US announcing massive stimulus for infra building) may have added to demand acceleration for steel and aluminum etc. while renewed mobility restrictions in many jurisdictions, Suez logjam, container shortages etc. may have added to supply restrictions.

There are some conspiracy theories also in the works. Couple of which I heard go like this:

(i)    Fearing further intensification of trade war with US, EU, Quad etc., China may be building strategic reserves of many commodities, causing an artificial scarcity in global markets.

(ii)   The global currencies face the prospects of getting materially debased after trillions of dollars in fresh printing, over and above the global financial crisis (GFC 2009-10) printing. Traders may therefore prefer to invest in physical commodities and independent (digital) currencies rather than fiat currencies.

Famous economist Nouriel Roubini, in his latest blog wrote, “Make no mistake: inflation’s return would have severe economic and financial consequences. We would have gone from the “Great Moderation” to a new period of macro instability. The secular bull market in bonds would finally end, and rising nominal and real bond yields would make today’s debts unsustainable, crashing global equity markets. In due time, we could even witness the return of 1970s-style malaise.”

A fund manager friend, who has been resisting investing in commodity stocks because he believed that it is purely a supply shock driven phenomenon and cannot be sustainable, is not finding the rally irresistible. His reaction yesterday was not entirely unexpected, when he said, “Inflation will kill this market. Till then buy commodities. Exactly opposite of what I have been believing for a year now. I am finally succumbing and buying xyz @$$$.”

It is part of my investment strategy not to invest in commodity stocks, except for short term trading purposes. To that extent, I am not too concerned about the price action in commodity stocks. Nonetheless, I continue to believe that most of the current forecasts for commodity inflation may not be fully factoring in the impact of some emerging trends like:

(a)   United global action on climate change may result in some dramatic change in consumption patterns across the world. This shall definitely impact the demand supply equilibrium of many commodities.

(b)   Acceleration in trends digitization of transactions, remote working, consumption of services (robots for housemaids, digital games for actual games, animation over normal entertainment, AI generated customizable digital books for physical books etc.)

(c)    Wider changes in food preferences, especially sugar, animal protein, simple carbs etc.

(d)   The rising inequalities of income, wealth and access to technology, may result in sever contraction in discretionary consumption.

(e)    One of the prolonged side effects of the pandemic could be acceleration in demographic degeneration of global population. As per some thoughts it could have impact of fertility and it could also impact the will to procreate.

It may be pertinent to note the following in this context:

·         US President Joe Biden has invited 40 world leaders to the Leaders’ Summit on Climate on 22-23 April, 2021. The agenda apparently is “to underscore the urgency – and the economic benefits – of stronger climate action.  It will be a key milestone on the road to the United Nations Climate Change Conference (COP26) this November in Glasgow.”

·         Reportedly, the summit will be preceded by United States announcing “an ambitious 2030 emissions target as its new Nationally Determined Contribution under the Paris Agreement.

·         “South Korea is developing the world’s largest offshore wind farm, generating up to 8.2 GW of power. The $42.8 billion project is part of the country's aim to become carbon neutral by 2050.”

·         A few months ago, Chinese premier Xi Jinping also surprised the global markets by announcing that “China will aim to hit peak emissions before 2030 and for carbon neutrality by 2060.”

·         India has also made commitment reduce greenhouse gas emission intensity of its GDP by 33-35 per cent below 2005 levels by 2030.

·         Many global companies have decided to include “Work From Home” and ‘Work From Anywhere” in their regular business plans.

Obviously, none of it impacts the portfolio today and I plan to hold on to my present metal and sugar sector stocks’ for few more weeks. Also, I am not planning to add duration to my debt portfolio anytime soon. Nonetheless, I do not subscribe the hypothesis of a sustained bout of high inflation over next few years. I believe that technology and climate change efforts will consume most of the money floating around in the world and in 15-20years the world will become a much better, cleaner and safer place to live and work.