Data on the Data
Episode 8: The commodity boom
In this week’s episode of Data on the Data, Refinitiv’s Alessandro Sanos and Ollie Hetherington discuss the boom in commodities and the trends in data usage. Is this a supercycle or is this an environment where a few commodities will dominate? The energy transition is one area that supports a megatrend in specific commodities. Copper looks set to become a major beneficiary, though the availability of data itself may be the biggest trend to arise from this structural shift.
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Roger [00:00:06] Copper has made a new all-time high, and many other commodities are surging. This is currently the market's hottest topic. Refinitiv's commodity data usage has understandably increased dramatically as well, but user numbers have not yet shown the same growth. Ollie Heatherington talks to Alessandro Sanos, Refinitiv's Global Director of Sales, Strategy and Execution in Commodities, about the key trends that they are seeing across this space.
Ollie [00:00:30] Thanks, Roger. So, Alessandro, what's happening in the commodity space at the moment?
Alessandro [00:00:35] Thank you Ollie. Thank you for having me. What we're seeing in the commodities market is a broad surge in commodity prices over the past few months. And this upward movement has fueled expectations among some analysts and investors that a new commodity supercycle may have kicked off. And from an investor point of view, the truth is that when you look at the relative performance of commodities to other asset classes as an example compared to equities and the S&P500 over the past five years, commodities valuations are low. But even when you stay within commodities, and you look at historical commodity prices, it is very interesting to see why the rebound of the Refinitiv Core Commodities CRB Index is gaining steam. The index includes energy, agriculture and metal contracts and has rebounded from its lows in a directional move comparable to the beginning of the last commodity supercycle.
Ollie [00:01:32] And how would you define a supercycle?
Alessandro [00:01:35] Some investors and analysts believe that commodities are in the early stages of a new supercycle. That is enforced by a weakened dollar and supportive central banks. Government spending on post-pandemic recovery programs are also fueling inflationary expectations, which have increased the attractiveness of commodities for investors as they see the asset class as a hedge against inflation. But the supercycle is different, and a supercycle is usually driven by structural change across the world and can last for decades. Commodity supercycles are a relatively rare phenomenon, where over a long period of time, commodities trade above the long price trend. And only four commodity supercycles have been identified since the 19th century, and each one is tied to a transformational period of economic development. The last one characterized the first years of the millennium, and it was fueled by the rapid industrialization and economic growth of China and other emerging markets. The boom lasted until the financial crisis knocked on the door and the Chinese economy started cooling off. So the big question today is whether the increased prices signal an upswing caused by a temporary post-pandemic growth or whether this is just the start of something which is more substantial?
Ollie [00:03:03] Should we also be talking about a cyclical upswing?
Alessandro [00:03:07] As we saw, the CRB Index has risen over 23 percent year to date, to its highest since 2015, and it has nearly doubled since its recent lows. If a new supercycle were about to start, it would need to be fueled by robust and sustainable demand for several years, especially from China, the world's biggest consumer of commodities. But this may not necessarily be the case. So while the global economy is indeed experiencing a post-Covid expansion, many analysts do not expect this boom to be enough to fuel a new commodity supercycle. Perhaps what we're facing is the overlay of a cyclical upswing with a new megatrend, and the structural phenomenon that I'm thinking of is a transition to a low carbon economy.
Ollie [00:03:59] And how does that transition in energy affect the prices?
Alessandro [00:04:05] Climate change and climate risk pose significant threats. But I do believe that the market is coming to the realization that despite the uncertainty arising by the mix of different tools that can be applied to meet the Paris Agreement and the UN's sustainable development goals, there are a lot of opportunities for organizations that will help the economy decarbonize. And make no mistake, this transition to a low carbon economy will last for decades. The impact on commodities will not be homogeneous. Different commodities would be impacted in different ways as different raw materials have different exposure both to climate risk and transitional risk. As an example, energy metals are increasingly interconnected. The switch to a low carbon energy is already providing a significant boost to the metals and minerals needed to build renewable energy infrastructure and to produce the batteries that support the electrification of the economy and the expansion of the electric vehicle fleet. To make one example, copper or 'Dr. Copper', as the metal is often referred to for its ability to gauge the health of the global economy due to its widespread applications, has rallied over 34 percent since January, and it's now at record highs. And the seemingly unstoppable electric vehicle revolution would provide higher demand for copper in the years to come. But as more and more vehicles will be electric, you might wonder what would happen to oil prices? Oil is here to stay, as it cannot be switched completely, at least not in the medium term. So overall, I would say that even if several clues support the idea of a new commodity supercycle, I believe that what we're witnessing is something more complex. The overlay of the decarbonization megatrend with a series of different cycles for different raw materials. And the most effective commodities will be those that play a role in the energy transition to a carbon-neutral and sustainable economy.
Ollie [00:06:15] So what in your opinion is the most valuable commodity?
Alessandro [00:06:20] It is knowledge! Knowledge is the most valuable commodity. Historically, the business model of commodity players revolved around exclusive access to information. Companies holding the physical assets and infrastructure used to control the majority of the data. Today, technology has democratized data and is allowing new entrants to leverage granular and detailed information. But it was once the privilege of the big players, and we have a number and variety of these new data sources deemed to increase over time, what I'm saying is that the competitive advantage is evolving from being able to access additional sources of data to how well and how quickly commodity companies can integrate data and commingling with appropriate information to make informed decisions ahead of the competitors.
Ollie [00:07:12] Great Alessandro, thanks so much for that. It was really interesting.
Alessandro [00:07:14] Thank you.
Roger [00:07:16] Some, but not all commodities are part of this new megatrend. A weak dollar can help the broad commodity complex, but those commodities which are directly involved in building new communications and energy networks, are part of a massive structural shift. And the biggest trend that Refinitiv are seeing, is in the increasing demand for their coordinated commodity data offering, in a clear sign that investors are preparing themselves for the longer-term investment opportunities.