Halfway through 2021, commodities such as steel and ethanol have seen impressive gains, though others have seen prices drop sharply this month, with lumber nearly erasing its climb this year.
“Commodities may have started the postpandemic investment run like a tortoise in 2020, but morphed into a hare,” so far this year, says Hakan Kaya, senior portfolio manager at Neuberger Berman. Tightness in the commodity markets has gradually increased due to a pickup in demand, as well as supply issues, building a “scarcity premium,” and commodities were “the late bloomers among risk assets.”
The S&P GSCI
SPGSCI,
a commodity index composed of 24 exchange-traded futures contracts, trades more than 28% higher this year, on track for the biggest first-half gain since 2009.
Steel leads this year’s rise in major commodities, with steel CRU index futures
HRNM21,
HRN00,
up by over 70% as of June 22, at $1,658 per short ton. “The root cause of this unprecedented price rise is due to the bullwhip effect” of shutting down so much capacity in the early part of the pandemic, says Maria Rosa Gobitz, senior research analyst at MetalMiner. Steel prices will likely continue to rise for another quarter, but once demand and production level out, which could take another year, “we should see a more normal market.”
Ethanol
ACN21,
AC00,
has also seen a nearly 63% climb this year. The drop in driving demand last year put pressure on ethanol blending activity, and the Trump administration declined to provide a 2021 mandate, known as the Renewable Volume Obligation, by November 2020, says Brian Milne, editor and product manager at DTN, reducing mandated demand for renewable fuel, including ethanol. That helped prices establish a low base to rally from, he says.
Expectations that the Biden administration would align the RVO under statute, combined with improving driving demand boosted ethanol prices this year, says Milne. A report from Reuters this month, however, said Biden’s administration may provide relief to oil refiners from biofuel blending mandates. Still, summer gasoline demand is expected to be “robust”—even if it’s not likely to return to the 2019 highs, he says.
The rise in lean-hog prices this year also garners attention. Arlan Suderman, chief commodities economist at StoneX, attributes the high prices to “strong domestic and export demand,” though demand is expected to soften in the second half of 2021 as shipments to China slow. Lean-hog futures
LHQ21,
LH00,
trade almost 48% higher this year, after losing less than 2% in 2020.
Meanwhile, lumber prices are up just 2% this year, after dropping over 30% this month. “The industry never really prepared inventory-wise for the impending spring business this year,” says Greg Kuta, president of lumber broker Westline Capital Strategies.
Lumber futures
LBN21,
LB00,
soared to a record $1,670.50 per 1,000 board feet in May, but lost 47% since then to trade below $900.
Building material shortages and supply chain logistical issues slowed lumber consumption, says Kuta. Still, he says lumber prices have more than doubled over the last 52 weeks, suggesting there’s not enough supply to satisfy demand. Prices may “find a home’” in the $550 to $850 range longer term, but volatility is likely to be high for the rest of the year.
Looking more broadly at the commodities sector, volatile may be the best way to describe its outlook.
The rally witnessed since April 2020 is “likely coming to an end,” says Neuberger Berman’s Kaya. “Commodities may continue to show fundamental strength, but with different magnitudes going forward, he says. “We prefer commodities with either structural demand sources or supply issues…or both.” Those may include copper, nickel, and other industrial metals.
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