Economics Department/Senior Analyst
Naomi Suzuki
2004 is 20 years ago now. I remember that year well. It was the year when the commodity market showed something different and suddenly started to attract attention in the financial markets. Twenty years have passed since then, and the situation has changed dramatically again.
The 1990s saw a long period of decline in gold prices, dropping by about 70% in the 20 years since its peak in 1980. Oil prices spent most of the 1990s in the range of $15 to $25 per barrel, with Brent crude oil even dropping below $10 per barrel at the end of 1998.
However, the situation changed dramatically at the beginning of the 21st century. China joined the World Trade Organization (WTO) and Jim O'Neill of Goldman Sachs coined the term "BRICs" in 2001. There was growing concern that demand for goods in emerging countries was growing rapidly, but that a lack of investment following the long slump of the 1990s meant that supplies of goods with long lead times would become tight.
On the other hand, the euro was introduced in 1999 as part of the European Monetary Union, and between 2000 and mid-2003 the US Federal Reserve lowered its policy interest rate from 6.5% to 1.0%, causing the dollar to fall after peaking in 2002. This led to growing calls for diversification due to the weak dollar, and for commodities to be a promising investment.
In the past, commodity investments were limited to buying related stocks, investing in commodity futures, or buying physical goods. However, in the 21st century, investment trusts and ETFs linked to commodity indexes were born one after another. SPDR Goldshares (then StreetTRACKS), which is currently the world's largest gold ETF, was listed in November 2004. In December 2004, famous investor Jim Rogers published Hot Commodities (Japanese title: The Age of Commodities), predicting that "the tide has turned, and a commodity bull market is coming." In fact, the inflow of commodity demand and investment funds from emerging countries has brought about major changes in the commodity market. After the financial crisis, the large-scale monetary easing in developed countries and China's "4 trillion yuan economic stimulus package" caused commodity prices to soar to levels that were unimaginable 10 years ago.
However, another change occurred in the mid-2010s. The price hikes of the 2000s gave rise to the shale revolution, which led to an increase in the supply of mineral resources after a long lead time, and Russia, which was subject to economic sanctions after its annexation of Crimea in 2014, massively increased grain production, throwing supply and demand out of balance and causing resource prices to fall. It was around this time that I began to feel uncomfortable answering "commodities" when asked, "What are you in charge of?" This is because the word commodity began to convey more of its complex, product-specific elements than its implicit nuances of "generalization" and "equalization."
The price gap between WTI and Brent, the international crude oil benchmarks, diverged by more than $20 between 2011 and 2013. This was the result of a local factor: pipelines and refining capacity could not keep up with increased shale oil production, resulting in a surplus in the United States. Even when the supply and demand of iron ore was roughly balanced and the benchmark price was not changing much, there were times when the price of iron ore with a high iron content (fewer impurities) was traded at a large premium as China got serious about reducing air pollution from its steel industry.
In recent years, as decarbonization and ESG efforts have intensified worldwide, there has been a movement to differentiate the same products based on the "power source used" and "whether or not deforestation and child labor have been involved." Trade flows have also changed due to tariff barriers and economic sanctions, logistics have been physically impeded by the COVID-19 pandemic and war, abnormal weather has occurred frequently, and we have experienced chaos during the energy transition period, reaffirming the importance of supply security. The division between the West and the "non-West" has created a gap between the "international price" determined by Western commodity exchanges and the prices of countries that procure resources from countries subject to Western sanctions, and the "international" commodity price represents only a small part of the commodity market.
Commodity markets are expanding, and supply risks are also rising. Nevertheless, the current price of Brent crude oil has not exceeded its 2008 high of $147.50 per barrel, and although LME copper has recently exceeded its 2011 high of $10,190 per ton by about $1,000, it is still well below its previous high after adjusting for inflation. This is the result of many efforts by many people, including challenges to overcome the difficulties of securing supplies , technological innovation, and energy and resource conservation. We would like to keep an eye on commodity market trends that cannot be seen from price movements and look for what can and should be done now.