Friday 21 Jun 2024
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KUALA LUMPUR (April 13): The uptrend in prices of a number of commodities — reflected in the 14.2% rise in the S&P GSCI from its recent December trough — brought back memories of the commodity bull run in 2021 and 2022, when the effects of the Covid-19 pandemic followed by the war in Ukraine choked global supply chains and sent food prices higher.

There are several key themes that seem to be affecting commodity prices, the most positive factor being the bottoming of China’s economy. A pickup in economic activities in the first two months of this year, coupled with the improvement in China’s purchasing managers index (PMI) in March, sparked hope that the worst could be behind the world’s second largest economy. The PMI rebounded from 49.1 in February to 50.8 points in March. It was the first time in six months that the PMI data had turned expansionary.

But some warn that the worst might not be over yet for China given the country’s woes in the real estate sector which have continued to drag the economy.

On a more negative note, tension in the Middle East has escalated over the last six months stemming from the Israel-Gaza war, causing Brent crude prices to climb in recent months.

Meanwhile, climate change has played a significant role in the harvest of various agricultural crops, leading to soaring prices where crops have been severely impacted by extreme weather patterns.

Cocoa is one example of an agricultural commodity which has been impacted negatively by climate change. A drought has ravaged West Africa, the largest producer of cocoa beans, and consequently resulting in soaring prices of the commodity. It does not help that there has been years of underinvestment in the crop, as cocoa is usually farmed by smallholders with little capital.

Gold has also risen dramatically the last few months, breaking the US$2,300 (RM10,972) per troy ounce threshold.

With the current trajectory of commodity prices, is the asset class headed for another bull run so soon after the last one?

How will this development affect central banks’ path towards monetary easing?

Read the cover story on commodities in the latest issue of The Edge Malaysia weekly.

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