HSBC’s chief economist Paul Bloxham described global commodity markets as being in a “super squeeze,” primarily driven by supply constraints, as quoted on CNBC. This situation differs from high prices caused by robust demand growth and is considered less positive for global growth.
Factors like geopolitical tensions, including the Israel-Hamas conflict in Gaza and the Ukraine war, have contributed significantly to this situation by disrupting global trade and shipping.
Climate Change and Investment Shortfalls
Climate change is exacerbating supply chain disruptions, particularly affecting the agricultural sector. Furthermore, the pursuit of a net-zero carbon future is increasing demand for energy transition metals like copper and nickel.
However, there is a noticeable lack of investment in procuring these critical minerals, leading to a sharper supply squeeze. The Energy Transitions Commission highlighted the potential shortage of metals such as graphite, cobalt, copper, nickel, and lithium in the next decade, emphasizing the need for increased investment in mining and production.
The “super squeeze” could deepen or prolong if supply disruptions related to geopolitical, climate change, or energy transition issues are more significant than anticipated. Technology advancements in metal extraction could mitigate some of these challenges. However, a potential way out of this squeeze could be a global economic downturn, which would likely lower commodity prices.
Metals are expected to see the most significant upside, with iron ore highlighted due to decreased inventory and lack of investment in capacity expansion. Despite China’s property crisis, its steel production has fueled demand for iron ore and coking coal. Contrarily, some analysts believe that commodity markets are still adequately supplied, with a focus on slumping demand due to the sluggish global economy.
Role of Chinese Demand
The future of commodity markets may also hinge on the resurgence of demand from Asia, particularly China. The year 2023 witnessed unfulfilled demand from China, which significantly impacted commodity markets. A rebound in Chinese demand could be crucial in determining the future trajectory of these markets.
ETFs in Focus
Given this, we have highlighted a few commodity ETFs that may continue to trend higher given the same trend persists.
iShares S&P GSCI Commodity-Indexed Trust GSG – Up 3.5% this year
United States Commodity Index Fund USCI – Up 3.0% this year
USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund SDCI – Up 3.0% this year
KraneShares California Carbon Allowance Strategy ETF KCCA – Up 2.7% this year
First Trust Global Tactical Commodity Strategy Fund FTGC – Up 2.5% this year
VanEck Commodity Strategy ETF PIT – Up 2.3% this year
iShares U.S. ETF Trust iShares GSCI Commodity Dynamic Roll Strategy ETF COMT – Up 2.3% this year
(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)
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