Commodities Supercycle

KOMPAS/HERU SRI KUMORO

Ari Kuncoro

Financial institution Goldman Sachs recently issued an interesting statement that the Covid-19 pandemic had triggered a new major cycle of global commodities. The Bloomberg commodity index rose 11 percent year-on-year in March 2021, while the cumulative gain reached 40 percent in the last 52 weeks.

The trend is similar to the situation after the Asian financial crisis in 1998-1999. At that time, Indonesia was badly affected by the delayed demand. During the crisis, people withheld spending except on basic commodities such as food and clothing. People also refrained from spending on durable goods and self-actualization, such as travel.

After the crisis ended, people’s pent-up desires were released, which in turn pushed the economy out of recession. Purchasing power was supported by the injection of funds from the commodities super cycle during the 2004-2012 period. The extra funds from commodities exports was recycled into the non-traded good or non-export sectors, such as property, trade and other services. The explosion was so powerful that the global financial crisis was not able to stop it. Conversely, the impact of the restrained demand during the global financial crisis extended the cycle until 2012-2013.

Also read: Tiered Approach to Recovery

Three big commodities

There are three commodities that lead the new commodities supercycle (Home [2021]). First, the oil represented by West Texas Intermediate (WTI). International oil prices initially remained stagnant due to the pandemic. Vaccine euphoria encouraged traders and speculators in industrialized countries to buy up oil. As a result, the price of WTI oil, which was stagnant at around US$40 per barrel during September and October 2020, rose to above US$50 per barrel in mid-December 2020. Oil price is currently testing the market, whether it has the fundamentals to pass $60 per barrel.

Production cuts made by members of the Organization of Petroleum Exporting Countries (OPEC) and speculation in commodity futures markets as well as the signs of recovery in the world economy also boosted crude oil prices. The next commodity is copper. The price of copper is currently around $9,000 per metric ton, close to its highest ever level reached in 2011. The increase in prices is driven by the reopening of the economies of industrialized countries and fiscal stimulus in the United States. Public demand for electronic goods and vehicles is also expected to increase.

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The next factor is the shift toward electric vehicles, which require five times more copper-based components than fossil fuel vehicles. The international copper association estimates that demand will increase from 185,000 tons in 2017 to 1.74 million tons in 2027 (Kimani [2021]).

The third commodity is lithium. As a consequence of the increase in demand for electric vehicles, the demand for lithium — as an alternative to cobalt and nickel for electric vehicle battery components — is also increasing.

Impact on Indonesia

Like the flying goose pattern, the movement of the three big commodities will also push up the prices of other commodities. This can be observed from Indonesia\'s trade balance. Export performance has improved since November 2020. Data from the Statistics Indonesia (BPS) shows that Indonesia\'s trade balance recorded a surplus of $2.44 billion in February 2021. Meanwhile, the accumulated surplus during January and February reached $3.96 billion.

The surplus was due to improvements in commodity prices, such as palm oil, which rose 39.59 percent compared to that in February 2020. Meanwhile, rubber and coal prices increased 45.49 percent and 28.24 percent, respectively on an annual basis. The surplus in the non-oil and gas trade balance can cover the deficit in the oil and gas trade, which reached $1.11 billion during January-February 2021.

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As Indonesia is a net importer of oil, the rise in oil prices can further worsen the trade balance. However, the chain effect of commodity prices makes the trade balance surplus more sustainable. The surplus is an important buffer of the rupiah, which has been supported by the influx of capital inflows. In January-February 2021, net capital inflow reached $8.5 billion, putting the balance of payments in a healthy position.

The prospect of US economic recovery due to fiscal stimuli opens up opportunities for a shift in the global portfolio investment due to the potential to increase capital outflows.

Kompas/Priyombodo

Workers load fresh palm fruit bunches onto a truck in Semoi 2 village, Sepaku, Penajam Paser Utara district, East Kalimantan, Thursday (11/3/2021).

Repetition

The 2004-2012 global commodities cycle helped lift Indonesia from the 1997-1998 economic contraction as a result of the Asian financial crisis. Will it happen again?

International oil prices are now fluctuating in the short term to follow the rhythm of world vaccinations. The delay in the use of the AstraZeneca vaccine in eight European countries, pending a review by the European Drug Administration (EMA), caused a fall in the WTI oil price by around $7 in a week. After the EMA declared AstraZeneca safe and effective, the price crawled to around $60.

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It will be too early to conclude that the current commodities supercycle will repeat the 2004-2012 pattern in Indonesia. Apart from generating an average growth of 5.6 percent per year, the cycle also had a positive impact on the growth of Indonesia\'s middle class. However, the Gini ratio also increased, from 0.346 in 2006 to 0.399 in 2014.

It remains to be seen whether the new commodities supercycle will push up middle class spending. Although at least this will provide additional impetus for the economy, which has received financial stimulus to finance social assistance and the productive sectors of micro, small and medium enterprises, as well as the vaccination program.

There is a positive side even if the commodity boom is not as big as the 2004-2012 period. The effect of the pressure resulting from the booming commodities exports on other sectors, particularly export-oriented manufacturing industry, will be minimal. The opportunity for a phenomenon known as Dutch Disease will be smaller so that the economic recovery process will be more balanced sectorally.

ARI KUNCORO, Rector of the University of Indonesia

This article was translated by Hendarsyah Tarmizi.