The commodities that help build an economy have rallied, with lumber, copper, and iron ore reaching record prices in recent weeks — and demand looks set to continue.
“Clearly, commodities have been on a tear,” says Peter van der Welle, strategist at asset management firm Robeco. The rally’s pace is surprising, but “we expected rising inflation expectations and a subsequent boost in demand for assets with inflation-hedging capabilities, like commodities.”
Expectations for further global economic growth and a greater need to compensate for inflation risk—along with excess liquidity, historically low real interest rates, fiscal stimulus, and a weaker trade-weighted U.S. dollar—have underpinned the commodities rally year to date, van der Welle says.
The S&P GSCI index
which tracks 24 exchange-traded commodity futures contracts, has climbed 27% year to date as of May 11.
trade around the highest since 2012.
The commodity rally is a “reflection of significant demand over a short period of time following the pandemic,” says John Kartsonas, managing partner at Breakwave Advisors, the advisor for the Breakwave Dry Bulk Shipping exchange-traded fund
“Demand growth is strong because it is starting at relatively low levels due to the pandemic.”
“The world isn’t running out of commodities,” he says. The “logistic system cannot handle such a spike in demand in a short period of time.”
Lumber futures prices are up about 77% from the end of 2020. Prices hit a record high of $1,670.50 per 1,000 board feet on May 7.
Prices reflect “shortages in actual product,” says Kartsonas, with new highs for cement and steel futures in Asia reflecting real demand for construction materials.
Copper futures climbed to a record settlement of $4.76 a pound on May 11. “Strong demand, but also speculative activity,” has led to the rise, with the metal considered a “macro-related commodity with lots of fund activity behind it,” says Kartsonas.
On May 10, meanwhile, all-time highs were recorded for iron ore, at $215.48 per metric ton, and steel futures, at $1,630 per short ton. Supply constraints from Brazil and strong demand from China for steel due to infrastructure spending is driving iron-ore prices higher, Kartsonas says.
Iron ore is among the most important commodities for the Breakwave Dry Bulk Shipping ETF, says Kartsonas. The fund, issued by ETF Managers Group, was up nearly 238% this year as of May 11—the best-performing ETF year to date. It invests in shipping rates, and dry bulk shipping is a “very important sector of the global economy,” says Kartsonas. Dry bulk ships transport food such as corn and soybeans, as well as goods such as iron ore.
“You need ships to move the basic commodities in order to produce goods,” Kartsonas says. Freight is “highly correlated with economic activity over longer periods of time,” and this year, “strong demand for commodities has led to strong demand for oceangoing transportation.” Freight rates have increased, lifting the ETF’s returns.
“We see strong demand for construction around the world, and that means more demand for basic commodities.”
— John Kartsonas, Breakwave Advisors
Freight is volatile, and the Breakwave ETF is the “most volatile ETF in the market,” he says, adding that there are higher potential returns but also higher risk. Still, the ETF can be part of a diversified portfolio as a small allocation, he says.
If Brazil exports more iron ore, freight would benefit the most, Kartsonas says. Overall, “we see strong demand for construction around the world, and that means more demand for basic commodities. We are quite constructive for the commodities market for this year,” he says.