Commodities on the rise: Copper, Cocoa, Nickel, Zinc, Aluminium… What are the reasons?

Commodities, especially copper and cocoa, are once again experiencing a bullish period. The recent prices of certain commodities are reminiscent of past events that triggered commodity prices, such as the COVID pandemic, the blockade of the Suez Canal, the war in Ukraine…

A tonne of copper has reached 10,000 dollars. Supply is shrinking while demand will increase in the coming years, moreover, droughts may affect supply and the increase in demand will be amplified by the end of the stock clearance process in China.

Cocoa is appreciating more than Nvidia. Poor harvests, lack of diversification and concentration of production are some of the reasons. La Financière de l'Echiquier (LFDE) explains why commodities, especially copper and cocoa, are rising.

Copper, Nickel, Zinc, Aluminium: supply shrinking while demand is growing

Enguerrand Artaz, fund manager at LFDE

10,000 dollars is the price of a tonne of copper according to the forward contracts currently traded on the market. This level, which was not reached for two years, symbolises the recent rally in the most famous of the industrial metals, whose price has rebounded by more than 15 % since the beginning of the year.

There are structural reasons for this. On the one hand, supply is shrinking: global copper reserves are very low and production capacity has been significantly reduced in recent years, especially after the closure at the end of November of the gigantic open-pit mine operated in Panama by the Canadian group First Quantum. On the other hand, demand is set to accelerate in the coming years due to the development of data centres around the world and the infrastructure investment plans - especially green ones - put forward in the US and Europe. The result is an increased risk of a copper deficit in the coming quarters, which should continue to drive the price upwards. In addition, supply problems threaten to be aggravated from time to time by the effect of the historic droughts suffered by many mining territories - it should be borne in mind that water is an essential resource for extracting metals. At the same time, the increase in demand will be amplified by the end of the stock clearance process in China and, therefore, the return of the Asian giant as a buyer on the world market.

However, it should be noted that copper is not the only metal affected by this rapid price increase. The same is true for nickel and, to a lesser extent, zinc and aluminium. Traditionally, a rebound in the prices of these industrial metals is seen as a good sign of cyclical recovery in the economy. In the current environment, this signal corroborates the message that numerous indicators have been sending for some months now, both sentiment indices (e.g. the global manufacturing PMI, which recently returned to expansionary territory for the first time since mid-2022) and actual data (e.g. growth in road and rail transport).

Climate drift and lack of diversification drive up cocoa prices

Alexis Bienvenu, fund manager at LFDE

Cocoa is breaking all its records. It has risen by 260 % over the last year, more than the annual increase in the star stock of the moment: Nvidia. This is undoubtedly a cause for rejoicing for some producers and certainly for some speculators, but it is mainly due to difficulties throughout the production chain.

The most obvious germ has little general scope: too much rain and then too much heat, which have weighed down the main producing countries in Africa. Another more telling cause is climate drift, amplified by the El Niño cycle, which has suddenly accelerated to produce a significant disruption in 2023. Signs of a disturbance in the vegetation cycle can be detected here, which does not bode well for regular harvests in the coming years. Some will be better, that's for sure, but the trend does not suggest a lasting return to past conditions.

Another nefarious ingredient in both agriculture and finance is the lack of diversification. The quantitative approach to production that dominates in agriculture has resulted in industrial cocoa tree plantations devoid of diversity, with systematically impoverished soils being out-competed by fertile, often primary, former forests. A small impact on the system, in this case rain or wind, is enough to disrupt it completely, as all the trees are ultimately the same. If conditions are favourable, the parasites multiply, as the natural mechanisms of self-regulation through species diversity have been disrupted.

This crisis has highlighted a final angle related to diversification, also evident in industrial crises: sourcing. Just as the production of advanced electronic chips is concentrated in Taiwan, which exposes the global economy to possible local tensions, cocoa production is almost 60% concentrated in Côte d'Ivoire and Ghana. A better global distribution, which would logically be detrimental to the concentration of production advantages in the short term and thus to the cost price, would help to balance the environmental risk and thus to homogenise prices in the long term.