“With further expectation of US stimulus and quite a few countries seeing infrastructure investment as a way out of the coronavirus contraction, the commodity cycle may continue for a while.”

The rapid rebound, and supply constraints caused by social distancing requirements, helped spur the recovery in commodity prices in 2020 after earlier steep falls triggered by the pandemic.

Gains are being extended this year, with the price of oil surging almost 39 per cent per barrel so far in 2021, while copper has jumped more than 17 per cent and iron ore around 4 per cent.

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China’s economy accelerated at end of 2020, but virus-hit annual growth lowest in 45 years

China’s economy accelerated at end of 2020, but virus-hit annual growth lowest in 45 years

Though the shift is a threat to rapidly rising prices, it will not be all bad for commodities. Instead, it will trigger a rotation of investment away from materials-intensive property development to manufacturing, which will replace real estate as a driver of investment this year, said Gene Ma, head of China research at the Institute of International Finance (IIF) in Washington.

While property and infrastructure investment is poised to slow, providing less support for iron ore and other materials, renewable energy, electric vehicles, and power grid-related investment – industries supportive of industrial metals – will rise further, said Wang Tao, chief China economist at UBS in Hong Kong.

Materials used in hi-tech assembly, from electric car batteries to wiring, may still see demand growing robustly, benefiting from a structural demand shift in the global economy, said Frederic Neumann, co-head of Asia economic research at HSBC in Hong Kong.

But even as China scales back stimulus, the impact is unlikely to “dramatically change the outlook,” said the IIF’s Ma.

Shuang from Standard Chartered Bank forecasts slower credit growth and estimates the broad fiscal deficit, which includes local government special bond financing, may drop to 6 per cent of GDP from 8.6 per cent last year.

Economists widely estimate overall economic growth of more than 8 per cent this year, boosted by last year’s low base for comparison.

“I expect China to only modestly tap on the policy brakes this year and so real GDP growth should be solid at close to 9 per cent,” said Rob Subbaraman, global head of macro research at Nomura in Singapore. “Elsewhere, the relaxation of social distancing restrictions and massive policy stimulus should see a synchronised recovery in aggregate demand. So I’m bullish on commodity prices.”

Policymakers will welcome the pressure on factory-gate prices because it helps raise industrial and manufacturing profits and deflates debt levels, said Rory Green, an economist covering China and North Asia for TS Lombard in Seoul.

With China only gently tweaking policy, there is optimism that the West will compensate for the reduced demand.

The prospect of a Green New Deal in the US and similar clean energy investment initiatives across the globe have turbocharged purchases of industrials metals that will benefit from electrification of transport systems and cleaner energy production, added TS Lombard’s Green.

“There are reasons for a rally in the commodities market because of global recovery, low inventories, supply chain disruptions and the quantitative easing effect,” said Tao Dong, vice-chairman for Greater China at Credit Suisse Private Banking in Hong Kong. “Cyclically, it makes sense.”

Investment banks Goldman Sachs and JPMorgan Chase even see the beginning of a new so-called supercycle for commodities. That is when a sustained period of extraordinarily strong demand pushes prices higher.

There may still be some turbulence ahead, with any indication vaccinations are failing to counter new Covid-19 variants a possible jarring setback.

Markets may already be ahead of themselves as easy money sloshes around the globe, attracting speculative buying. One possibility is that recovery for the whole of 2021 is already priced in, said Derek Scissors, chief economist at the Washington-based China Beige Book International.

“I’m sceptical of the durability of continuous price increases,” he said. “They’re not justified by new information in the market and appear to be more an extension of excess liquidity.”

Even some analysts that believe commodity prices are well supported at current levels doubt the show can go on much beyond this year, when Western economies will be forced to confront the debt burdens they have accumulated.

“While a quick rebound is on the way this year worldwide, it’s artificially fuelled by fiscal and monetary stimulus,” added Tao from Credit Suisse. “This isn’t sustainable beyond 2021.”

But until then, it seems, it is game on. The International Monetary Fund sees the global economy growing 5.5 per cent this year after a 3.5 per cent contraction in 2020. It sees the US expanding 5.1 per cent this year after contracting 3.4 per cent in 2020.

“China won’t really shift policies enough to undo the commodity cycle,” said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis in Taipei. “A growth rate of 7 per cent for China, added to the US at a similar level, should be enough for the commodity cycle to continue on an upbeat tone.