Archived: Will Latin America benefit from a new commodity supercycle?

There are increasing signs that the global economy is facing sustained price increases for raw materials and energy. These could become an unexpected driver of growth and investment for Latin America.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

A weak dollar leads to rising raw material prices – this has always been the case. But the weakness of the US currency is not the only reason why the prices of copper, oil, soya and iron ore, for example, have risen so sharply in recent months. There are many indications that the global economy is facing a new super-cycle for commodities.

China entered the world market as a new buyer and drove up the prices for raw materials. At that time, South America’s economies in particular were experiencing a huge growth boom. The continent is one of the world’s leading suppliers of raw materials. This applies both to soft commodities from agriculture and to industrial raw materials.

Now not only their prices have been rising for months. There is also a change in the preferences of investors on the stock exchanges: Investors are pulling out of tech shares and increasingly investing their capital in industry, energy and, of course, raw materials. “The revenge of the old economy”, it is already said at the investment banks.

The arguments for a sustained bull market in raw materials and energy are obvious. Most economists expect the global economy to grow significantly again soon. On the one hand, because of the foreseeable end of the pandemic after the start of the vaccination campaign and, on the other hand, because of Biden’s election victory, which investors expect will reduce tensions in world politics.

In addition, interest rates are low and the industrialized countries will continue to use government support programs to mitigate the damage of the pandemic in their economies. All of this is causing demand for raw materials to rise sharply.

But this demand meets a rigid supply: companies have invested little in mines and farms over the last decade due to low prices. In addition, inventories of most raw materials are historically low. Rising prices will be the consequence.

There is also new demand on the world market: India could play the same role today as China did a decade ago. India’s growing prosperity is causing the demand for food such as steel and copper, but also soy and wheat, to rise rapidly.

In addition, the switch to electromobility and new battery technologies is driving global demand for copper, aluminum and zinc.

This could offer an unexpected opportunity for the whole of Latin America. For example, Brazil, Chile, Peru and Mexico are important exporters of metals worldwide. In agricultural products, Argentina and Brazil are the leaders.

The decisive question, however, will be whether the governments in the region will succeed this time in using the capital inflows from raw materials exports productively instead of using them to finance consumption and corruption.

COVID-19 in Latin America

Development of case numbers in the region

Currently reported cases in the countries