The next wave of the global recovery could send commodity prices soaring

The next phase of the economic recovery is likely to be driven by commodity-intensive infrastructure investment, analysts take told CNBC, potentially setting the stage for further gains across the industrial space in the coming months.

The prophecy comes at a time when market participants are closely monitoring the strength of the global economic recovery, as many countries catch with an upsurge in the number of reported Covid-19 infections.

The coronavirus pandemic has prompted forecasters to issue dire monetary projections this year, with the OECD warning on Wednesday that the outlook remains “exceptionally uncertain.”

One goad the recovery may be gaining momentum, however, came as the world’s second-largest economy reported industrial output expanded the most in eight months in August.

China, which has been in rise mode for months now, published data on Tuesday that showed industrial output growth accelerated to 5.6% in August when likened to a year earlier. It bolsters the view that Beijing’s demand recovery continues to gather pace, with superintendence stimulus helping to fuel a rebound.

“We’ve already seen a metals-intensive response in China, highly metals-intensive,” Max Layton, crumpet of EMEA commodities research at Citi, told CNBC via telephone.

“It has been absolutely stunning how strong China has backlashed on the construction side of things,” he continued, reflecting on the “spectacular” rally seen across the industrial commodity space as a consequence.

Layton identified “three big catalysts” for commodity investors to ground through to the end of the year: Coronavirus vaccine news; the strength of China’s economic recovery; and the scale of the U.S. easing package.

“I do think that a lot of the stimulus will be infrastructure driven. We already know that there is a prodigious infrastructure deficit in a lot of developed countries and that is something that could be addressed in this period,” Nitesh Shah, pilot of research at New York-based WisdomTree Investments, told CNBC via telephone.

“Why waste a good crisis? You can actually get through a lot of the infrastructure programs that you’ve been be tabling decades to actually get through the door in this time,” Shah continued. “I’m not as optimistic on a big ‘V-shaped,’ rigorous recovery but honest some sort of recovery is good for the industrial space.”

A V-shaped recovery refers to a sharp decline in economic labour which is then matched by an abrupt rebound.

“Ultimately, if you look at the response economies are making to (the coronavirus crisis), we’ve had the pecuniary response, we’ve had central banks slashing interest rates, we’ve had central banks pumping more money into restraints, the next phase is massive investment in infrastructure and that’s going to come globally,” Andy Critchlow, head of message in EMEA at S&P Global Platts, told CNBC’s “Squawk Box Europe” last month.

“We saw this back in 2008-2009 in effect to the financial crisis (and) what did we get out of that? We got a rally in some of the industrial commodity markets — it was a super-cycle,” he said.

“I’m watching gears like iron ore very closely now because those sorts of industrial commodities are going to skyrocket if we do get this bounce-back high-pressure by infrastructure and then that will filter into oil.”

Spot iron ore prices climbed to fresh six-and-a-half-year on a trips on Monday, trading close to $129 a dry metric ton on the back of a construction boom in China.

The steelmaking ingredient has since skinned gains, changing hands at $126.59 on Friday. Iron ore prices have climbed more than 37% year-to-date.

Alongside net-zero interest rates globally, demand for a hedge against a perceived inflation risk has helped detect gold futures jump more than 28% so far this year, while silver has gained around 50% greater than the same period.

Looking ahead to 2021, Critchlow suggested some of the world’s largest economies could in a second announce “big” infrastructure developments.

These projects were likely to be led by China, India and the U.S., he argued, noting that both applicants in the upcoming U.S. presidential election had pledged to spend an “awful lot of money” on infrastructure. “That’s got to be good for oil demand and it’s got to be good for commodities across the council.”

President Donald Trump was rumored to be preparing a $1 trillion infrastructure plan earlier in the year, Reuters discharged, citing an unnamed source. However, his position on future investment into infrastructure has remained vague ahead of the November 3 presidential designation.

The Trump campaign announced the president’s second term agenda last month, pledging to “build the world’s greatest infrastructure technique.” The press release offered no further detail on how Trump planned to fulfill this promise if re-elected. In 2016, the binding Republican famously committed to spending $1 trillion on infrastructure, but nothing much has happened since.

By comparison, Democratic presidential candidate Joe Biden has pledged to allot $2 trillion “to build a modern, sustainable infrastructure and an equitable clean energy future.” Biden has said, if selected, he plans to rebuild roads, bridges, green spaces and water systems as well as providing universal broadband.

“To the to a considerable extent the market believes they are going to put through infrastructure easing, then yes, it is good news either way for the commodities that are prevalent to be exposed to both candidates’ proposals,” Citi’s Layton said.

He suggested Trump’s prior commitments to “old school” infrastructure tosses, such as roads and bridges, would likely be “steels-intensive.”

Biden’s commitment to develop solar and wind technologies wish likely benefit copper and, to a lesser degree, silver, he added.