Words on What’s Driving Commodity Markets

In this episode of Words on Wealth, CIO Tim Rocks is joined by Vivek Dhar, Head of Commodities and Sustainable Economics at CBA, to discuss the forces behind the recent strength in commodity markets. They explore shifting global conditions, changing investor behaviour, and why supply challenges are driving renewed momentum in metals such as copper and aluminium. The conversation also considers China’s evolving role and what these trends could mean for investors in the year ahead. Tune in to find out more.

This episode is also available on Apple Podcast. 

Tim Rocks 
Hello, welcome to Words on Wealth. I’m Tim Rocks, Chief Investment Officer. Today I have with me Vivek Dhar, who is Head of Commodities and Sustainable Economics at CBA, now based in Singapore. Vivek’s been on our podcast before talking about ⁓ events or issues to the commodities and certainly a very interesting topic for now. So welcome Vivek and thank you very much for your time.

Vivek Dhar
My pleasure. Thank you for having me again.

Tim Rocks 
All right, well, let’s perhaps just start ⁓ big picture. Commodity prices have really been surging over probably a year now, depending on which ones you’re looking at. mean, precious metals sort of started the move, but there has certainly been a broader spread to some of the industrial metals recently, sort of copper in particular. Would you say that there’s one catalyst for all of this or? What would you say has been the big mover here?

Vivek Dhar 
Yeah, look, in terms of how we break it down, look, the way that different metals move, precious and industrial, you have your own individual commodities and what governs them and more the industrial commodities we look at supplying demand and that can certainly have an influence. But when you have synchronized movements like this, typically you’re looking at for what is the common factor. And in terms of what has really played out in terms of especially the industrial metal side has been that it’s been caught up in a lot of the trades that have seen precious metals really go crazy. And really that trade, when we talk about it, the one that has really attracted our attention is this US dollar debasement trade. And in that, we’re seeing this shift towards hard assets and a shift away from the US dollar. So that has been for us one of the key factors. And I’d say probably towards the end of last year, it became quite apparent. But if I had to really pick turning points so far, I would say April, 2025. So the liberation day tariffs, I think it ushered in a very different view of precious metals and that infected the industrial metal complex as well. But for the first time, we saw precious metals outperform the US dollar when the equity markets fell initially at the liberation day tariffs announcement. And that is unprecedented. And it really shifted a reordering of safe haven demand, where now precious metals sit above the US dollar. And that, for me, has been probably the biggest catalyst of this shifting view of metals in the last one.

Tim Rocks
Okay, yeah, okay. So the US debasement is the big story. do you think, I mean, this is harder, but what is the major driver of that? Is it these aberrant actions by Trump, or do you think this is something really sort of structural?

Vivek Dhar
Yeah, look, it’s something that I think certainly is being amplified by Trump and it’s kind of that instability in policy. But if we had to break it down in terms of what’s driving almost this structural flow in this direction, I would say one has been the whole sell America thematic, which comes out whenever we see some real questions asked about what US policy is doing, right? And, you know, for example, liberation day tariffs was a good example, but even with Greenland, and the EU tariffs that were initially threatened, we saw this, this South America theme play out. So that certainly is something that encourages the U.S. dollar debasement. The other factor has been this, this, well, what’s happening in, terms of Fed independence. You know, when you have institutional credibility concerns come through, then you certainly have this push towards, okay, can we really trust this in the long run? And that in itself feeds itself into that, that U.S. dollar debasement story. And finally, and this is more an adjacent with the markets, is we’ve seen the equity market become really concentrated in the US. And that concern of that AI bubble, that AI investment, the idea is could precious metals or hard assets almost be that insurance in case this bubble pops? And I’d say those are probably the three vectors in which we’ve seen structurally stronger safe haven demand play out. But more than that, it’s driving that US dollar to basement trade.

Tim Rocks
Yeah, okay, that’s very interesting. And it feels like each of those three factors that you mentioned could be around for some time. So it would be too early to say, think that we’re, you know, well, anywhere near the end of that story.

Vivek Dhar
Yeah, look, we’d be very much in that boat. In fact, when we saw gold sell off and silver sell off and, you know, for us it was, this is a buying opportunity. And quite simply, our view was the narrative that’s shaping this, it hasn’t changed. That we are not at the point of stable policy where we can kind of unwind some of this debasement trade. Because even though, you know, Kevin Warsh, you know, the new federal act, which was really the catalyst behind the plunge in industrial metal prices and precious metals. It really, like in our view, yes, he’s less dovish than his peers, but this idea of changing the whole narrative of how Trump’s policies, Fed independence, I think they will all become an issue still in the next 12 months.

Tim Rocks
Yeah, yeah, yeah. I wouldn’t mind then talking a little in a bit more detail about copper, ⁓ because there are some other drivers of copper price on the demand and supply side, which makes them a little bit more than just the debasement story, I think, or I’m happy to have your view on that. Did you want to sort of take us through some of the factors that make copper a little bit different?

Vivek Dhar
Yeah, no, absolutely. And look, on the supply side, I would say that’s very much been one of the key positive drivers and one of the biggest narrative shifts we’ve seen has come through in terms of just how immediately we’ve seen shortfalls occur in copper markets. And that was very much driven by disruptions to mine supply. Like to put into perspective, know, copper is a market which has perennially seen supply disruptions. And in terms of like how we forecast it, you always have a disruption allowance because we’ll always see something happen when it comes to, you know, the democratic Republic of Congo or Zambia or, you know, Chile, Peru, Mongolia, Indonesia. Those are really the risk that we’ve seen. But last year was a really like, well, one of the key exceptions because we really saw disruptions hit 6 % of initial supply estimates. And that’s the highest it’s been since the late 2000s. So, you know, what has driven this narrative of deficit has been the fact that mine supply is just disappointed. And naturally that’s led through to this, this copper shortfall. And we’re seeing that play out. So that’s been something that’s been a massive tailwind on top of this, this depacement story. So, you know, it’s, certainly been quite idiosyncratic when we talk about for copper in particular.

Tim Rocks
Yeah. And then on the demand side as well, there’s some pretty interesting, you know, structural changes too with electric electric vehicles and the clean energy transition and the like. How important do you think that is? Or is that still to really happen?

Vivek Dhar 
Yeah, look, think supply explains more of it. think demand certainly gets caught up in a lot of excitement around AI demand and what’s needed in the power side transmission. Like, don’t get me wrong, these sectors are going to grow and you’re going to get double digit growth. But when you put in terms of what’s the non-clean energy share for copper, for example, we’re talking 70 to 75 % of demand. And that excludes grid, right? And that’s kind of cheating in a way because historically grid was always part of your non-clean energy, right? So when you really unpack it, yes, there’s a lot happening in terms of EVs, but EVs, for example, are only 2 % of copper demand in 2024, right? So these are quite small shares and look, they’re expected to grow quite strongly, but the fundamental issue here is actually that supply is really struggling to keep up with demand. And so, know, where you get your, like, if you look at, say, where we are now and you project a climate scenario of, you know, where the world is heading of, a 2.4 degree increase in global temperatures, you know, we’re talking in terms of compounded annual growth rate for total demand of about two and a half to 3%, right? Which isn’t outrageous, right? And when you then take in your most climate ambitious scenario, that’s where things can get quite heated. And we’re talking even then, 4 to 4 and 1 half percent kegah. So it’s not something which we’re looking at and we’re like, this is a problem. Like if you look at some other kind of curriculum, it was like lithium, it’s double digit kegahs for the next kind of six years. So this is not, in my view, a demand narrative which is going nuts. The problem here is finding the supply to meet the demand. And we’ve had this near fall, this near term shortfall, but what has really characterize copper differently to everyone else and why BHP, Vale, every single major is looking at copper production is this is long held view that long run production is going to be well short of what’s needed to meet the demand projections. And that’s really where a lot of work’s being done to figure out how do we even get that supply on.

Tim Rocks 
Yeah, and is there a solution to that? I mean, I did see a chart that showed that even the copper that is now being discovered is either underwater or much deeper than previous discoveries. So if there’s a really structural problem there with supply that just makes it so much more difficult for this whole thing to be resolved.

Vivek Dhar
Yeah, look, in terms of the fundamental issues, you’re spot on. Finding discoveries and how relevant are they going to be in terms of plugging a gap over the next 10 years, it just won’t work that way given how long mines are taking to go from discovery to production. On average, we’re talking about 17 years for copper. And therefore, if you’re going to solve the next 10 years, it has to almost come from the copper deposit you know. And in that the question is what is the incentive price to bring on a lot of that? And you know there are there is a lot of projects out there. Is it going to be enough? That’s I think a big question. You’re going to lean heavily on copper scrap. But when we’ve plugged in numbers and we’ve been trying to figure out okay what’s the incentive price for this? You know we’re getting something close to $11,000 a tonne. So it’s you know if that’s the incentive price and that’s where prices need to kind of get to kind of to get that investment in the next five years, that may be where stabilization point is for pricing so that we get FID for a lot of these projects.

Tim Rocks
Yeah. Okay, that’s interesting. All right. So let’s just sort of perhaps broaden the discussion a bit. I mean, I’ve got this thesis, which I’m happy for you to, to shout down if you don’t believe it. But for commodities, China, for most commodities, China has been the only game in town for about 20 years. Just that just, you know, became 30 40 % of copper demand, demand for the most, most metals. It feels like everything we’ve been talking about there are now some new drivers, be it US dollar debasement or some of these supplier stories you’re talking about. ⁓ Do you think that’s true? Is China any less important now in driving commodity markets?

Vivek Dhar 
Look, in terms of the share of demand, they are still by far the most sizable. I’d actually put the number higher at about 50 to 60 % of total base metal demand. know, when we talk about copper, nickel, alloy, you know, that’s really what we’re talking about. So it’s very, very sizable. I’d say what’s changed is what’s happening in terms of the demand impulse. It is just more flat and that opens the door for other factors to be more influential And that’s why the US dollar.

Tim Rocks
That makes a lot of sense. that’s right. So China is now stabilizing terms of demand. So the delta in demand is coming from from elsewhere.

Vivek Dhar 
That’s correct. Yeah. So that’s almost how I’d characterize it. But it’s even probably a bit more negative than that in that we’re almost seeing that demand slide. ⁓ say the construction sectors in China are very, very weak. And so you’ve had other sectors offset it. But that’s kind of where you’re getting this kind of subdued growth, which is opening the door for other drivers, as you just mentioned. But the constant threat in terms of what’s happening in China is do policymakers turn on the taps for stimulus? So do they look to boost growth because the economy isn’t picking up or consumption isn’t doing what they wanted to do? That’s something we watch very closely because that demand impulse shift, as much as right now it’s in the background, it can quickly come to the foreground. And that’s why it’s something to just keep watching just in terms of where do policymakers go with particularly property and infrastructure. Those are the two sectors we watch pretty closely.

Tim Rocks
Yeah, actually, it might be worth digging a bit deeper on that. what are your thoughts? Is China going to be, say, a negative or a positive for demand for commodities over the next year as those factors play out?

Vivek Dhar
Yeah, look, it’s a good question. If I looked at base metals, I would actually say that I think you’re probably going to see shallow growth, right? And that’s really because we don’t think right now policymakers are in real urgency to go down a path of property and infrastructure, right? are like, look, a lot of their problems could be fixed if they provided, you know, property developers the room to actually stabilize. But we’re talking trillions of RMB needing to be spent for that stabilization. And that’ll probably happen because of buying the excessive inventory. And because there’s reluctance to go down that route and to go down, you know, an investment led model, we’re almost thinking that policy makers might be okay with lower growth and those hits being taken in those commodity intensive sectors. And where the attention will really turn to is how do we get consumption back up? How do we give it back to the household sector? And I think that shift, you know, there are risks, you know, that you may get it wrong. And are you going to stimulate the economy? But last year in a while, we didn’t see policymakers step in nearly as aggressively as we thought. And that’s because they did so well in terms of growth in the first half. The question is, you know, we’re coming into a year where if they start off poorly, does that mean we open the door to stimulus at the back end of the year to get the growth targets? And that’s really where I think the questions are. But overall, steel demand we see as contracting, base metal demand, very subdued. And I think that’s based on policy kind of being patient.

Tim Rocks 
Yeah. So are there any other factors that we should think about? So you’ve mentioned, you know, if I was to try and summarize this, that the big factors driving this is the US dollar debasement trade, supply issues for a number of key commodities, and the China policy debate. Are they the main things that we need to focus on? Or is there anything else that you think is important?

Vivek Dhar 
Yeah, look, the part which where it starts differentiating is that for supply, yes, think copper, certainly that narrative is there. For aluminium, what’s really interesting right now is China has put a cap on its capacity at 45 million tonnes. And they’ve actually reached that. So now a lot of your aluminium supply, your primary aluminium supply now has to come from ex-China. And so you’re looking at Indonesia, you’re looking at India, you’re looking at the Middle East. And it’s the first time we’re going to see that shift. And if they disappoint, it gets delayed, it doesn’t happen as quickly. Then we could come down this pathway of tightness developing in the aluminium side. And that’s something that’s certainly worth watching, right? But what gives, I think, aluminium an extra edge is we’ve, you know, it’s got the tailwind of macro and debasement. It’s got this supply concern coming through. But on top of that, while China’s restricted aluminium output, they haven’t restricted alumina output. So alumina prices, which is a key input, have come off quite a bit. So aluminium smelter margins have actually improved better than what people think. Like this is a sector that’s heavily being underwater, but it’s something that I think the market is forgetting that these margins are actually increasing relative to what they were in the past. And so it’s just worth watching to see where that goes. Nickel though, is a completely different story. You know, where Indonesia, basically holds the cards. They have like introduced almost structural oversupply and the level of oversupply is just like, you know, eye opening, you know, we’re talking almost a 6 % share of the market, which is, you know, a surplus last year and that’s expected to expand to nearly 7 % in 2026. So we’re watching these trends pretty closely, but I’d say, you know, supply risks sit with Ali and copper. with Nicholas the other way around. And that’s probably how to characterize the key differences when you look at them individually.

Tim Rocks 
Okay, that’s very interesting. Look, thank you so much for your time, Vivek. It feels like this whole commodity space is just going to be continue to be front and centre and be a really ⁓ important place for investors to focus. So we really appreciate your insights.

Vivek Dhar
No worries, thank you.