​Could There Be A New Commodities SuperCycle Ahead?

Last month a leading global investment banking, securities and investment management firm hinted in reasonably strong terms that they believe indicators are pointing to what could be a new supercycle for commodities over the coming months. Surprisingly, or perhaps not, it comes on the back of the global health and economic disaster that is covid-19. Notably, governments around the world are pouring stimulus dollars into their economies to try and get things moving again. As a result, many analysts are forecasting 'extraordinary' industrial output growth during the first 6 months of 2021.

Predictions are that this growth may well reach 6%, considerably up on the 3.4% previously forecast. If it happens, it will be the strongest growth we've seen in a decade! Accordingly, there will be increased demand for the bulk commodities and base metals that underpin industrial growth, with pundits predicting we could be looking at the best growth figures here too since the GFC. Demand growth is likely to be further boosted by the restocking of global goods chains that supply industrial producers. After the economic woes of 2020, this is very welcome news for producers.

In particular….

….China's GDP for Q1 appears set to grow by more than 10% compared to last year. China obviously is a voracious consumer of bulk commodities and base metals. She's not alone in her growth though. Fuelled by that Covid stimulus spending, analysts are also predicting that globally industrial production in general will be up by over 10% on last year during Q2.

This is all very promising for base metals and bulk industrial commodity prices because historically these rise when global industrial production ramps up. We should therefore expect to see sustained improvement in margins for bulks and base metals across the board that will in turn support improved capital returns and better multiples. Gold and silver are projected to remain relatively stable with traditional demand increasing to compensate for slower exchange traded fund (EFT) demand.

However, it needs to be remembered that for much of the first half of last year, global industrial production had all but ground to a halt so it's logical to expect there will be some 'significant' year-on-year growth figures. I think what has caught many analysts by surprise though is that it is shaping up to be a lot more significant, widespread, and dynamic than previously thought.

Are other sectors of the economy up to challenge though?

On the flip side, not all sectors of the economy are back up to full speed production, meaning that we'll likely see some supply chain bottlenecks slowing things down a bit. On the base metals front for instance, mining industries in some countries are still not back in full swing due to ongoing outbreaks of Covid-19. There's also a shortage of transport containers and that is producing distribution headaches too.

The Increasing Rise Of Green Initiatives To Fuel Demand For Metals

One of the most notable things to arise out of the global Covid lockdowns in 2020 was the highly visible reduction in global pollution. Has this brief glimpse of a cleaner, healthier world galvanised interest in renewables and 'going green'? Very likely! It's almost certain that a fair portion of those stimulus packages will be spent on green initiatives and helping the world transition to cleaner energy. Renewable energy sources and green technologies, particularly things like electric vehicles, require a lot of metals, and this will help fuel investment in companies that are looking for, and producing, those metals.

The Year Of Mergers And Consolidation For Mining?

Could we also be seeing a period of mergers and consolidation within the mining industry as the abovementioned demand for precious metals remains steady and that for base metals ramps up? The improved margins are making smaller and mid-tier producers a lot more interesting to bigger outfits looking to increase production or perhaps just come to their 'rescue'. A case in point was Agnico Eagle Mines' rescue of TMAC Resources earlier this year. Chinese state-owned interests had targeted TMAC last year but the take-over was ultimately deemed to contravene the Investment Act of Canada. Some analysts predict that the Agnico/TMAC consolidation could indicate further such mergers / consolidations / acquisitions are on the horizon, particularly amongst mid-tiers in North America. The potential 'target' list includes the likes of Belo Sun, Liberty Gold, and Pretium, all of which have significant assets.

If there is a commodities supercycle looming, how can we expect some of the major metals to perform?

Gold, everyone's favourite safe haven metal, reached new heights during 2020 as investor fears during the pandemic spread faster than the Covid virus itself! However, we'd already noticed it rallying and moving in the right direction during 2019 but the pandemic certainly gave it wings. As history has faithfully recorded, it hit a record high price of US$2,072.50 in August. Earlier in the decade though things weren't looking so rosy for the shiny metal as prices slumped in 2013 after rises in the dollar and the review of the US Federal Reserve's quantitative-easing program.

Like gold, silver has had a super run of late with some spectacular, and record, gains over recent months. This looks set to continue in 2021. The gains were certainly welcome after the precious metal hit double-digit % declines earlier last decade alongside gold.

As a second wave of Covid hit the major copper-producing regions in South America, copper continued easing upwards in price, continuing a trend started in the second half of last year. Futures for March are US$3.652 a pound, up .3% and exceeding its previous high recorded in December 2020. Indeed, there are strong parallels with its early 2000's spike, caused when China abruptly upped its orders for the metal, and sparked the last commodity supercycle.

The major market for platinum and palladium is the automobile industry. However, with sales and thus manufacturing, of new cars down significantly during the pandemic, demand for the autocatalyst metals likewise dropped and this was reflected in their prices. Despite this slowdown, analysts still expect both metals to experience a gradual price rise throughout 2021. Historically, there has been a longstanding undersupply of palladium, and this eventually culminated in a record price of more than US$2,800 an ounce last year. Average prices for the metal are tipped to hover around US$2,100 during 2021. Conversely, platinum has long been in plentiful supply, creating surpluses that have kept its price low. It is expected to average just over US$900 an ounce this year.

In 2016 coal made an unexpected rally after a large number of global coalmine closures and China's decision to cut domestic production. However, the rally was short lived and since 2018 coal has been going the same way as other fossil fuels in the face of growing demand for renewables and clean, green energy. It's probably fair to say though that the 5% slump in fossil fuel demand globally during 2020 owed more to the mass industrial shutdowns sparked by the Covid pandemic than to natural reduction in demand. Coal dropped by 1.29% in price during that time but is expected to bounce back this year courtesy of recovering economic and industrial activities.

In the light of all this activity, are we in for another commodity supercycle? The last one was in 2010/11, catalysed by China's sudden increase in orders for bulks and base metals. Some experts say we are, given that once again Chinese industrial activity is going 'gangbusters', and many other countries are following suit. Others are exercising caution, preferring to call it a 'strong cycle' instead. Time will tell who is right!
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