The bullish and bearish factors threatening commodity markets
Now is not quite the time to throw the red flags, but some recent developments in the commodities markets suggest it may be time to start looking for them in the locker.
Two main factors appear to be emerging that could threaten to end the current rather rosy situation surrounding the demand for raw materials such as iron ore, steel and the metals most exposed to the battery boom, cobalt, lithium and nickel.
On the supply side, there is renewed optimism that could spark another round of mining companies paying too much for assets or spending way too much capital on projects approved on the basis of overly optimistic forecasts.
On the demand side, the drums of a trade war between the United States and China are starting to beat a little harder, with Beijing announcing tariffs on up to $ 3 billion in U.S. imports on March 23.
This came after the Trump administration announced plans to tariff $ 60 billion in Chinese goods, in addition to import taxes on steel and aluminum.
While the stock markets are the first to be hit in the first rounds of what markets fear will turn into a full-scale trade war, it is highly likely that commodities will suffer longer and harder if the worst were to happen.
Commodities are generally considered to be more exposed to the prospects for global growth, and a trade dispute will almost certainly cause economic growth to deteriorate.
This is especially important for commodities, as they also tend to perform best when a business cycle has matured, as is the case with the current global recovery in the decade after the crisis. 2008 financial year.
However, there is still a chance that trade wars will mostly remain in the realm of rhetoric rather than sustained damaging action.
It remains to be seen whether the apparent optimism of large mining companies about the future translates into a return to the bad old days of overinvestment and bad business.
Certainly, business leaders appear to be at their highest level in recent years, with the world’s largest miner, BHP, speaking about the mineral demand outlook.
Andrew Mackenzie, chief executive of BHP, told a conference in Switzerland on March 20 that the world may have to spend $ 3.7 trillion a year to develop and modernize its infrastructure.
“If we look at China’s Belt and Road Initiative, demand for steel is expected to increase by an additional 150 million tonnes over the next decade,” Mackenzie said.
These numbers were echoed by BHP iron ore chairman Edgar Basto at the Global Iron Ore and Steel Forecast Conference last week in Perth, in a presentation that went a long way in justifying the iron ore project. the company’s $ 3.6 billion South Flank plan in Western Australia. .
While the new mine is primarily planned to replace existing operations that are running out, BHP is far from alone in planning new operations, with rivals Rio Tinto and Fortescue Metals Group also considering signing developments.
BELT AND ROAD BULL
The industry is still a long way from having undertaken the same type of massive expansion as in the 2010s in a burst of optimism about Chinese demand for ingredients for steelmaking.
But some similarities are emerging, with Chinese demand once again in the foreground.
Mackenzie and Basto have made much of China’s Belt and Road Initiative (BRI), the government’s plan to build infrastructure and energy projects in Asia and Africa as part of ‘a new Silk Road promoting trade and development.
The problem is that, for now, much of the BRI remains in the vision stage, and very little in the implementation stage.
If China were to actually undertake large infrastructure projects in South and Central Asia, as well as Africa, it would be logical to expect it to export a lot more capital, machinery and semi-finished materials. -finished such as steel.
Instead, foreign investment fell 2.7% in 2017 from the previous year, and this accelerated in January with a 3.1% drop in the previous 12 months, according to the official figures.
Steel exports fell 30.5% last year and 27.1% in the first two months of 2018 compared to the same period last year.
Cement and clinker exports fell 27.9% in 2017 from the previous year, and while vehicle shipments jumped 43.1% last year, this is mainly due to an increase of 83.6% of car exports, which is probably unrelated to BIS spending.
BHP, Rio Tinto, Brazilians Vale and Fortescue had all invested billions in expanding iron ore capacity, leading to a collapse in the price of the material.
It has since recovered, with Argus Media citing the 62% benchmark iron ore delivered to China at $ 64.15 a tonne on March 23, down from $ 74 at the end of last year, but still almost the double the low of $ 37.30 reached in December 2015.
It took the fall in prices for BHP and Rio to retreat somewhat reluctantly from their long-held predictions that Chinese steel production would hit 1 billion tonnes, and the risk is now once more than the the reality of the BIS is a little less rosy than the current optimism. .
China’s 8% increase in storage battery exports has been more positive for miners seeking to enter the battery metals space.
But as some mining executives have pointed out, getting deals at the right price in areas the market sees as hot is a challenge.
“There’s probably around 5 percent of these opportunities that you can really add value with,” Mark Cutifani, managing director of Anglo American, said at the FT Commodities Global Summit in Switzerland last week.
“But in most cases you’re going to pay high prices for the assets, so it’s a tough way to make money,” he added.
It’s too early to say that major mining companies are about to dive headlong into the old boom-bust cycle of supply expansion to meet overly bullish forecasts, but the cash generated by the rally in commodity prices over the past two years could start to burn holes in their pockets. – Clyde Russell
Commodities expected to soar and collapse over the next 2 years
- The Macquarie Bank has released its updated estimates for where individual products fall in their price cycle.
- He likes the look of gold and uranium this year, but says battery and steel-related products should be avoided.
- Longer term, he says lithium, cobalt, nickel and copper will likely outperform over a five-year horizon.
David Scutt – If you like to venture into the commodities markets, this is a treat for you.
This is an excellent chart from Macquarie Bank that shows where individual commodities fall in their price cycle – at least in Macquarie’s opinion – providing investors with a guide to which commodities are likely to be hot, not , over the next two years.
We’ve featured this a few times before, but for those who haven’t seen it before, the arrows indicate where Macquarie sees prices move over the next couple of years based on supply and demand dynamics.
In 2018, Macquarie likes the appearance of precious metals given the likelihood of a weak US dollar, higher inflation, and lingering anxiety surrounding global trade.
He also likes the appearance of uranium, which suggests that upside risks are mounting as low prices have crippled new projects, leading to a reduction in existing mine supply.
On the other end of the spectrum, his least favorite commodities in 2018 include lithium and cobalt as well as steel, manganese ore, iron ore and metallurgical coal, with the latter three all related to slower growth in global demand for steel.
Macquarie is also pessimistic about the outlook for thermal coal and LNG, so his view does not bode well for the outlook for Australia’s major commodity exports this year.
For those more interested in medium to long term trends, this list shows the individual products Macquarie expects to be the stars and the sliders over a two and five year period.
Source: Macquarie Bank
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