The supply crisis is felt in the commodity markets

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A prolonged period of underinvestment by commodity producers paves the way for large price increases in commodity markets, according to optimistic investors who are focusing on the metals and energy industries.

The prices of copper, nickel and aluminum could break previous highs, more than 40% above current levels, in the coming years, according to the portfolio managers. Such a development would probably transform markets marked in recent years by low prices and mixed investor interest.

Global miners are spending a third of what they did five years ago on new projects. They are on track to invest around $ 40 billion for the third year in a row, up from more than $ 120 billion five years ago and $ 80 billion nearly ten years ago, according to the consultancy firm in Raw Materials Wood Mackenzie.

Fears that US-China tariffs will slow growth and hurt demand for raw materials have weighed on prices in recent weeks. Copper is on the verge of its third decline of at least 15% in the past five years. Zinc, aluminum and nickel are in a bear market.

But some investors are still betting that the current rate of investment will tighten supply, causing the prices of metals like copper and aluminum to soar. Investors and analysts also expect the long-awaited switch to electric vehicles to exacerbate any supply shortfalls.

“It’s incredibly bullish and inflationary for metals over a long enough horizon,” said Stephen Gill, Managing Partner of Pala Investments. He accumulated stakes in mining companies like Nevada Copper Corp.

“You have a window of opportunity at these low prices. “

Analysts say the lack of investment in metals echoes what has happened in the oil market. A 25% drop in spending on new projects in 2015 and 2016 paved the way for a recovery that has pushed crude prices up to near four-year highs this year.

A worker in a maintenance shop at the Oyu Tolgoi copper-gold mine in the Gobi Desert. Miners are spending a third of what they did five years ago on new projects.


Photo:

Taylor Weidman / Bloomberg News

The potential supply tightening developed after a chorus of investors – burned by the commodities crisis that lasted until 2016 – demanded greater discipline from mining companies. Mining stocks have lagged in recent years. The MSCI World Metals and Mining Index has fallen 20% over the past five years, compared to a decline of 3% to a greater extent.

Glencore PLC, known for its aggressive investment strategy, reduced its annual spending on new projects from 2014 to 2016, according to FactSet. Managing Director Ivan Glasenberg, one of the mining industry’s foremost experts, said rewarding investors is now the best use of the company’s cash flow.

Other large miners such as Rio Tinto PLC and Vale HER

have reached a similar pace, pushing capital spending to its lowest level in years and spending billions of dollars in shareholder returns.

“None of these mining companies are keen to increase supply by spending or acquiring someone,” said Arthur Calavritinos, portfolio manager at Boston-based ANC Capital, which trades futures on the. copper and retained investments in Freeport McMoRan Inc. and Teck. Resources Ltd.

Mining deals are on track to total around $ 40 billion for the fourth year in a row, a fraction of the record $ 131 billion spent in 2011, according to Dealogic. Meanwhile, share buybacks from the world’s largest miners are expected to more than double for the second year in a row, according to FactSet data.

The uncertainty over world trade this year has further deterred miners from commissioning new projects. Companies are also dealing with governments in emerging markets which are increasingly seeking a larger share of profits and imposing stricter regulations.

US copper miner Freeport reduced its capital spending every year from 2014 to 2017. “We are not going to start investing until we clearly understand the end result of all of these current uncertainties,” said the CEO Richard Adkerson on an October earnings conference call. Freeport shares are down 36% this year.

Copper miners will need to spend an additional $ 50 billion over the next decade to balance the market, said Christopher LaFemina, mining analyst at Jefferies. These companies currently spend around $ 10 billion a year. Zinc is also expected to run a shortfall of several hundred thousand tonnes, according to LaFemina, who has “buy” ratings on many industrial metal producers.

Historically, metal prices have reacted quickly to tense market conditions. Copper more than doubled to reach $ 4 a pound in one year through May 2006. Prices jumped about 50% to $ 4.50 in the year through February 2011. The metal rose. currently trading at around $ 2.75.

“These types of price spikes are coming,” said Leigh Goehring, managing partner of Goehring & Rozencwajg Associates, which has maintained its investments in copper miners. “In a world where supply just isn’t increasing, you are superimposing all this new demand.”

A growing metals market would benefit countries that are major exporters of metals, such as Indonesia and Chile. But it would also likely increase the prices of everything from smartphones to homes. Metal-dependent businesses, such as contractors and car manufacturers, could also be affected. Such developments could raise concerns about inflation around the world.

Metals markets are also known to have boom and bust cycles, adding to the challenge for investors focused on more immediate profits.

“You’re not going to have the mines that were recently approved [producing] into several years, ”said Marisa Hernandez, metals and mining research analyst at Neuberger Berman, an investment firm that oversees $ 315 billion. Ms. Hernandez recommends buying copper producers with a time horizon of at least one year. “This can lead to a period of time where you don’t have enough supply.”

Write to Amrith Ramkumar at [email protected] and David Hodari at [email protected]

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