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Commodities in 2021: a new super cycle or same old, same old?

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By Robin Bromby - 
Commodities 2021 new super cycle same old

Commodities are severely undervalued on a historical basis when compared to equity markets.


Steen Jakobsen, chief economist and chief investment officer at Saxo Bank in Denmark, sees an “epic” commodity boom about to unfold.

His reasoning?

We have been concentrating so much on the digital expansion, and developing new platforms, that the world has neglected the physical side of the global economy.

He cites the fact that in Europe it’s nigh impossible to find containers for shipping goods (and he also sits on the board of a large shipping company).

The COVID-19 pandemic has seen the transfer of immense volumes of money from the official sector to private hands, and this has unleashed spending.

In short, people can have a digital platform — their problem comes with what Jakobsen calls “the last mile”; that is, the transporting of the physical product, and this is overloading the global logistics network (and even producing enough of the physical product to meet demand).

He believes that commodities have been what he regards as “this undervalued” relative to other assets for at least 50 years.

Global digitisation is stirring up a new world order that the physical world cannot satisfy in terms of production of “real” things.

You can extrapolate from that several scenarios — iron ore/steel demand for more containers; copper for electric vehicle recharging (with US President-elect Joe Biden now saying he will roll-out some 500,000 new charging stations) but where in the electricity to come from?

Jacobsen says 70% renewables is unrealistic with present technologies. It will need new ones.

Not enough investment in mining

What Jakobsen is arguing is that investors should be looking to physical products, mining being one, where there has been underinvestment or malinvestment.

Over the weekend we saw Luke Smith, portfolio manager at Sydney-based Ausbil Investment Management saying that Australia is now in the early stages of a multi-year bull cycle for resources.

One piece of evidence to support this view is the stellar performance of the mining companies in the S&P/ASX200 Index over December as mineral prices — particularly iron ore, followed by copper — underpinned rising share prices.

Copper is closing in on US$8,000 per tonne, zinc nudging closer to US$3,000/t, nickel likewise with US$17,500/t and even the oft-ignored tin has pushed its head above US$20,000/t.

Iron ore closed last week at US$158.5/t for 62% fines (and US$153.3/t for 58% fines).

Moreover, unloved commodities that were the target of previous investor frenzies — lithium and, in particular, uranium — are now back in investors’ spotlight.

This December surge followed a good November when copper and iron ore reached multi-year highs (helped by vaccine promises).

Gold and silver took a few knocks: seven days into December and gold was down 11% on its all-time high four months earlier.

Junior gold stocks here and in North America have seen a combined US$3 billion (A$3.95 billion) in private placement paper over 2020, and most days on the ASX at least one company announces a gold ground acquisition (usually with a historic mine somewhere in the tenement).

There’s a lot of money chasing a slow-growing supply of the yellow metal.

Coal is facing multiple problems

Coal has been the black sheep of the commodities family.

The environmentalists’ war against coal is gaining ground (except in China and India, of course, where it is still seen as a vital energy source) and now has institutional support.

Take the case of Bathurst Resources (ASX: BRL) which mines coal in New Zealand.

A national radio news network reports that Bathurst is looking for a bank in New Zealand that will open an account for it — this after Westpac and ANZ successively closed the company’s banking facilities.

Earlier this month, a group of protestors lay down on a railway line in the sleepy South Island city of Dunedin to stop the company’s daily coal train delivering its load to keep the boilers going at the huge dairy factory owned by Fonterra (ASX: FSF) which, incidentally, is a major export earner for NZ.

Meanwhile, in Australia, there are now reports that some coal mines may have to close due to China’s bans on producers here.

Coal is Australia’s biggest export item underpinning the largest state economy — NSW.

India, China, step up coal output

But there is a longer-term issue, too.

The International Energy Agency, in its latest coal report, makes a critical point about the Chinese and Indian markets.

These two most coal-reliant major countries are taking steps to boost domestic mining and rein in imports.

In China, the government is continuing efforts to increase the competitiveness and profitability of the coal sector, said IEA.

In 2020, the Coal Trading Centre opened in Beijing and two big new corporations were formed, Jinneng Holding Group (in Shanxi) and Shandong Energy Group.

These companies, together with China Energy Investment Corporation, will produce more than 1 billion tonnes of coal each year.

“In India, the government intends to transform its coal sector by increasing efficiency and competitiveness, and, notably, by introducing commercial mining,” the agency noted.

Last year marked the first year in four decades in India in which coal-fired power generation declined, reflecting the country’s economic slowdown, above average hydropower output, and expanding wind and solar PV capacity, the report said.

Expanding LNG supply in the US and Europe spurred significant coal-to-gas switching in the power sector.

In the EU, coal-fired power generation saw its largest drop ever, both in relative and absolute terms. Over in the US, coal-fired power experienced its largest drop in percentage terms and second largest in absolute terms.

Slowing demand in China could derail boom

What if the Chinese economy slows down in 2021?

After all, it has been the rebound of that economy that kicked off the recent prices increases for mineral commodities.

Obviously, that will put a dent in metal prices.

The forecast prices in the Australian Federal Government’s recent Mid-Year Financial Economic and Fiscal Outlook (MYEFO) were very much on the conservative side.

These forecasts have 62% iron ore dropping back to US$55/t by the end of September, with lower thermal coal prices also.

Capital Economics in London sees iron ore in surplus next year as declining China demand occurs while supply is growing.

In fact, Capital analyst Samuel Burman uses the word “plummet” in forecasting iron ore’s price performance in 2021.

China’s demand, he argues, has been boosted by fiscal stimulus but this stimulus will be gradually withdrawn over the year. In addition, he expects Beijing to place limits on homebuilding.

At the same time, high prices are encouraging production expansion and Brazil supply could bounce if COVID vaccines allow restrictions there to be relaxed.

Probable best commodity advice: expect the unexpected

Back to Steen Jakobsen for the final word.

Recently Mr Jakobsen pointed out that he is one of the authors of Saxo Bank’s now famous annual outrageous predictions.

He says that the events of 2020 have made it very difficult to come up things that sound crazier than what is actually happening — and when you realise that the US Federal Reserve’s balance sheet expanded by 75% this year, you can see his point.

In brief, it may take some large event to give a nudge to uranium junior share prices after their recent surge.

Analysts seem as divided as ever on the outlook for gold and silver.

But the precious metals seem to be on a one step backward, two steps forward trajectory (plus they have 5,000-plus years of track record behind them).

Yet we don’t yet know the outcome of key questions that could change the whole scenario for commodities in 2021.

Will China invade Taiwan?

Will Europe be able to bounce back after COVID?

Will US President-elect Biden be mentally on top of his job?

What happens if Kamala Harris, noted as the most extreme left-wing member of the US Senate, becomes president?

When will (or even will) the virus be checked and defeated?

Anything could happen.