WHY COMMODITY PRICES ARE SURGING

You don't need to look far to see why commodity prices are surging and there’s the prospect of demand for some natural resources exceeding supplies for years to come. Some leading investment advisers now say that we’re in the early stages of another “super-cycle.”

Factors to consider:

Demand

1. Share price action 

From March 23 to May 10 this year, big run up. Biggest customer, China, responds with all manner of clever detailed actions to knock back price. Since demand is increasing as far as we can see into the future, this tamping can only be short term. Copper has doubled in last year, for example.

2. Covid bounce-back

3. Batteries and energy-transition metals

For storage especially Lithium, wind turbines, electric vehicles. Energy-transition metals, copper and platinum group metals for example are now a pinch point because limited new supply.

Green demand - copper.

4. Paris 2015

The data shows a looming mismatch between the world’s strengthened climate ambitions, US rejoining, and the availability of critical minerals that are essential to realising those ambitions.

Means political pressure. Decarbonization could cost more than is currently estimated and will be a structurally inflationary force for some time.

Is political pressure a good thing for investors?

5. Biden's billions

The Biden administration views covid as an opportunity to pour money into its favoured interests – voters, welfare, public services.
The recovery package it has already forced through Congress was for $1.9 trillion. It’s asking for $3-4 trillion more.

6. Much greater and relatively stable demand. Copper is the new oil, but no equivalent to shale. 20k tonne by 2025?

Supply

1. Miners not investing

Despite this boom, technology metals, such as cobalt, copper and lithium, are set for particularly large deficits.

Not investing because investors want dividends, not wasted investments as in last decade of boom pre 2012 which led to bust.

Capital spending this year is set to fall by 6% among major diversified mining companies and 10% among copper miners, according to analysts’ consensus. Mines typically take 10 to 15 years to develop.

2. Emerging imbalances

Between supply, stockpiles and demand have eventually this last year adjusted balances in favour of higher prices. Inventories are low. Covid has disrupted supply chains.

3. Resource quality

Is declining. Eg Chile copper 30pc grade contraction these last 15 years.

Profits

1.  Rolling in lolly  

$140 billion ebitda Rio BHP Glenmore cf 44b 2015.

2. Weakening dollar, in which contracts are written raises prices and profits.

Investor demand

1. Inflation

Commodities as hedge against inflation.  Risk-off now means commodities-on. Ie commodities decorrelate, like before 2008.

2. Long memories are wrong memories

The LME metals index, a gauge of metals trading in London, fell 50 per cent over the  five years post 2011 tank. The market capitalisation of London’s five largest listed mines fell 75 per cent.

But that was China coming out of max demand for industrialisation. Now, with the energy transition, demand will be worldwide. Investors had better think again.

3. Healthy balance sheets

Mining companies are also more disciplined and focused on shareholder returns than they were ten years ago. After a near-death experience in 2014, when the sector was left struggling to service debts piled up in the boom years, balance sheets are in much better shape.

4. Dividends and Valuations

Yields around 5% with excellent cover and rising revenues earnings and profits.

DCF on current Income projections make miners fairly valued. But analysts will revise these valuations when the factors listed above are seen in play, giving many years of double-digit TSR.