Industrial commodities hitch a ride on global growth hopes
Metals are rising sharply, but this is not a repeat of the commodity ‘supercycle’
by David Sheppard and Neil Hume in London
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© Bloomberg
Industrial commodities are on a tear. Oil, copper and niche metals such as cobalt all shot to multiyear highs in recent weeks, buoyed partly by the strongest and most widespread global growth since the financial crisis.
The move, which has seen Brent crude top $60 for the first time in two years and copper pass $7,000 last month, has been accompanied by renewed interest from investors and hedge funds who had largely abandoned the sector during a brutal slump over the past three years.
Now, with growth picking up and commodity markets tightening due to under-investment and producers’ attempts to rein in output, some industry executives and analysts say funds are again treating commodities as the go-to assets to profit from global growth.
They caution, however, that while the commodity cycle appears to be turning, this is not a repeat of the so-called “supercycles” that propelled oil and metals to record highs last decade, as China’s rapid industrialisation caught the industry napping.
“We are in the upswing of a classic commodity cycle but this time — while demand is strong — it is being driven by supply constraints rather than a sudden surge in consumption that the industry just wasn’t ready for,” said Julian Kettle, vice-chairman of metals and mining at Wood Mackenzie.
“The last five years there has been under-investment in metals and to a certain degree energy and, while supplies are relatively comfortable, investors are starting to see that producers are risking storing up problems for the future.”
The issue, analysts say, is that miners and oil producers were so badly burnt by the commodity crash that they have pulled investment from new projects during the downturn.
While demand is not soaring at the rate it was last decade, it is now expanding quickly enough to provoke concerns about future supplies, drawing in investors who want to tap into global growth and to have a possible hedge against rising inflation.
“The herd-like behaviour from investors is certainly reminiscent of what we saw a decade ago,” said Caroline Bain, chief commodities economist at Capital Economics in London.
“But a lot of this optimism we’re seeing is about future demand. The crash in prices has caused much lower investment.”
Take oil, for example. Swiss commodity house Trafigura was one of the first to sound the alarm in September when it warned demand could exceed supply by as much as 4m barrels a day by the end of this decade, after energy companies halted $1tn of spending on new production during the oil crash.
While the market is currently being propped up by Opec supply cuts, doubts are growing that the US shale industry will be able to meet future demand growth wholly on its own, which is forecast to keep expanding even as electric cars become a bigger part of the market.
Hedge funds have amassed a near-record bet on higher Brent crude oil prices in recent weeks.
In metals, the industry has been awash with projections that the same growth in electric cars will transform corners of the market, with nickel — long a laggard on the base metals complex — set to see demand soar as battery use grows, while copper is also seen benefiting due to its use in charging points.
Cobalt, essential to modern battery technology, has also become the industry’s new darling, with supply dominated by challenging jurisdictions such as the Democratic Republic of Congo, where 50 per cent of the metal is mined. The price has soared by 200 per cent over the past 18 months.
Ivan Arriagada, chief executive of Chile-focused copper producer Antofagasta, said this week that the talk around electric vehicles meant that investors were looking at metals and mining with different eyes.
“We have generally been seen as an industry at the periphery of the modern economy and all this [the electric vehicle narrative] is showing that metals are very important,” Mr Arriagada said.
Ian Roper, general manager of Chinese metals data company SMM, highlighted, however, that it is still supply issues rather than demand that has provided the main impetus for the recovery in industrial metals. China has prioritised cutting pollution, leading it to place restrictions on mines and smelters for many key metals and minerals, including steel and coal.
“Given we’ve seen all the clampdowns from the supply side and the lack of investment in new mines globally that could put commodities on a very firm footing on the next three to five year cycle,” Mr Roper said.
Not all commodities are benefiting, however. Agricultural commodities, from grains to pulses, remain weighed down by bumper crops. Gold, which tends to act as a hedge against weak economic growth, is likely to face headwinds.
Paul Horsnell, head of commodities research at Standard Chartered, said the key message was investors still need to pick and choose commodities and the companies that produce them carefully.
“This probably isn’t a rising tide that is going to raise all ships,” Mr Horsnell said.
“Each of the commodities that has rallied has its own unique story and fundamentals, so investors need to be cautious. In a lot of them we’re going up simply because prices have been too low.”
Additional reporting by Henry Sanderson
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