Commodity prices: don’t place your bets — yet
Thanks to Covid-19, the base metals lineup looks like a race of lame old nags. But 2021 could see a galloping revival
While gold is enjoying its moment in the sun, there are few obvious bets in the broader commodity market as Covid-19 rampages around the globe.
Prices for some metals had already begun to sag in January but the coronavirus crisis has whacked demand for cyclical commodities such as oil and for base metals such as copper, lead, nickel and zinc.
Oil’s implosion has been nothing short of spectacular, with the May futures price of West Texas Intermediate falling to an incredible -$37.63 a barrel this week. In other words, producers are paying buyers to take it off their hands, owing largely to a storage glut that has built up as demand has collapsed.
There are signs of life among other metals, however.
John Meyer, mining analyst and partner at SP Angel in the UK, says mine disruption is lifting commodities as inventories are withdrawn from Shanghai and London Metal Exchange warehouses.
He says lead prices, for example, are recovering on disruption to the supply of batteries for recycling, while zinc prices "are rising on the closure of mines in Peru and problems in China".
"Copper smelters in China are struggling to shift surplus sulphuric acid [a by-product of the process], limiting production now that storage tanks are full."
Giovanni Staunovo, a UBS commodity analyst in Switzerland, cautions that investors would do well to avoid broad commodity exposure for now.
He argues that most commodity prices will likely continue to weaken until economic activity stabilises in developed economies. Crude oil and base metals will only find support when deeper supply cuts emerge.
"On a spot basis, we think broad commodity indices could drop by up to 10% from current levels in the second quarter of 2020," Staunovo says.
He and many other analysts expect prices to recover firmly in the second half of this year, particularly in the final quarter, as global growth recovers. "On a broad commodity index level, we target a 40% spot recovery into 2021 … in line with the price recoveries seen after the global financial crisis and from the troughs in 2015 and 2016," he says.
UBS predicts base metals will bounce first, followed by oil.
Low base metal prices are not sustainable in the long run, Staunovo says. But that doesn’t mean they don’t have further to fall — as surpluses build up, he thinks copper, now higher than $5,000 a ton, will test $4,200.
Before oil’s historic crash on Monday night, Staunovo had reckoned on Brent crude settling at around $20 a barrel this quarter.
In the longer term the cuts may help to rebalance the market if demand recovers in the second half, in which case UBS expects Brent will reach $43 a barrel by year-end.
Thanks to the unlimited quantitative easing programme announced by the US Federal Reserve, gold rebounded sharply and is set to benefit from monetary stimulus by key central banks across the globe. Staunovo sees the price rising from current levels of $1,670 an ounce to $1,800 in coming months, and possibly higher if monetary response is especially aggressive.
René Hochreiter, a consulting mining analyst at Noah Capital Markets in SA, thinks it could go to $2,000 an ounce and higher thanks to its safe-haven and inflation-hedging properties, as well as fears that huge stimuli will "destroy" the value of the dollar over the next two years.
Despite a fall in car sales, Hochreiter sees platinum group metals (PGMs) holding at current levels as SA’s shutdown takes about 20% of supply off the market. PGMs are used in the autocatalysts that mitigate car emissions.
Meyer notes that palladium prices have recovered to near their recent highs as Chinese automakers resume work. Significant PGM supply chain problems may be good for prices in the short term but could force automakers at last to seek alternative metals for autocatalysts, he says.
Hochreiter thinks 2021 "will see a bounce-back of serious proportions and let 2020 pale into the past".
The major unknown, of course, is whether there will be a swift economic recovery.
Bjarne Schieldrop, chief commodities analyst for SEB, a Nordic financial services group, says there are two reasons to expect that huge stimulus will be forthcoming to lead a global economic rebound.
For one thing, 2021 is a critical year for the Communist Party of China, marking its 100th anniversary. By next year, the country should have achieved "xiaokang shehui" status, a Confucian concept that translates as "moderately prosperous".
Next year marks the first of two centenaries that are important milestones in the party’s "Chinese Dream".
For the Chinese government, failure in this aim is not an option and it is likely to pull out all the stops to ensure 2021 is an economically prosperous year — pandemic or not.
In the US, the world’s largest economy, November 3 is the date of the presidential elections and Donald Trump, who is hoping to secure a second term in office, is likely to throw everything he has at fuelling the economy.
But monetary stimulus, through lowering interest rates, has its limits. Further stimulus will have to take the form of increased government spending, probably in fixed infrastructure investment, and that is good news for many commodities — especially steelmaking inputs such as iron ore, manganese and coking coal.
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