A commodities super cycle? Not really

By Morningstar |  18-11-21 | 
 

At the 2021 Morningstar Investment Conference- India, asset managers and economists shared their views on commodities. Here are what three of them had to say.   

Sunil Singhania, founder, Abakkus 

  • Optimistic on Metals

Over the last six years, no significant investment has gone into the sector largely because the prices were a bit subdued, demand was subdued. So it made no sense to engage in new mining or new capacity build-up. Over the last one year, liquidity has been immense. Money printing has been rampant across the world. A key usage of that excess supply would be investing in infrastructure across by various economies.

The U.S. has a huge plan of almost $3 trillion of investing in CapEx on the infrastructure side. India has $1 trillion of plan as far as CapEx is concerned. All that needs a lot of metals – various kinds of metals, steel, aluminum, copper and so on and so forth.

Additional demand is coming from the likes of EV predominantly on the copper and nickel side. Investments made in power and power transmission leads to a spike in demand for aluminum and copper. Supply has not kept pace because of underinvestment over the last four or five years.

The last straw on the camel's back has been China. The world wants to be green. We are looking at net zero kind of a scenario, a carbon neutrality. Every nation wants to shut down polluting industries. In China, we have seen across steel and other metals, almost 20-25% of the capacity is being shut down. All this has led to metal prices seeing an upsurge. Even with this, they are where they were 10 years back.

We are positive on the metals cycle. As far as Indian companies are concerned, we have companies which are fully integrated - mines, power, and produce the final product. As portfolio managers, we don't go beyond 5-8% allocation in case of deep cyclicals.

  • Oil

When it comes to crude, prices had fallen to negative last year. Shale oil became unviable, and wells were shut down. Demand in the case of oil has not moved up because we have alternatives - renewables. Fossil fuel usage has gone down.

However, oil producing nations have cut supply massively. Right now, the world is operating at maybe 85-88% of what they can produce. Our view is that from a medium to long-term perspective, oil is a weak commodity fundamentally. Over a period of time, we should start to see oil again trading at $50-60. However, in the near term, because of the short-term demand and supply mismatch, you might have a further $5-10 uptick. From our perspective, medium to long term, oil seems to be more on a softer trajectory than a stronger trajectory.

Joachim Fels, managing director and global economic adviser, PIMCO  

If the property market is 35% of the Chinese economy, and that is slowing down, it's not good news, obviously, for commodities. I mean, there are some commodities, obviously, some minerals that will actually greatly benefit from the transition from brown to green. But a large part of the commodity market, I think will be under pressure.

Many other emerging markets, particularly the commodity-heavy emerging markets that have benefited so much from China's growth over the past decade or two, will have to look for a new growth model. And that is extremely difficult. It requires very decisive government action. And well, as we know, in many of those countries, particularly in Latin America, populism is back even in places where nobody had expected it. So, I think this is a much more difficult environment for many emerging markets, particularly those that were highly leveraged plays on Chinese growth.

Matt Wacher, Chief Investment Officer for Asia Pacific, Morningstar Investment Management

  • Oil

Oil prices dipped down to negative in April 2020. Now, oil is back above $80, the highest it's been for five years or longer. Demand is slowly coming back as COVID recedes. We may well grow demand to a position where it's even above 2019 slowly over the next couple of years.

What's really driven the oil price up is the fall off in supply. OPEC has restricted supply, and they're slowly bringing it back online. But the U.S. shale producers as well have shown a huge amount of discipline. They were producing huge amounts of oil a few years ago that were really putting a cap on oil prices. What those companies have been doing is favoring returning capital to shareholders over CapEx. And this coupled with a dearth of capital flowing into the industry mean that this supply-constrained dynamic could continue for quite some time.

On the demand side, I think that India rather than China will be a key driver of demand over the next few years. And I think that mix is going to really continue to put upward pressure on oil prices.

  • Metals

There has been a huge rise in copper prices. Copper and other metals got quite a long growth runway. And as the world moves towards needing more renewables, needing the inputs that go into building out renewables, even just the significant infrastructure spend that lots of countries, in particular, the U.S. are looking to get underway, I think, there's going to be an underpinning of demand for all metals, not just copper.

  • Inflation

The key risk is how it feeds into inflation, the higher prices, and how companies and economies can deal with this additional costs. Can companies push the cost into the pricing that they can then push on to consumers? Or will it impact earnings adversely?

I believe that inflation will be more persistent than we expect. But I don't think that we're going to experience a 1970-style shock. And I think that a lot of that's going to come down to oil and in particular, OPEC. They understand the dynamics of higher oil prices, and they don't want to see the levels of demand destruction – where demand destruction kicks in and starts to affect the economic growth, which will flow through to company earnings and whatnot. Higher commodity prices are a risk to global growth if they persist or even go higher. I think they're inflationary. And I think that the potential to impact, and in some cases, significantly impact company earnings, is real. But I think that there's sufficient levers, particularly with oil, with OPEC, to keep prices under some level of control.

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