By Alex Kimani
Despite the ongoing vaccine rollout snafu, including supply chain constraints, delayed approvals and—more worryingly—dozens of countries banning the cheapest and most widely available Covid-19 vaccine, there’s growing optimism that the global economy is gradually marching towards a full reopening. A year after the WHO declared the Covid crisis a pandemic, all the world’s biggest economies are on a rebound trajectory and slated to record significant growth in the current year after major slumps in 2020.
After shrinking by the largest amount in 74 years, the United States could emerge from the health crisis with its strongest growth in decades. Goldman Sachs says the economy could expand at a brisk annual rate of 7%, the fastest clip ever since Ronald Reagan proclaimed “morning again in America” in 1984.
The world’s second largest economy, China, is expected to post 8.4% annualized GDP growth in 2021, rebounding from a much slower 2.3% growth last year.
Meanwhile, the EU is expected to post 3.8% growth after nearly crawling to a standstill in 2020.
The massive monetary and fiscal stimulus packages by the world’s governments appear to have worked to enable the fastest recovery after the March deep slide.
Factories are humming and consumers are spending again, helping to trigger a broad commodity rally thanks to the so-called reflation trade.
In fact, Wall Street is now predicting a new commodity bull market that will rival the oil price spikes of the 1970s or the China-driven boom of the 2000s. Market experts, including Goldman Sachs, believe the commodity boom could rival the last “supercycle” in the early 2000s that powered emerging BRIC economies (Brazil, Russia, India and China).
These expectations are supported by the fact that price movement of most commodities has historically been both seasonal and cyclical. Peering at the 10-year charts of leading commodities reveals a clear pattern of mean reversion where prices tend to oscillate backwards and forwards towards their mean or average.
And so far, Wall Street appears to be right on the money with the Bloomberg Commodity Index (BCOM) up 11% in the year-to-date and nearly 40% over the past 52 weeks.
Here are 3 key commodities that can act as an inflation hedge and also as a nice play in the emerging commodity supercycle.
Bloomberg Commodity Index 12-Month Change
After a historic slump, oil has also been on a tear, up 110% in a year. In a sharp turnaround from last year, the energy sector has emerged as one of the best-performing. Brent crude has been flirting with $70 per barrel, a level it last touched nearly two years ago.
The oil rally this year has been spurred by encouraging production discipline including OPEC+ recently extending most output cuts to April and Saudi Arabia agreeing to voluntarily extend its output cut of 1 million barrels per day output cuts as well as the ongoing Covid-19 vaccine rollout that gives hope that a full reopening might not be far off. You can expect to see oil demand considerably in the coming months as more people begin to travel, especially with the EU now launching a “Digital Green Certificate” will facilitate safe and free movement within the bloc for people who have been vaccinated.
Although the rally has lately taken a breather due to concerns that demand continues to be patchy, consumption is roaring back in notable regions including the U.S. A stronger dollar has also been curbing crude’s gains.
The hiatus might, however, be temporary with eyes glued on U.S. inventory data when it comes out on Wednesday, which could show the first drop in crude stockpiles since mid-February. The Fed is also expected to release a policy statement later on the same day as attention on the pace of global inflation grows. Fed Chair Jerome Powell has promised to maintain aggressive support of the U.S. economy, the central bank’s quarterly economic forecasts will show how many of his colleagues share his commitment. The Federal Open Market Committee (FOMC) is widely expected to hold interest rates near zero at the conclusion of its two-day policy meeting on Wednesday, and keep buying bonds at the current $120 billion monthly pace.
So the current outlook is largely bullish for oil.
Which is just as well: Danielle Shay, director of options at Simpler Trading, has told CNBC that not only can oil perform even better in a reopening economy but can also be really good hedges against inflation. Indeed, with oil prices having surpassed even the most bullish projections on Wall Street, some punters are now imagining the seemingly impossible. Bank of America says oil prices could spike over $100/barrel in the coming years.
Similarly, Danielle Shay has picked copper as the other commodity that can perform well in a reopening economy and also act as a good hedge against inflation.
The price of copper has doubled in the past year to over $9,000 a metric ton for the first time in nine years driven by tight supply and strong demand for the industrial metal.
Copper is moving closer to an all-time high set in 2011 as investors continue to bet that supply tightness will increase as the world recovers from the pandemic. Spencer Barnes, associate vice-president of mutual fund and ETF strategy at Raymond James Ltd, says that thesis is mostly sound since copper is cyclical and driven by market expansion, and should see a surge in demand given the massive push to reopen the economy and the fiscal stimulus that could spur consumption.
Further fueling the rally is an anticipated ‘green’ shift in the post-COVID economy, which supports higher demand for copper and other base metals since EVs use about 4x more copper than gasoline-powered vehicles.
The International Copper Association estimates that the rapid rise of EVs will raise copper demand in EVs from 185,000 tonnes in 2017 to 1.74 million tonnes by 2027.
Lithium bulls are enjoying their best moment in decades, lithium prices already up 88% YTD thanks to robust demand for cobalt and nickel free EV batteries.
Bullish tech markets are rarely without curious dislocations. And right now one of the biggest imbalances can be seen in the huge momentum behind EV stocks such as Tesla Inc. (NASDAQ:TSLA) and the lithium market, which has remained in bear territory for years now.
Over the past couple of years, a cross-section of analysts including Goldman Sachs have tried calling a bottom on lithium prices, reckoning on a significant contraction in supply as persistently low prices limited production of one of the key commodities in the EV powertrain. That has not happened–until now.
Lithium’s moment to shine appears to have finally arrived, thanks to the massive electrification drive and robust demand for electric vehicles.
Specifically, lithium prices have been on a tear thanks to explosive demand for lithium iron phosphate (LFP) batteries according to Benchmark Mineral Intelligence (BMI).
BMI says battery grade lithium carbonate midpoint price (EXW China, ≥99.0% Li2CO3) for mid-March was a good 88% higher since the start of the year to over $12,600 a tonne, the highest level since March 2019.
Lithium hydroxide prices are up 20% over the timeframe, although a relatively deep discount to carbonate continues to exist.
Cobalt and nickel free vehicles are proving to be a runaway success.
According to BMI analyst George Miller, “…demand for durable, improved, and low-cost LFP cathode material has become rejuvenated in China – a very similar story to what we saw in lithium’s last price run of 2016 but with a much improved product for the 2020s.”
A year ago, Tesla Inc. (NASDAQ:TSLA) surprised the electric car industry when it announced some Model 3s made in its Shanghai factory will be equipped with lithium iron phosphate (LFP) batteries.
In December, only its second full month of sales, Tesla Model 3 55KWh LFP-battery captured 5.9% of the global full electric car market in terms of battery capacity deployed despite not being for sale in the US. Strong demand in Europe saw LFP-powered Model 3s command 46% of all Model 3 sales in January.
The Democratic Republic of Congo (DRC) is home to over half of the global cobalt reserves and provides over 70% of the total cobalt feedstock production globally. Unfortunately, for many years, human rights groups have highlighted severe human rights issues in cobalt mining operations including child labor, leading to buyers shunning supplies from the region.