Material Matters: Mini-Cycle, Oil & Metals

Commodities | Jan 14 2021

A commodity mini-cycle is underway; China aims to increase self-reliance in iron ore and steel; Uptrend in oil prices is expected to continue

-A Mini-cycle in commodities
-Cyclical case for metals remains strong
-Oil production growth expected to be sluggish in 2021
-Nickel and steel: bullish outlook

By Angelique Thakur

Most commodities have seen a surge in prices over the last few weeks as markets continue to price in the end of the pandemic.

Brent oil price is up 19% since the beginning of December while coking coal and iron ore prices have also rallied by 22-30%. The only exception to this are precious metals which have remained under pressure.

The advent of a mini-cycle

Longview Economics’ analysts are excited about what they believe is a new commodity “mini-cycle” in progress.

Enhanced by the quantum of monetary and fiscal stimulus, the cycle presents a strong environment for commodity prices.

Consequently, Longview Economics has retained its longer-term bullish take “until markets begin to worry about the withdrawal of cheap money from the Fed”, something not expected until late 2022.

Delving deeper, Goldman Sachs analysts assert the current commodity boom cycle will be different from the previous two booms.

A concoction of high demand from China, sluggish response from the mining sector (a result of many years of under-investment) and low inventories were some key themes during the 2003-2007 cycle.

In contrast, the next relatively shorter cycle during 2009-2011 was driven by a rebound in demand post the GFC slump.

Now, with the mining sector observing capital discipline and deleveraging over the last five years, Goldman Sachs believes the current cycle will be a supply-side driven rally as global demand recovers from the pandemic.

However, Goldman Sachs is not as optimistic as Longview Economics and does not think demand would shoot beyond 2019 levels. The road to recovery is also expected to be fraught with volatility.

Ample liquidity but trouble looms

In 2021, Goldman Sachs predicts the commodity sector will revolve around the themes of recovering global demand and supply constraints. Based on this, the analysts prefer met coal, iron ore, copper, aluminium and zircon.

Bullish on commodities, Goldman Sachs’s price forecasts for the mining sector are right at the top with its operating income forecasts for the sector on average higher than consensus estimates.

Goldman Sachs also foresees consensus earnings forecasts upgrades for the sector over the first half of the year along with strong capital returns, especially for companies exposed to iron ore and copper.

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