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We hosted veteran commodities market strategist

Robert Ryan from BCA Research. He shed some light on the ongoing debate on the commodity cycle. Ryan is largely inclined to call this a super-cycle and not just a bull run. However, he reckoned the commodities movement will be asynchronous in the medium term, led by different fundamental drivers. He is bullish on base metals (Cu, Al, Ni), bulk metals (Steel, Iron ore) and energy, and neutral on Agri/soft commodities.

* In the short term (to the end of 2022), oil and base metals will appear to be in the early stages of a commodity super-cycle, but in the medium term, demand dynamics will rule.

* In the medium term, oil will behave like a commodity in its sunset phase, with demand rising slightly or remaining flat to down over the next decade. Base metals, amid their criticality to renewables and electric vehicles (EVs), will behave like a commodity in its early growth phase.

* Metals leg of this renewables buildout is just the beginning – higher prices will be required to incentivize the development of new supply.

* Steel prices work as a leading indicator for copper prices – leading copper prices by ~9 months. Steel, Iron ore, etc. will be supported by continued buildout of China’s defense, technology, communications, and energy industries, in line with copper prices.

Industrial metals (Copper/Aluminum): 2021-2030 will be their decade

* Base metals output will struggle to meet higher demand from the ongoing buildout of renewables infrastructure and growing sales of EVs. China’s buildout of defense, manufacturing and infrastructure continues under its 14th Five-Year Plan and will support base metal demand.

* Metals markets – particularly copper and aluminum, which are critical for the transition to renewable generation – likely will be in physical deficits in CY21-22, with demand > supply which inclines them to believe the metals leg of this renewables buildout is just beginning – higher prices will be required to incentivize the development of new supply.

* However, high and rising copper prices could prompt the Chinese government to release some of its massive state holdings of copper.

* Another leg-up in copper would pull other base metals higher with it. BCA recommended investors to get long on politically-induced sell-offs, particularly with USD weakening in the near term.

* The tax on carbon emissions ahead would also enhance competitiveness of solar and wind energy − beneficial for copper and iron, respectively, which are the key inputs.

Bulks (Steel/Iron ore): Bull medium-term; may correct marginally in near term amid easing supply

* Steel, Iron ore, etc. will be supported by the continued buildout of China’s defense, technology, communications, and energy industries − in line with copper prices.

* Steel prices work as a leading indicator for copper prices – steel leads copper prices by ~9 months. This makes sense when one considers steel is consumed early in infrastructure and construction projects, while copper consumption occurs later with completed project (in the form of wires or pipes) as airports and houses are fitted with copper for electric, plumbing and communications applications.

* Even as steel is carbon intensive, there aren’t any substitute to it yet. With US focus on infra increasing, steel demand is here to stay. Decarbonizing steel would be a story of later decades maybe, but in the visible medium term, possible higher carbon tax would mean higher demand even amid higher input cost of steel.

* Stronger steel margins and another round of environmental restraints on mills continue to boost demand for high-grade iron ore. Iron ore is trading off its recent highs and will likely move lower toward the year end as Brazilian supply returns to the market.

Brent oil to hover around USD60-80/bbl for the next five years

BCA sees Brent oil to average USD65/bbl in CY21 and believes that the production-management strategy and physical supply deficits in base metals will keep growth in demand higher into 2022. Supply will be calibrated to demand in the global oil market amid equations of dominant producers.

However, prices kept too far above USD75/bbl to put a dent in demand and incentivize US shale production, which can ramp up quickly, or encourage EV sales. Beyond 2025 and out to 2030, oil supply side looks cloudier. OPEC may not want to aggressively invest in increasing crude-oil production capacity amid uncertainty around global oil and gas demand once renewables kick into a high gear.

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