Geordie Wilkes explores data trends in geopolitics, the automotive industry and agriculture to analyse the prospects for a commodities supercycle.
- Recent months have seen rises in commodity prices, stoking speculation that we could be on the cusp of a new commodities supercycle.
- A major catalyst for the commodity price rises is the COVID-19 fiscal stimulus, along with countries such as the U.S. and China embarking on ambitious plans to make their economies carbon neutral.
- The consequences have been felt in the automotive industry with a shift towards electric vehicles, and subsequent increase in demand for copper, nickel and lithium. Meanwhile, the growth in the global middle-class will have an impact on agriculture as food trends change.
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During 2021, there has been much talk about the beginning of a commodities supercycle. While pockets of the commodity spectrum show signs of long-term growth due to changing consumer diet preferences and the green economy, a commodities supercycle is a bit far-fetched. It is important to remember the level of stimuli we have seen in the last 12 months.
Raw materials are needed for companies and countries to hit climate change goals and net-zero pledges; this creates a compelling case for base and industrial metals.
We have seen this play out in commodity prices in recent months through improved bullish sentiment following President Biden’s Green New Deal and China’s 14th five-year plan. Both place a greater emphasis on renewable energy, energy storage, electric vehicles (EV), and social housing.
Transitional policies encouraging commodities supercycle?
President Biden’s plan to decarbonise the power sector by 2035 and to have a carbon-neutral economy by 2050, in conjunction with China’s plan to achieve carbon neutrality by 2060, are enormous commitments for the world’s largest economies.
These will be completed with years of planning and short-term targets in all industries. One of those industries is transport.
Electric vehicles and e-mobility is a seismic shift in a significant global industry, and this trend has started to reduce emissions in the transport sector.
According to the International Energy Agency (IEA), the transportation sector was responsible for 24 percent of fuel combustion emissions in 2019, an increase of 0.5 percent y/y. The slow growth is due to increased efficiency, biofuels, and electrification.
Electric vehicle sales defied COVID-19, with the IEA estimating EV sales grew by over three million units in 2020. The ‘Build Back Better’ narrative could cause EV sales to accelerate in 2021 as new policies promote new energy vehicles (NEVs).
Metal’s role in the green economy
Nickel, copper, and lithium are metals that are at the centre of the EV story.
According to the International Copper Association, copper consumption is expected to reach 250,000 tons p.a. for the windings in electric traction motors alone, according to the International Copper Association.
It also indicated that a battery-electric vehicle consumes 83kg of copper compared with an internal combustion engine which requires 23kg.
The demand for nickel and lithium depends on the battery cathode chemistry. Market expectations of the chosen cathode chemistry change as technologies develop.
Presently, high nickel oxide cathodes will be at the forefront of the EV battery market, but nickel production’s environmental impact remains a worry.
Where do agriculture markets fit in?
Agricultural markets play a vital role in the daily running of the global economy and human development.
According to the European Commission, as the global population increases and the global middle-class expands to 5.3 billion by 2030 from 3.5 billion in 2017, 87 percent of the additional middle-class will be Asian, resulting in changes to food trends and patterns developing.
The rise in the middle-class will, for instance, lead to increased meat consumption in Asia, putting pressure on soybean markets. The European Commission estimates that by 2030, food, water and energy consumption will increase by 35 percent, 40 percent and 50 percent, respectively, from 2012.
As income per capita increases, another trend we foresee is Asian countries such as China consuming more coffee.
According to company reports, evidenced by the joint venture between Starbucks and Nestle in 2019, sales are growing year-on-year, with the average ticket size 9 percent larger in China than other vital global regions.
The growth of coffee demand in China is illustrated by the re-exports of soluble and roast-and-ground coffee from Japan. In the long run, this creates a large hole in the coffee market supply-and-demand balance sheet, which is compounded with adverse weather patterns, and on and off cycles causing crop yields to be volatile.
Impact on prices
There will be winners – likely to be copper, nickel, and lithium on the surface – and losers
However, the dynamics change quickly, especially when you factor in how fast the market could move away from cobalt. The long-term narrative for these metals remains constructive, even with looming surpluses.
Agriculture, as ever, remains a mixed bag. Agricultural markets are dominated by the changes in supply, predominately because of weather. There is no doubt that consumers are becoming more conscious of their diets and their food origins. One of these trends is coffee consumption which will grow this year, but Brazil’s supply is expected to fall sharply, causing the price to rise.
There are certainly bright spots for some assets in commodities, but a commodities supercycle? I am not convinced.