Investors are watching the recovering raw materials market with suspicion. There is even a commodities supercycle on the way, according to Jeffrey Currie, the global head of the commodities research department at investment bank Goldman Sachs.
Currie is not alone in this expectation. According to the Dutch research bureau Alpha Research, which carried out a survey among 58 asset managers, 46 per cent gave a buy recommendation.
In an interview with CNBC, Currie even spoke of the initial stage of a ten-year “commodity super cycle”. This would be an exceptional phenomenon, meaning that commodities trade above their long-term price trend for a long period of time. Experts say this super-cycle will start in 2020 - the year of the pandemic outbreak.
“The fundamentals in commodity markets, including oil and metals, remain incredibly positive”, he said. “That applies, for example, to oil markets, which are currently producing about 2 per cent less than global demand, while inventories are about 5 per cent below their 5-year average.” Currie called this the revenge of the old economy. “What is important for investors is that oil producers on the stock exchange are relatively cheap relative to the price of oil.”
Despite the enthusiasm of Goldman Sachs, data clearly show how rare super-cycles are. Since the 19th century, only four commodity super-cycles have been recorded. The last one took place in the first years of the new millennium and was fuelled by the rapid industrialisation and economic growth of China and other emerging markets.
Of the asset managers surveyed by Alpha Research, 43 per cent were neutral towards commodities. Only 11 per cent saw no benefit in commodities. These figures actually illustrate, in contrast to price developments, that investors are still cautious. This is partly because most investors have no positive memories of the course of the previous super cycle. They got that bad impression because investors wrongly saw commodities as a structural asset class. But because of the negative correlation with other investments, the course of the super-cycle has been diametrically opposed to expectations.
The energy transition
From an investment perspective, all these developments are interesting. Interest rates are low and shares are relatively expensive. Precisely commodities can provide a good inflation hedge and diversification in the portfolio. With the shortages in raw materials and the knowledge that the demand for energy will continue to increase, especially in fast-growing Asia, this category is interesting for investors.
“The transition to a low-carbon economy will take decades. Its impact on commodities will not be homogenous. Different commodities will be affected in different ways, as the exposure to climate and transition risks differs from one commodity to another,” wrote Alessandro Sanos, commodities specialist at Refinitiv, in an analysis.
“The energy transition towards renewable sources is already giving a significant boost to those metals and minerals needed to build renewable energy infrastructure and produce the batteries that will support the electrification of the economy and the expansion of the electric vehicle fleet,” he continued.
ABN Amro energy economist Hans van Cleef said investors should be wary of commodity market volatility. “Price movements always come sooner than you expect and are always more violent than you thought.”
Copper
According to Goldman Sachs, it is the metals that are essential for the ESG and energy transition that will benefit most from the commodity super cycle. Currie even went so far as to state that “copper is the new oil”, because copper is indispensable in global decarbonisation strategies and because copper shortages are already being felt. Copper, with its high conductivity, efficient heat transfer and ductility, is crucial in the production of such things as motors and wiring.
“According to CRU, a commodity consultancy, the demand for copper from renewable sources will be about 801,000 tonnes in 2022 out of a total global consumption of about 25 million tonnes. Renewable energy sources will account for 72 per cent of the total growth in demand for refined copper over the next four years, according to the firm,” the Financial Times reported this week.
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