A new 'commodity supercycle' is lifting the JSE

First published in the Daily Maverick 168 weekly newspaper.

From oil and liquid natural gas to iron ore and copper, rice and soybeans, the world’s most important commodities have surged from lows in 2020 to eight- or nine-year highs, though in the case of oil it’s an eight-month high after the price collapsed to $18 a barrel in April last year.

This is having a significant impact on the earnings of South Africa’s resource stocks, triggering share price hikes across the sector and leading the JSE’s Resource 10 index to a 12-year high in January.

The likes of Sappi, Kumba, Sasol and Implats have seen their share prices appreciate by between 20% and 86% over the past 90 days. Even ArcelorMittal is feeling the love, gaining 670% over the past 90 days.

The rally has triggered speculation that a new supercycle in commodities is under way – one driven by stimulus spending, growth in China, rising inflation, more aggressive environmental policies and a weaker US dollar.

This is unlike the commodities supercycle of the 2000s, which was driven by rapid industrialisation and urbanisation in emerging nations Brazil, India and China in particular. The 2008 financial crisis brought an end to this.

Goldman Sachs was already arguing in October last year that the strong rebound in commodity prices in 2020 could be “the beginning of a much longer structural bull market for commodities”.

This week, JP Morgan Chase added its voice to the conversation: “We believe that the new commodity upswing, and in particular the oil upcycle, has started,” its analysts said in a note that was covered by Bloomberg. “The tide on yields and inflation is turning.”

Commodity prices may also jump as an “unintended consequence” of the fight against climate change, which threatens to constrain oil supplies while boosting demand for metals needed to build renewable energy infrastructure, batteries and electric vehicles, the bank said.



But is it really a supercycle?

A supercycle can be defined as “decades-long, above-trend movements in a wide range of base material prices” deriving from a structural change in demand. Not everyone is convinced that the world is entering such a phase.

The previous supercycle was largely driven by China, which spent billions on infrastructure, had an insatiable demand for commodities and issued credit to revive its economy. “In the process, it revived the global economy,” says Reuben Beelders, CIO at Gryphon Asset Management. “The question is: can China drive that level of demand now?”

For sure, China’s economy is growing strongly. It was the only global economy to record growth in 2020, but the growth is of a different nature to that in the 2000s.

Instead of investing in infrastructure, Chinese leaders have taken steps to boost domestic demand. A strong consumer market allows China to rely less on exports and it is diversifying into a more market-based economy. This means China’s voracious appetite for the world’s commodities is unlikely to see a repeat of the 2000s.

But if not China, then who? Global growth remains wobbly and is far from synchronised. The US stimulus is all about supporting consumer demand and simply kicks the economic can down the road.

Global growth has simply not recovered as expected. “A lot of the current price rises are a function of supply problems rather than demand,” Beelders says. “We believe true growth will only pick up when underlying demand picks up.”

For instance, the supply of iron ore is currently constrained because Brazil, the second-biggest exporter after Australia, has not fully recovered from the horrific waste dam collapse in 2019 and other, Covid-related disruptions. As a result, the price is hovering at $150/tonne, levels last seen in 2011.

If anything, adds Abdul Davids, portfolio manager at Kagiso Asset Management, iron ore could be reaching the end of a cycle. “The most efficient producers, like BHP and Vale, are making enormous margins. At these margins, other suppliers enter the market and prices adjust.”

A PGM supercycle?

Davids is also cautious about calling the current boom a supercycle. That said, some commodities warrant attention. In particular, platinum group metals (PGMs) may be primed for a potential supercycle, he says.

The green economy is one key driver of demand.

“Every time vehicle emissions legislation is tightened the loading of PGMs has to increase – in particular for heavy-duty diesel trucks. The demand for PGMs is almost predetermined.”

Electric vehicles, he adds, are not a headwind yet. And when they are, 50% or more will be hybrid vehicles. “These have fuel tanks which require PGMs.”

In addition, the weight of electric batteries, and their limited range limits their use in buses and trucks. “The solution is hydrogen fuel cells, of which platinum is a big component. This is a new vector of demand for platinum.”

The last factor supporting PGM prices in the longer term is a supply shortage.

It has been winter here for four to five years – we saw Lonmin collapse, Anglo Platinum close mines, other mines mothballed. It takes years to bring a new mine to production. All of this, Davids says, sets us up for a PGM supercycle.

Not all stocks are created equal

This is not to say it’s the end of the run for South African resource stocks. Commodity prices remain high for the time being. But, with many stock prices having run hard, bottom-up research becomes important.

Investors would be wise to look for companies that are conservatively managed, manage their gearing well and aren’t planning any ambitious investments right now. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.