With an economic boom of epic proportions fast approaching, the natural resources needed to fuel the global resurgence are facing intense demand pressures.
While prices have soared across the spectrum of commodity markets, including forest products and agricultural commodities, industrial metals have recently taken centre stage in financial markets.
These are materials at the heart of global construction and manufacturing, and collectively, their prices have risen by more than 75 per cent since bottoming out in March, 2020. “Copper is the new oil,” Goldman Sachs analysts declared in recent report. On Tuesday, the price of copper on the London Metal Exchange hit US$9,965 a tonne, and is close to surpassing the record high set in 2011.
The dominant force behind the bull market in copper and other base metals over the past year has been Chinese demand.
Now, with China’s post-pandemic economic rebound set to cool off, some analysts believe growth in the rest of the world is well on the way to picking up the slack.
Explosive demand combined with persistent supply constraints lingering from widespread shutdowns, means metals are seeing the most bullish set-up in years, said David Burrows, president and chief investment strategist at Barometer Capital Management.
“Base metals have all broken out of long-term downtrends they started in 2009,” Mr. Burrows said. “I think we’ve entered a new bull market in commodities.”
Last year, as the first wave of COVID-19 infections tore through the developed world, Chinese demand prevented global resource prices from utter collapse.
China’s factories sprang back to life in relative short order, filling the void as the rest of the world faced life under lockdown.
In 2020, for example, demand for copper globally fell by a modest 0.7 per cent. That number, however, masks an enormous drop in copper consumption of 6.4 per cent outside of China, which was nearly offset by Chinese demand growth of 4.8 per cent, according to a Bank of Nova Scotia report.
China’s appetite for resources has yet to wane. In the first quarter, China’s consumption growth rates of copper, steel, aluminum and zinc rose by between 24 per cent and 30 per cent year over year, after factoring in changes in inventories.
“Undoubtedly, China’s call on refined metals markets has been strong,” Colin Hamilton, managing director of commodities research at BMO Capital Markets, said in a note.
“When combined with the competition for units emerging from the rest of the world, this demand [change] in such a short space of time has strained supply chains and resulted in the commodity price levels we are currently witnessing.”
First in and first out of the pandemic, China was the only major economy to post positive growth in 2020. In the first quarter of this year, China’s gross domestic product expanded by 18.3 per cent compared with the same quarter last year, when the effort to contain the outbreak was in full force.
On a sequential basis, however, the Chinese economy grew by just 0.6 per cent over the final quarter of last year, suggesting the country’s growth spurt is actually tapering off.
Considering China consumes roughly half of the world’s copper, a slowdown could materially soften demand for the metal.
“The much-discussed copper super cycle does not have as much China support as perceived,” UBS analysts said in a note. “As the country’s economic recovery continues, the government is tightening construction stimulus which historically has proven net negative for materials.”
Commodity bulls point to two key catalysts that could support prices in the years ahead. The first is the global economic expansion taking place beyond China, even as key parts of the world struggle with the rampant spread of COVID-19.
U.S. manufacturing indicators, for example, point to the highest level of factory activity in 40 or 50 years. Incredible volumes of fiscal and monetary stimulus, including U.S. President Joe Biden’s US$2-trillion infrastructure proposal, provide a powerful backstop to commodity markets.
Additionally, the pandemic has left the mining space with capacity constraints that could take years to correct. A recent estimate suggested that 60 per cent of current investment by major global copper producers is aimed at maintaining existing projects, rather than expanding production, Mr. Burrows said.
Other encouraging signs for copper prices include growing inflationary pressures, a rotation into cyclical and value stocks, emerging market outperformance, a downward trend in the U.S. dollar, and an upward trend in bond yields – all of which are associated with commodity strength, Mr. Burrows said.
“All the pieces kind of fit together.”
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