So far so good for commodities which stage quickest ever recovery after fastest ever bust

Iron ore pellets

FEW commodities have performed better than orange juice so far this year.

Traded in New York in a frozen concentrated form, it was much sought out during the early months of the Covid-19 pandemic when consciousness regarding health was especially high. Prices ended up more than a fifth higher by the end of June.

Arabica, a high-grade coffee bean, also experienced significantly improved pricing after initially retreating when investors first worried about its consumption in cafés amid lockdowns. Prices then surged as concern shifted towards securing coffee in the face of rising logistical risks, another factor brought to bear by the Covid-19 pandemic.

Luckily, these are not the only commodities that have enjoyed price support since the World Health Organisation declared Covid-19 disease a pandemic on March 11. In fact, analysts think the earnings of mining companies making rival commodities such as platinum group metals (PGMs) and iron ore might not end up as liquidised as first feared when the Covid-19 virus first swept across the globe.

Australian bank, Macquarie, said in a recent report that the last six months has seen one of the world’s fastest ever ‘busts’ replaced “… by one of the quickest recoveries”. Global GDP growth is likely to increase by about 7% in the second half of the calendar year after falling 8% in the first half, although the recovery may slow in the fourth quarter as occasional lockdowns are implemented by governments.

“In retrospect, we were perhaps too bearish,” the bank said. “The correction/recovery transition of the industrials was more fleeting than we expected, mostly contained within 1H20 (first half of the 2020 calendar year),” it said.

BMO Capital Markets, a Canadian bank, has also been reappraising earlier forecasts. It upgraded by 11% its earnings predictions for industrial mineral producers – iron ore and metallurgical coal – in its coverage universe. Goldman Sachs, thinks whilst outright bargains for some oversold mining shares are now gone – valuations are nonetheless still in buy territory assuming “normalised” market conditions.

The upshot is that allowing for some outliers, such as orange juice, commodities in general are in a decent place. Both uranium and rhodium had outperformed orange juice; in fact, rhodium was more than 30% stronger in price and off an already elevated base.

South Africa’s PGM production is expected to operate at 90% for the second half of the year, a level that supports continued strong free cash flow generation since the rand-denominated basket price is 60% above cost curve support, said RMB Morgan Stanley.

This spells good news for Anglo American which owns 80% of Amplats as well as 70% of Kumba Iron Ore. Both companies posted solid interim numbers last week.

Anglo American CEO, Mark Cutifani, said last week the remainder of the year could be “bumpy” for the company, the pulse of recovery in commodities might be uneven. Over the longer term, however, he’s optimistic, especially in iron ore and even diamonds.

“Prices are pretty good with all the things that are happening in iron ore at the moment, the Brazilian challenges,” he said in connection with supply reductions as Vale, the national iron ore producer, having to deal with the consequences of iron ore tailings dam bursts that killed hundreds of people in 2017 and 2018.

Cutifani also thinks the accidental blasting of protected first nation caves in Australia by Rio Tinto, which was expanding its iron ore operations, will be another factor limiting new production. “The potential disruptions in iron ore are probably more significant than people appreciate,” he said. “Copper is tight given the challenges, so overall the prognosis for mining, we think, is fairly solid.”

The view among Macquarie is that the commodity markets will continue to be heavily influenced by some of the tensions that pre-existed Covid-19, such as the trade war between the US and China.

“China related trade conflict is proving to be an enduring theme in commodities,” the bank said. “Since it consumes 40% to 70% of most commodity trades, investors now seek strategies to manage exposure to such conflict,” it added. Investors therefore avoid minerals where China has self-sufficiency such as aluminium and coal, and prefer minerals where imports are required, such as iron ore and copper.

Stimulus efforts aimed at speeding up broad economic recovery by central banks is also likely to support commodities in the short-term whilst supply shocks, the inability for whatever reason, of the mining market to meet growing demand is also expected to support commodity pricing.

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