Metal price correction puts pay to supercycle as Covid-19 demand impulse weakens

MINERAL price behaviour of the past two months indicated the commodity markets were beginning to cool and putting a damper on hopes of a metals supercycle.

UBS said earlier this month in an update to a note in June that it did not believe the market was at the start of a supercycle. While the demand outlook was “solid”, fundamentals were not strong enough to support prices at elevated levels, the bank added.

A slowdown in property sales in China triggered by the Evergrande’s financial problems combined with power shortages and power rationing in China had punctured metals demand. The post-Covid-19 demand impulse was also petering out, said UBS.

While mining companies were in “a better place” to withstand a correction in the market owing to more disciplined spending which had strengthened balance sheets, the outlook for minerals such as iron ore was not as favourable.

In the longer term, UBS backed thermal coal prices to perform along with nickel and lithium owing to the expected growth in electric vehicle production, but aluminium prices were not expected to maintain levels of mid-year.

Commenting on the diamond market, Morgan Stanley said recent data out of India demonstrated a decline in rough diamond imports and exports – the latter were indicative of how diamond company sales would perform.

Retail demand signals were more mixed, however.

Recent Mastercard spending data suggests demand was strong, but Google Trends with searches for diamond jewellery tracking just above the five-year range, while searches for diamonds are still within the five year range.

“Polished diamond index pricing has finally stopped rising, and has actually started to reverse slightly after a strong performance year to date,” said Morgan Stanley analysts in a note published on October 4.

The bank also believed that inventory levels were rising in the mid-stream, the price sensitive cutters and polishers industry. “While the market does indeed look to be in a good place, with demand strong, and inventories low, in our view the current valuation leaves little margin of safety for investors,” said Morgan Stanley.

Weaker iron ore and diamond prices, as well as a correction in platinum group metals will have a negative impact on Anglo American shares as “the earnings upgrade cycle has run its course”, the bank said. This was despite Anglo’s “robust operating momentum, strong ESG credentials and a compelling portfolio mix”.