Commodities set for a long-term bull cycle in the 2020s
As we enter what could be the roaring 2020s, many commodities have been soaring in value in recent months. Silver has even reached an eight-year high as it became the next target of the Reddit Wallstreetbets retail investor community.
In general investors are turning bullish on a range of metals because of rising optimism over a recovery in the global economy thanks to the rollout of coronavirus vaccines, as well as long-term structural growth drivers such as the rise of electric vehicles and renewable energy.
Rising inflation expectations are also important as miners should be able to charge more for their products.
The likes of copper and iron ore have soared in recent months as markets become more upbeat on prospects for the global economy, and this has helped bump up the share prices of FTSE 100 stalwarts like Anglo American (AAL), BHP (BHP), Glencore (GLEN) and Rio Tinto (RIO).
In this article we look at some of the main commodities driving investor interest and highlight two stocks to play rising commodity prices.
Investing in commodities via tracker funds
There are various tracker funds which track the gold price including Amundi Physical Gold ETF (GLDA). Such funds are designed to mirror the performance of the asset being tracked, so in theory a 2% rise in the gold price
should see a gold ETF rise by the same amount.
The selection of ETFs is more limited for silver and copper, but some relevant names include iShares Physical Silver ETC (SSLN) and Wisdom Tree Copper ETF (COPA). We are not aware of an iron ore ETF available to UK investors.
COPPER BRIGHT SPOT
We’ll start with copper and iron ore. These two metals are keenly watched by investors as they are considered economic bellwethers.
Copper prices have risen on the back of expectations for an economic recovery and the metal is trading at $7,852 per tonne, up 80% compared to its lows in the first half of 2020 when demand tanked on lower industrial activity.
Canaccord analyst Sam Catalano expects the continuation of Chinese
stimulus to support copper demand, working in conjunction with the economic recovery underway in the rest of the world throughout 2021.
He says: ‘Upside risks include further deterioration in the US dollar, or further disruption of supply in key producing countries — Chile and Peru have elections and labour force negotiations upcoming.’
IRON ORE PULLING BACK
Iron ore prices have started to come back to earth somewhat at around $165 per tonne, but this is still 65% higher than the price a year ago.
Anglo American, BHP and Rio Tinto are some of the big iron ore producers. Analysts at Morgan Stanley believe that if iron ore prices stay elevated throughout this year, it could underpin 45% to 70% consensus earnings upgrades among such miners.
They say any combination of higher steel production growth in China (the world’s largest consumer of iron ore), better than expected ex-China demand recovery and supply disruptions could push the iron ore market into a deeper deficit and prices even higher, potentially reaching $200 per tonne.
The analysts highlight Rio Tinto as a key player, with 76% of its earnings coming from iron ore, alongside Brazilian miner Vale which is the world’s largest iron ore producer. ‘A hypothetical increase in our long-term price forecast from $64 per tonne (base case) to $110 per tonne (bull case) could yield a disproportionate 60% to 200% upside to share prices,’ the analysts say.
THE GOOD ALL-ROUNDER TO OWN
If commodities are in for a long-term bull cycle, what better way to play this situation than through a diversified miner? BHP is one of our top stocks to own in the commodity sector.
BHP benefits from having low cost assets which means it can still generate cash even in tougher economic conditions.
The miner has worked hard on improving its ESG credentials, writing down its coal assets and reducing its scope 3 emissions, while it has set a target to be carbon neutral by 2050.
Its products are relevant to investments around the world in infrastructure and renewable energy.
For example, in 2020, BHP said over the previous year it had produced 280 million tonnes of iron ore, enough to create the steel for 875,000 wind turbines. It produced around 1.7 million tonnes of copper which could be used to build around 600,000 megawatts of PV solar capacity.
BHP also produced around 80,000 tonnes of nickel which would make enough lithium-ion battery packs to power around 2.5 million electric vehicles.
GOLD AND SILVER
Along with iron ore and copper, two metals which often receive attention in commodity markets are gold and silver.
Analysts at Berenberg forecast an average price of $1,850 per ounce for gold and $23.50 per ounce for silver in 2021.
At the time of writing, gold traded at $1,862 and silver at $29.70. Put another way, gold currently trades at 63 times the silver price, against the long-run average of 58 times, so on paper silver is the cheaper of the precious metals, even after its recent rally.
Berenberg says precious metals should be supported by lower interest rates globally, with potential to go higher if central banks are ‘obliged to engage in further exceptional monetary policy measures or if material second-order economic impacts from the pandemic emerge’, like what happened after the global financial crisis in 2008 and 2009.
Under an bullish scenario, they expect the gold price to move back above $2,000 an ounce and ‘potentially materially higher’.
BUY THIS GOLD AND COPPER STOCK
Investors wanting an under the radar way to play rising copper and gold prices should look at AIM-quoted Anglo Asian Mining (AAZ:AIM).
Unlike a lot of other small mining companies, Anglo Asian
is an established metals producer and had such a bumper year in 2020 it recently announced plans to pay a special dividend of $0.015.
The firm, which has mines in Azerbaijan, reported record annual revenues for 2020 in excess of $100 million, driven by higher metal prices in the year. This helped the company go debt-free with cash increasing to $38.8 million at the end of December.
This has also given the miner added impetus to pursue growth opportunities and it said it will continue exploration of five priority discoveries at its Gedabek project with the aim to fast-track them into production.
HIGH EXPECTATIONS FOR METAL PRICES
Eldur Olafsson, chief executive at gold explorer AEX Gold (AEXG:AIM), believes the market is in a ‘bullish cycle for commodities’ generally at the moment, and adds lower overall supply of gold in the past year, combined with higher demand from the likes of central banks, could also underpin gold prices.
He says: ‘The supply/demand issue and the money printing we are seeing at the moment are working hand in hand, and I think we will see a price floor at around $1,800. Historically there are price swings within that range, but I think we are in a bull cycle for gold for at least the next five to 10 years.’
Nitesh Shah, a research director at WisdomTree, believes silver could outpace gold and reach $34 an ounce by the fourth quarter of 2021.
Silver jumped by 19% between 28 January and 1 February as retail investors using the Wallstreetbets forum on social media platform Reddit rallied together to push up the price. This resulted in a big rally for many silver miners including Fresnillo (FRES).
While it is feasible that this rally is short lived, Shah at WisdomTree says industrial demand for silver is expected to recover this year, supporting the value of the metal.
‘Although silver faces some headwinds from potential supply increases as mining production recovers post-Covid, its correlation to gold should act as strong tailwind,’ he says.
‘Moreover, its hybrid status will allow it to benefit from a cyclical upswing, as we pass the “bumps in the road” in combating the Covid-19 pandemic. Silver outperformed gold in 2020 and its historic high gold beta may continue to see it outperform gold when the price of the metal is rising.’