At the peak of the COVID-19 onset around March and April last year, when global markets plummeted, many experts predicted commodity prices would fall.
And while some made correct early forecasts about an end to the downturn, few could have foreseen the dramatic gains many metal commodities have made in the past 15 or so months.
21 of the 22 industrial commodities tracked by Trading Economics have experienced growth in 2021 thus far; coal, lithium, cobalt, tin, molybdenum and soda ash have all seen value inflations in excess of 50%.
Further to this, energy commodities have also seen increases across the board; propane has increased nearly 70% in 2021, followed closely by gasoline (61%), natural gas (56%) and ethanol (55%).
The precious metals, however, have stagnated, with falls of around 4%, 3% and 1% for gold, silver and platinum, respectively.
Precious metal value remains strong
But, as Shaw and Partners WA state manager and director of corporate finance Davide Bosio explained to Proactive Investors, this is not necessarily a sign to jump in on industrial metals and leave the precious ones behind.
“We have seen strong moves in commodities that reflect global markets,” Bosio said.
“We experienced the initial pandemic sell-down and then we saw the markets open up again. But we’re not through the ‘pandemic effect’ yet.
“There has been huge demand for steel, particularly from China and iron ore prices are being driven by that demand, as well as supply disruption in South America.
“We have seen some phenomenal runs for things like iron ore this year, whereas when it comes to precious metals, I’m left scratching my head — all the gold bulls are still waiting for the inevitable yet elusive gold rally.
“But despite that gold has still been quite a good and safe performer; and we think there is plenty of strength in gold, particularly as stimulus continues around the world and real interest rates continue to fall.”
As markets closed on Tuesday, the gold price was sitting at US$1,811 an ounce up ever so slightly from one month ago, while both silver (US$25.41/ounce) and platinum (US$1,052/ounce) have fallen about 4% in the past month.
Impact of Basel III regulations on gold
Bosio said gold is also likely to be impacted by the new Basel III regulations, which are designed to mitigate risk within the international banking sector by requiring banks to maintain proper leverage ratios and keep certain levels of reserve capital on hand.
They will also mean that for those interested in investing in metals, their investment must be backed by a physical commodity, such as a gold bar, backing the instrument.
“For example, if you’re buying an ETF it needs to be backed by gold, not just a contract,” Bosio said.
“We’re still trying to understand what this means for the gold market. What I can tell gold investors out there is it potentially means the unwinding of certain derivatives and instruments and banks will be buying physical gold.
He also said investors should make informed decisions, as it is easy for people with vested interests to put a positive or negative spin on how the new regulations will impact precious metals.
“We will see how it plays out in the second half of this year,” he said.
Steel, iron ore, base metal demand through the roof
Whilst precious metal prices have stagnated in 2021, the opposite is true for steel and iron ore, base metals and battery metals, which are all in vogue as demand skyrockets.
Steel and iron ore prices have risen 27% and 20% respectively this year, on the back of astronomical demand from China, which imported $14.8 billion in iron ore from Australia in June alone, up $1.1 billion on May.
Australia is responsible for shipping more than half of the world’s iron ore, and supplies have been predicted to fluctuate in the coming months, which could put further upward pressure on prices as South America countries like Brazil continue to battle supply issues.
“We are so reliant on these metals and China is trying hard to displace their sourcing of iron ore from the Pilbara,” Bosio says.
“It is pouring billions into Africa to control the supply chain of what is such an important raw material.
“We have governments around the world spending more than ever before on stimulus and infrastructure, ultimately stimulating our consumption, which is going to continue to ratchet up demand.
Meanwhile, demand for base metals and battery metals is being driven by the global transition towards greener and cleaner technologies, causing supply crunches and sending demand and prices skyward.
Lithium has gained 91% this year, sitting at ¥89,000 per tonne, while cobalt has gained 63% to US$52,500 a tonne. Other popular, in-demand metals such as copper and nickel have seen significant gains in 2021.
Higher prices aren’t always good for investors
But, Bosio said, higher prices do not automatically equal investor wealth, particularly when supply is challenging.
“World-class deposits are few and far between,” he said. “Miners are spending more money than ever looking for these big Tier 1 deposits, and there are more miners than ever competing in this space.
“The EV theme is underpinning the markets for metals like nickel, copper, cobalt and lithium and the future looks very bright, with a number of major projects around the world maturing.
“But there is more money swirling around than ever trying to find the next big project, more IPOs, more exploration and it is becoming harder and harder to find the next big deposit.”
Making sense of the metals market
So how does a would-be metals investor make sense of all of this? It sounds cliché, but Bosio says to do your research and look at the key fundamentals.
“Equity markets are strong at the moment, so a lot of capital is being raised; while the volume is so high, lower quality projects are able to come to market,” he says.
“But not everything is going to be the best mine, so it’s important for investors to understand that a lot of products are being marketed and promoted.
“Look at the key fundamentals. How mature are the assets? Are they in a sector that has strong market appeal and are perceived as growth sectors? Who are the management teams behind these companies and what is their track record?
“There are a lot of explorers and a lot of money going into the ground, and that’s what makes the markets exciting, just be aware that the amount of exploration projects that turn into producing mines is very low, so back good management teams with strong track records.”
Aussie, Aussie, Aussie
The good news for Aussie investors is that Australia’s resources sector remains perhaps the world’s most highly-renowned mining jurisdiction, making Australian projects promising bets.
“We are considered excellent miners,” Bosio said. “We have an array of Tier 1 projects in a very mining-friendly country.
“We have a strong track record of being able to turn discoveries into operating mines; some countries are able to make discoveries but aren’t able to get the mine off the ground.
“We still face challenges, finding world-class assets is increasingly difficult and increasingly more expensive, and the current environment with travel restrictions makes getting the materials out of the ground harder.
“But with our track record for political stability, world-class assets and support for the industry, we are, and will continue to be one of the most well-regarded miners in the world.”
- Daniel Paproth