People who fail to learn the lessons of the past, so we are told, are condemned to repeat their mistakes.
Liberum Capital Markets certainly seems to believe in the merit of the aphorism as it has revisited how commodity markets performed when Covid-19 was first recognised as a growth risk back in February 2020 in an effort to prepare for whatever the Omicron variation might have to throw at us.
Liberum recalled that energy plays, because of their reliance on the automobile and aviation sectors, came under the cosh last year while platinum group metals (PGMs) also suffered as they too are hooked up to the car sector.
“Within eight weeks, all major commodity markets had already reported their respective price-lows of 2020,” Liberum noted.
The broker thinks oil is the most vulnerable commodity to a major correction. On the day the news broke about the new coronavirus variant, oil prices plunged 12-13% in a single day.
PGMs and base metals look the next most vulnerable in the broker’s eyes with the prices of these industrial metals pulling back 0.5-3.0% last Friday.
“However, 2020’s price history shows that PGMs are more exposed to lockdown than the base metals. Decline in auto-demand/-production prompted a PGM inventory draw + reduced OEM [original equipment manufacturer] buying; conversely, base metals demand weakness was quickly mitigated by China’s property-/infra- sector support (offset auto weakness), supported in 3Q20 by recovering RoW [rest of the world] metal demand,” Liberum said.
As for coal, Liberum said it is difficult to identify Friday’s primary price driver in the two coal markets. It could have been industry-specific or it could have been virus-related.
Both markets remain under pressure from China clamping down on activity in non-heating industries (steel, ferro-alloys, cement) – freeing up coal for power generation, Liberum noted.
“In 2020 though, lockdown hit these markets very hard (down 30-40%). It reflected the sustained decline of ex-China demand (power; steel) in North Asia and Europe. Also, China is largely self-sufficient for both coals, making it a bearish arbitrageur of their seaborne trades,” Liberum said, giving a name check in passing to Thungela Resources Limited, which it rates as a ‘buy’.
Gold bugs, meanwhile, can probably relax. The yellow metal actually went up on Friday while screens turned red elsewhere. As ever, the popular strategy in times of uncertainty is to buy gold.
In this sector, Liberum likes Shanta Gold Ltd.
Other defensive options exist, however, and Liberum suggested Ferrexpo PLC (LSE:FXPO), the iron pellets producer.