With commodity prices growing at their fastest weekly rate since the 1970s, following oil and gas in an upward trajectory, investors are asking when a ceiling might be hit for precious metals and coal.
UBS Group AG (NYSE:UBS) believes that while supply shocks will likely keep prices of metals and coal elevated over the next few months, inflationary pressures in Europe, price-induced demand destruction and increased Chinese exports meant they were not sustainable in the long term.
The broker said that China’s internal struggles meant it was likely keen to ship out more metals this year, after lower supply linked to Covid last year decelerating price rises.
“With the property market still weak, Covid impacting domestic consumption and export demand likely to be impacted; in our view metals supply growth exceeding demand growth in 2Q21 will result in increased exports/lower imports,” the broker said.
“In our view this will be a key offset to European/Russian supply disruption.”
But in the short run, inflation has yet to eat into Western demand for commodities, while supply remains squeezed.
This includes low inventory position for copper, lower European smelting outputs and trade flow disruptions affecting aluminium and zinc, and reduced Russian shipments and strong bettery supply chain demand lifting nickel.
“With very cheap spot valuations and large cash returns, in our view the miners remain well positioned.
“Whilst we are cognisant that LME metals & coal prices are already at very elevated levels and high volatility/sharp corrections are likely, we believe the near-term risk vs reward for industrial commodity prices remains attractive.”
UBS said the two big catalysts for prices include the continued flow of gas to Europe and China continuing to supply commodities to Russia, while in the short run the broker expects the continued Western commercial exodus from Russia, logistical disruptions and panic buying push up prices.