Benedikt Sobotka, CEO of Eurasian Resources Group, explains ERG’s outlook on global commodity markets
Commodities and resource equities rallied in the past six months, confirming that there was a major cycle bottom in 2016. However, it is clear that the markets are being influenced not only by commodity-specific factors but also by political and macroeconomic events. As some geopolitical risks became more apparent, we believe that markets are now more realistically priced after the excess optimism was removed. From a market fundamentals perspective, May is traditionally a weak month for commodity price performance. We are not seeing a downward trend now; however, we expect that a short-term correction is still possible, before a fresh ‘leg-up’ targeting key resistance levels and recent highs.
In terms of individual markets, we are particularly optimistic about copper and aluminium, and we see a bright future ahead for cobalt. We believe that steel and iron ore markets are going through a necessary correction phase so that they better reflect the true state of their supply-demand balances.
Improving fundamentals presage a very positive outlook for copper. Chinese and global growth has picked-up markedly in 2017, boosting demand for the metal, whilst copper supply has been held back by an absence of new projects and prolonged strikes. These factors have tightened market balances and led to rising prices. We believe that there will be renewed large supply shortfalls and significantly higher copper prices in consequence by the end of this decade. Discovery costs have increased dramatically over the past ten years, and the number of Tier 1-2 discoveries has fallen. Furthermore, existing mine production is shrinking as ore grades continue to decline. Looking towards the second half of this year, acrimonious labour contract negotiations, resulting in substantial production losses, may be on the cards as up to 1.5Mt of copper production is under risk from potential disruptions.
Meanwhile, Chinese environmental policy is fuelling a strong growth story for aluminium. We believe that the Chinese government’s efforts to tackle pollution have helped explain why aluminium has outperformed other base metals in 2017 and we are confident that the rally will be sustained into Q1 2018. It appears that Chinese authorities are serious about controlling polluting and illegal aluminium capacities. Naturally, it remains to be seen exactly how the new regulations will be implemented and what effect they will have on domestic and global supply. However, we estimate that 4-5Mtpa capacity might be at risk of closure or delay, and therefore anticipate a significant price rally that potentially breaches the USD2,000/t level later in the year.
Iron ore prices have settled into what we believe is a more fundamentally justified trading range of USD60-70/t. It is difficult to gauge the future trajectory of this metal, especially given that the market has been notoriously unpredictable over the past twelve months and perplexed many analysts. We think that the outlook will remain challenging over the next few years. However, there is still a chance that China may throw out another lifeline for steel and iron ore, and this would transform the market dynamics.
Finally, cobalt is regaining its ‘mojo’ after years of underperformance. The benchmark low grade price is up an impressive 70% YTD. This metal has captured the world’s attention because of the tremendous potential for increased cobalt consumption following from the rapid growth in demand for electric vehicles (EV) and battery storage. The EV market is expected to change the face of the global auto industry, with forecasts suggesting 15 million new unit sales per annum by 2022.