Orange juice to rhodium: A surge all round


Commodities – ranging from agricultural products to precious metals – are burgeoning as supply constraints worry investors and buyers.

Few commodities have performed better than orange juice so far this year. Traded in New York in a frozen concentrated form, it was much sought out during the early months of the Covid-19 pandemic when consciousness regarding health was especially high. Prices ended up more than a fifth higher by the end of June.

It can’t all be health, however. Arabica, a high-grade coffee bean, also experienced significantly improved pricing after initially retreating when investors first worried about its consumption in cafe´s amid lockdowns. Prices then surged as concern shifted towards securing coffee in the face of rising logistical risks, another factor brought to bear by the Covid-19 pandemic.

Luckily, these are not the only commodities that have enjoyed price support since the pandemic. In fact, analysts think the earnings of mining companies producing rival commodities such as platinum group metals (PGMs) and iron ore might not end up as liquidised as first feared when the Covid-19 virus initially swept across the globe.

Macquarie, the Australian bank, said in a recent report that the last six months have seen one of the world’s fastest-ever “busts” replaced “... by one of the quickest recoveries”. Global GDP growth is likely to increase by about 7% in the second half of the calendar year, after falling 8% in the first half, although the recovery may slow in the fourth quarter as occasional lockdowns are implemented by governments.

“In retrospect, we were perhaps too bearish,” the bank said. “The correction or recovery transition of the industrials was more fleeting than we expected, mostly contained within 1H20 [first half of the 2020 calendar year],” it said.

BMO Capital Markets, a Canadian bank, has also been reappraising earlier forecasts. It upgraded by 11% its earnings predictions for industrial mineral producers – iron ore and metallurgical coal – in its coverage universe.

Another bank, Goldman Sachs, thinks while outright bargains for some oversold mining shares are now gone, valuations are nonetheless still in buy territory assuming “normalised” market conditions.

The upshot is that allowing for some outliers, such as orange juice, commodities in general are in a decent place. Both uranium and rhodium had outperformed orange juice; in fact, rhodium was more than 30% stronger in price and off an already elevated base. So, it’s with some anticipation that investors look towards Anglo American Platinum (Amplats), which kicks off reporting season for SA’s mining stocks on 27 July when it posts its interim results (also see p.42).

The expectation is that the first half of Amplats’ financial year has been carved out by well-known, once-off events: Refined production was interrupted by processing capacity breakdowns, and mining reduced to 50% for five weeks during the hard lockdown. The narrative is likely to settle strongly into one of second-half recovery, the shoots of which were underway as early as May.

According to Stats SA, PGM production was 148% higher in May than in April. “As has been the case with many other commodities, Chinese imports of PGMs have remained robust year-to-date,” said RMB Morgan Stanley. “Over and above this we believe the market has begun to price in the post- lockdown ramp-up in production,” it said.

SA’s PGM production is expected to operate at 90% for the second half of the year, a level that supports continued strong free cash flow generation since the rand-denominated basket price is 60% above cost curve support.
RMB Morgan Stanley.

This spells good news for Anglo American, which owns 80% of Amplats as well as 70% of Kumba Iron Ore – the latter posts its numbers a day after Amplats on 28 July. Anglo American reports its interim results on 30 July.

Commenting in an interview with finweek in June, Anglo American CEO, Mark Cutifani, said the pulse of recovery in commodities might be followed by another contraction, a so-called W-shaped recovery to contrast with the V-shape that currently seems to be the consensus.

“We shouldn’t underestimate how crazy people will be coming out of the lockdowns,” he said of the current recovery in global consumer demand. This is a function of governments having “inappropriately terrified” people with the threat of the virus, although Cutifani hastens to add that the SA government has managed to “land” the crisis pretty well.

Over the course of the next two years, however, he’s sanguine about commodity market prospects, especially in iron ore.

“Prices are pretty good with all thethings that are happening in iron ore at the moment, the Brazilian challenges,” he said in connection with supply reductions as Vale, the national iron ore producer, is having to deal with the consequences of iron ore tailings dam bursts that killed hundreds of people in 2017 and 2018.

Cutifani also thinks the accidental blasting of protected first nation caves in Australia by Rio Tinto, which was expanding its iron ore operations, will be another factor limiting new production. “The potential disruptions in iron ore are probably more significant than people appreciate,” he said. “Copper is tight given the challenges, so overall the prognosis for mining, we think, is fairly solid.”

The view at Macquarie is that the commodity markets will continue to be heavily influenced by some of the tensions that pre-existed Covid-19, such as the trade war between the US and China.

“China-related trade conflict is proving to be an enduring theme in commodities,” the bank said. “Since it consumes 40% to 70% of most commodity trades, investors now seek strategies to manage exposure to such conflict,” it added. Investors therefore avoid minerals where China has self-sufficiency, such as aluminium and coal, and prefer minerals where imports are required, such as iron ore and copper.

Stimulus efforts aimed at speeding up broad economic recovery by central banks are also likely to support commodities in the short term while supply shocks and the inability, for whatever reason, of the mining market to meet growing demand is also expected to support commodity pricing.

Read more
This article originally appeared in the 30 July edition of finweek. To read the full story, you can buy and download the magazine here.

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