The Commodity Guru is back again

China wants to release state reserves
China not only influences commodity markets because of the enormous economic growth of the last decades and the associated demand for raw materials, but, as a heavy weight, it is also trying to pursue a raw material price policy beyond market processes. At one time, it would only take a cough from Alan Greenspan, long-time president of the US Fed, to move the US dollar rate. Today, the Chinese government wants to do the same as far as raw material prices, important for the future development of its economy, are concerned. Commodity price increases can not only cause inflation, but can also put the brakes on planned growth.

For this reason, the Chinese government had announced it would monitor the markets closely and, if necessary, regulate prices should the situation not calm down. In this connection, the Chinese National Food and Strategic Reserves Administration recently announced that it is planning to release strategic stock reserves, including copper, aluminium and zinc, in a bidding process with domestic non-ferrous producers and processors.

Already in the past, China was always opportunistic in the raw materials sector, when it was about supplying the country with raw materials. Whether through protectionism and corresponding trade restrictions in order to keep raw materials in the country, whether through global networks, investments, and dependencies which should secure important raw materials, for example in African countries, but also nickel ores and nickel pig iron in Indonesia. But who would think otherwise for a country with a population of 1.4 billion people?

And communist China has never claimed to be a democracy and liberal market economy or indeed an advocate of free trade (except where its own exports are concerned). “China First” is therefore a fact. And so, with a world market share of 50% and more in the consumption of nearly all raw materials, it is not surprising that after the announcements there was not only an end to the higher volatility, but also most of the base metals, including copper, aluminium and nickel, were a little more moderate.

Brakes put on the highs
The rise in prices was stopped for the time being, and to put it clearly, this is also healthy. Even though, it is only logical that commodity prices rose as a consequence of balancing supply and demand, following quite classical economic teaching. However, the speed and extent of the increases in some non-exchange traded commodities was more a reminder of the concerted action of Reddit traders with GameStop shares. And analogously, it should be warned that for various reasons (compensation through postponed demand, parallel recovery, logistic restrictions etc.) many commodity markets are currently in a bottleneck situation where supply is stuttering.

This does also apply to steel and stainless steel scrap, where the consistently high demand meets just an insufficient availability. Significant amounts can only be secured through high prices, which currently still lack the equivalent on the consumer side. And there can be no doubt about the actual return of the sellers’ markets, even if buyers are eager to display their doubts. Some poets would like to talk here of the father of wishful thinking. But this is certainly no reason to get carried away, for the situation, especially with the primary commodities, will normalise once again. Then someone will come along and hit the bottom of the ketchup bottle and from one day to the next prices will plummet again. The bubble will deflate.

Demand for raw materials is subject to longer-term changes
However, this should not hide the fact that there are indeed certain signs for a longer-term commodity cycle. Some, such as Goldman Sachs, are even talking of a new super cycle, but there is perhaps no need to go this far. The global energy transition ensures, not only against a background of climate change, a considerable additional demand for base metals and other raw materials for the technical equipment and necessary infrastructure investments. This technology leap will ensure, in the longer-term and on average, a solid support and an upwards trend in commodity prices.

Daily price peaks are, of course, not suitable as proof, and will also in the future accompany the price development, which will also continue to include price corrections. This is because prices, especially of exchange traded commodities, are still also influenced in the shorter term by other factors, some of which are even independent of commodity markets. Nickel is currently trading on the London Metal Exchange (LME) stably on a higher level, recently however, probably in view of the Chinese announcements, a little lighter with prices around USD 17,500.00/mt, and so in line with copper which is also trading lighter, and not as obvious for aluminium.

When prices rise, Jim Rogers is not far away
With regard to a possible new super cycle, Goldman Sachs expects commodity prices to rise consistently, certainly in the short term and also over time afterwards. Such a forecast was made already at the end of April and if the development of oil and gas and also precious and industrial metal prices is looked at, this expectation does not really seem quite so unreasonable. For the alloy metal nickel, in focus here, the investment bank expects for 2021 an average price of USD 19,437.50/mt and for 2022 even a little higher still with a round figure of USD 20,000.00/mt. Prices are, therefore, well supported and heading upwards, but will not completely touch the sky.

When there is talk of a super cycle one person cannot be missing, and that is Jim Rogers, in the meantime almost 80 years old. This augur from the last commodity boom, as well as being the ex-partner of George Soros, is back on stage and proclaims that commodities are at present the world’s cheapest asset class. In so doing, he does indirectly pave the way for investors to become involved. Already in 1998, Rogers had created the Rogers International Commodity Index and established its own commodity fund which had performed very well in the 2000s.

With the 2007/2008 cooling of the boom, Jim Rogers was not heard of much anymore, but now, since there are renewed signs of a growth, he is back again. There is life in the old dog yet, and at the moment the data is proving the commodity guru right. And yet, it is basically tragic, when representatives of a certain asset class are almost inextricably linked to a certain price trend. The natural cyclical nature of markets means that these are only called on in certain “appropriate” phases, however such calls are not really heard at all times.

Similarly, this also applies to the financial mathematician Nassim Nicholas Taleb, the originator of the black swan theory. As a consequence, it was impossible for him to make any positive forecasts because the public just did not believe them anymore. He was virtually the specialist for negative developments. Then better to be Jim Rogers, whereby it should be now clear, however, that Jim Rogers is there because commodity prices are going up, and not the other way around, i.e. that commodity prices are rising because Jim Rogers is there.

LME opens its floor trading again and yet open trade is dying a slow death
At the beginning of the month, the LME announced that from the 6th September it would resume trading in the open ring. As repeatedly reported here, LME floor trading is the last of its type, where traders call out prices and quantities to one another in a ring consisting of red sofas. The reopening of the ring is indeed a concession of the LME. But then the LME CEO, Matthew Chamberlain, indicated that the LME in the medium term has to listen to what the market really wants, whereby he obviously implied, that the future belongs to electronic trading and the ring is a relic of the past.

Ever since electronic trading began on the LME in the early 2000s, the future sustainability of the ring was put in question. Since stock exchange trading on a global scale is now largely carried out electronically, the iconic trading rooms now only play a subordinate part. Exchange jargon and hand gestures are only seen today in the old films. Critics even go as far as saying that the floor of the New York Stock Exchange is now only a Hollywood film set. The actual pricing takes place in the computer centre of the NYSE in New Jersey. The New York Mercantile Exchange stopped analogue trading years ago, while the Chicago Mercantile Exchange Group recently announced that trading in person for agricultural financial products would not be resumed.

LME CEO Matthew Chamberlain replies on discussion paper about market structure
The March issue reported on a discussion paper of the LME which has been met with broad resistance in the market. Amongst other things, it was about a change to the calculation method for clearing, which would have led to the LME losing its charm for the real economy. The LME CEO asked the market for its opinion. None too few experts took the opportunity of make their views known.

A few days ago the CEO thanked all participants per email for the feedback, and made an official statement on the next course of action: The LME reverses course and will not be changing the clearing system. But the LME would still like to carry out a study on whether it would be possible to offer customers a choice between different calculation methods for clearing. As already mentioned above, ring trading is to be resumed. The CEO has, however, written that the daily closing prices will continue to be determined electronically, as it has been since the closure due of Covid-19 in March 2020. In the times before corona the daily closing prices were determined in the ring. Just the reference price, much preferred by industry, will once again continue to be set in the ring.

Overall, it has been seen that the LME, in its push towards electronic trading and the new method of margins, is on a progressive path. However, most market participants apparently prefer a path which is not as much investor orientated. By resuming floor trading and retaining the old margin method, the LME is making concessions to the market. It does also show that in the long term the last word has not been spoken about this.

The United States would like to form strategic alliances for battery raw materials
The United States would like to team up with partners to secure the raw materials which are important for battery production for electric vehicles. In order for this strategy to be implemented, President Joe Biden’s administration plans to provide funding for international projects to forge ahead in mining metal deposits. At the same time, supply of metal should be increased by recycling old batteries. In addition, a working group set up by the American government is examining whether metals used in electric vehicle batteries and other technologies of the future, can be mined and processed within the United States.

At the moment, the American government sees a dependency on China for these raw materials. The goal is not to have complete autonomy away from China, the world’s largest producer of these scarce raw materials. But the American government would like to reduce its dependency on China.

This raw material strategy is also connected to the ambitious climate goals of the USA, that by 2030 most of cars produced in the USA are electric and by 2040 every car on the road is battery powered.

Study confirms important future for nickel in further development of batteries
In a study, recently published in the “Mining Review Africa”, nickel is named as the main beneficiary since electric vehicles have been introduced. The study was carried out by Fitch Solutions, a unit of the well-known rating agency Fitch, and addresses the opportunities and risks for nickel in battery development, and also the role of Africa in mining for nickel in the future.

Africa still has nickel deposits which have so far remained untouched. Since nickel prices will tend to rise over the coming years due to a supply deficit, Africa could profit from this price trend. African nickel production will presumably rise in the coming years. South Africa and Tanzania will participate in most in this.

Nickel, compared to other metals, stands out as it has a higher energy density, the use of which has a clear advantage in terms of the range and charging capacity of electric vehicles. The experts from Fitch Solutions, therefore, summarise that the proportion of nickel will continue to increase, whilst the amount of cobalt will correspondingly decrease.