Power change and unrest in the USA. Democracy under attack. Stock markets unimpressed. The expansive central bank policy makes it possible. Not just a year end rally for nickel.

Goldman sees new commodity super cycle. Pork and Kondratieff cycle the force behind this. Greetings from the past. Recovery from Covid-19, green revolution and social focus generate commodity demand.

Scrap and NPI the “white knights” in the 2000s. Climate goals and green revolution not in contradiction to stainless steel scrap. Quite the opposite. China has almost a monopoly for NPI. WTO should sort this.

Trade war between Australia and China into the second round. Iron ore and coal exports fall. LME suggests the permanent closure of the Ring. Stainless steel production increases in the third quarter of 2020.

Nickel’s support continues on the LME
The start of the year was quite something. A sudden change in the global pandemic could not be expected a priori, but that the changeover of power in the USA from the old to the new President would bring such unrest, although feared by many observers, had not really been fully expected. Because corona has also been dominating much of the media, the normal person in the street had not been able to properly grasp the profound problems of the USA. The terrible and undignified images of the Capitol brought everything to light. The mother of all democracies seemed to be cutting up its very self. And still the danger has not gone away, since problems have been building up over decades and strengthened by Trump’s term of office, something which cannot be simply reversed overnight.

And it’s certain that these social and political risks do not just exist in the USA, but also in many other countries, including Germany, where the political and social culture, and the related discourse, as well as the purpose of democracy, political class and government, have not always developed in the correct direction. The enormous challenge of bringing societies together again can only be achieved through a massive joint effort by civic and democratic circles. And from the start there should be self-criticism of the so-called elites. For on this thought provoking evening of the 6h January 2021, the authoritarian rulers of this world will have opened their best cognac, or should we say, vodka, raki or soju, to treat themselves to a glass of self-destruction of the ideological class enemy. What times are these?!

Capital, stock and commodity markets remained almost shockingly untouched by events. This can only be due to the expansive monetary policy of central banks and a political distancing of most financial jugglers. Prices of nickel on the London Metal Exchange (LME) even initially rose on the 7.01.2021. Nickel prices, in general, have grown stronger again over the last few weeks and have recently become established at levels above USD 18,000.00/mt. This shows that the development in the fourth quarter of 2020 was not just a year end rally. Without doubt, however, a lot of expectations have been discounted in the prices, although these have yet to be confirmed in the course of the pandemic and throughout the year to avoid any setbacks.

Goldman sees new commodity super cycle
The New Year had hardly begun when, according to the news agency Reuters, the investment bank Goldman Sachs – still one of the very big Anglo-American players in commodity markets – announced the approach of a new commodity super cycle. And with reasonable certainty, not just for unselfish reasons. The double negation has to be noted here. A super cycle is understood to be a very long-term structural upwards trend, as has already been seen, for example, in the decade after the year 2000.

Economically, the reason for these cycles, in terms of content and time span, lies somewhere between the well-known and much described pork cycle and Kondratieff cycle with respect to the theory of long waves. In the case of the latter, paradigm shifts in connection to innovation induced investments ensure a corresponding stable and long-term economic upturn.

The last commodity super cycle was driven at the time by the exponential growth of China (then expanded with the BRICS countries to include Brazil, Russia and India) which was tied to a considerable hunger for commodities. Other examples were the industrialisation of the USA in the latter years of the 19th century or the rebuilding of Europe and Japan after the second World War. The needs of the ever growing industry and consumers’ eagerness for affluence had to be met.

The demand of almost explosive proportions could not be met by the existing and short-term inflexible commodity supply. So, as in the economic textbooks, prices were the market mechanism determining a balance between supply and demand. A considerable portion of speculation and an appetite for risk were mixed in with this. As an investment object commodities were hip and trendy.

And, therefore, the copper price rose from under USD 2,000/mt to a record high of almost USD 10,200/mt. Of course, not linear, always broken up by corrections, as, for example, during the financial and sovereign debt crisis, without, however, permanently reversing the long-term trend. But even the longest bull market has to have an end sometime, and so there followed a four year long bear market until the beginning of 2016, the end of which left many of the late investors completely shaken and bewildered at heavy losses.

With the loss of glamour and sex appeal of commodities, many of the new commodity banks disappeared. They were those which had – as opportunistic as investors – jumped on the bandwagon without really having an understanding of commodities or even having a long-term business strategy. So at the end only those remained who were active before the super cycle of the commodities started, such as, for example, the aforementioned Goldman Sachs. A bank which is one of the biggest professionals, not only in the business of commodity derivatives but also for a long time in physical trade of commodities, which is not really known today by many market participants. And it is just this bank which is now announcing a new super cycle. How did this fine and established institute arrive at this assessment?

As Andy Home for Reuters summarises, the basis for the new super cycle is a recovery from the Covid-19 crisis combined with a “green revolution” and a strong focus on social needs. In particular, climate targets promise a considerable boost to demand, not just technologically but also economically, and not just globally but, above all, also synchronously. But the social component has also not to be forgotten. Redistribution ensures more wealth for the lower income groups, which has more direct significance for demand in goods than the wealthy sector has. This immediately fuels demand also for commodities, as the goods must first be produced by the corresponding input factors.

But Goldman Sachs is not just looking at demand. A sustained positive price growth should also develop because the present commodity supply, similar to that at the beginning of the 2000s, is not at all prepared for the immense demand. Investments in raw material projects have only been below average for a long period of time, in part because of a lack of or negative returns after the collapse of commodity prices. Supply is, therefore, in the short-term very inelastic. And this is also one of the conditions requisite to a super cycle.

But what certainly can be liked about this point of view, is the stringency and logic of the arguments, and also the fact that Goldman in its opinion is swimming against the tide. It is always easy and safe, to move within the consensus (amongst the average or majority of expectations). To see a new super cycle at such an early point is not easy and furthermore, takes a lot of courage. However, there is, of course, still no guarantee that this theory will actually become fact. But sometimes positive news can certainly change the (investment) behaviour of people. Due to the loose monetary policy of banks there would always be enough money in the markets.

Courage, vision and also new arguments seem to be what is missing in the politics of many countries at the moment in order to make transparent progress together with people in this Covid-19 crisis. For industry and for scrap this does all mean, despite corona, good times in the long-term, if Goldman has not made any mistakes. Scrap, in particular, has proven that raw materials are in no way a contradiction to climate goals and the green revolution. On the contrary, recycling of metals has considerable advantages, even on a social dimension.

Even nickel had a super cycle
While we are on the subject: nickel could also profit from the last super cycle and if this were to be repeated, the metal would surely once more be amongst the winners, not least because of its additional attraction as a raw material for batteries. In that time, from the beginning of the 2000s, prices rose from around USD 8,200.00/mt to over USD 50,000.00/mt in 2007. The visible nickel warehouse stocks on the LME in 2007 were at times below 4,000 tons. And if, at first, stainless steel scrap, and later, and increasingly so, nickel pig iron (NPI) had not appeared as “white knights to the rescue” to satisfy the commodity demands of stainless steel producers, then most probably nickel prices on the LME would have risen much more.

For even then, demand from China and the rest of the stainless steel producing nations met a supply which was unsuitable, insufficient and inflexible. Then the high prices brought stainless steel scrap out of all possible corners in order to meet the additional demand. With the collapse of industrial metal prices and with it the nickel price after the super cycle, the situation was, however, somewhat meagre, because then for a few years prices knew only one direction: downwards. Indeed, whether as part of a super cycle or not, a sustainable trend reversal could now be imminent. And this, even though there has been much speculation being made of late about the reasons for the strong nickel price increase over the last few weeks and months. And China has recently seen anything but high prices for NPI.

China has a quasi monopoly on NPI
However, as already explained in the last edition, balance via the price mechanism will only be realised in the market when the substitutes are allowed to move unhindered across borders. And with NPI this is not really the case, as NPI is and was an essential prerequisite for the successful rise of the Chinese (and more recently also the Indonesian) stainless steel industry. And control over such an important and competitive raw material – albeit not on the climate protection scale – is not readily given away. In this respect, China has a quasi monopoly on nickel ores and the subsequent NPI production, either directly or through close economic ties and controls.

Even if the metallurgic quality of NPI is probably not always beyond all doubt, other stainless steel producers, worldwide, would probably have liked to have had access to the commodity at some point or other. For this has had and still often does have an attractive price tag. However, if export is denied, then the situation is turned on its head, and contrary to normal functioning markets, a balance between supply and demand cannot lead to a balance of prices between exchange nickel, ferronickel, NPI and stainless steel scrap. For this reason, it is understandable that the European Union (EU) has now escalated the dispute about export restrictions for nickel ores by Indonesia at the World Trade Organisation (WTO). The EU has called for the formation of a body to preside over this case. In November 2019 a similar complaint about Indonesia had already been submitted to the WTO.

Trade war between Australia and China goes into the second round
The previous edition had a report about the dispute between China and Australia, which came to a head a few times in 2020. Tensions originally started when the Australian government demanded that an international independent investigation into the origin of the corona virus should be started. If the reporting of some international media is to be believed, then the Chinese government then issued instructions to companies and authorities to stop or prevent imports of Australian export goods.

At the beginning of this year, the Hong Kong daily newspaper, South China Morning Post, reported that the Australian government is slowly feeling the effects of the measures taken by the communist government in Beijing. The iron ore and coal exports to China in November had fallen by 2.2% and 3.6% respectively compared to the previous month. In a comparison with the same month of the previous year, Australian coal exports to China had fallen by 6.4% and were below levels of 2016. Overall, coal exports fell less drastically in the same time period as Australian mining companies found other buyers outside of China.

LME plans ring closure
In a discussion paper published on the 19th January 2021, the London Metal Exchange is considering closing its iconic trading floor, also called “The Ring”, permanently, so bringing to an end the long-established method and tradition of determining the exchange metal prices on a personal face to face basis.

The origins of the ring go back to the early 19th century, when traders met in a London coffee house to hedge price risks on metal cargoes, which were being shipped from faraway places like Malaysia to metropolitan London. Whilst today, there is an active electronic and telephone based market, the tradition of the ring has so far survived.

Up to now, daily settlements which also serve as a reference price to a global metal industry have been determined in the ring. Since the Covid-19 lockdown in March 2020, ring trading has been suspended and the room locked. Since then reference prices have been determined by the electronic trading system.

The discussion paper proposes, in return for the termination of ring trading, that costs and fees for the electronic trading system for market participants be reduced. Since this move is seen as a total departure from 144 years of history, the LME has invited market participants for comments on the proposal.

ISSF reports increase in stainless steel production in quarter 3.
According to a publication of the International Stainless Steel Forum (ISSF), in the third quarter of 2020 following on from global recovery, world-wide stainless steel production rose by 17,5% to 13.56 million tons in comparison to the previous quarter. In the first nine months global stainless steel production, however, significantly fell by -7.8% to 38.71 million tons compared to the same period of the previous year, whereas China only had a moderate fall of -2.4%. Europe, on the other hand, saw a significantly bigger drop in production of -13.1%.

LME (London Metal Exchange)

LME Official Close (3 month)
January 20, 2021
  Nickel (Ni) Copper (Cu) Aluminium (Al)  
Official Close
3 Mon.Ask
LME stocks in mt
  December 11, 2020 January 20, 2021 Delta in mt Delta in %
Nickel (Ni) 243,180 249,726 + 6,546 + 2.69
Copper (Cu) 146,325 93,950 – 52,375 – 35.79
Aluminium (Al) 1,329,600 1,417,050 + 87,450 + 6.58

Oryx Commodity News

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