Scotiabank sees tight commodities ahead of super cycle

Commodities were on fire in 2021 and there was no let-up this year due to low inventory levels, an investment squeeze and a soaring demand in emerging markets, according to a new report.

In a report titled Tight commodity markets ahead of the imminent super cycle, Orest Wowkodaw, analyst at Scotiabank Global Equity Research, said that the demand leadership trend will continue over the next several years. S&P GSCI, the benchmark global commodity index, increased by 47.6 per cent last year, its best return in at least a decade, and analysts believe that conditions are ripe for a number of commodities to move higher in 2022 despite Omicron notifying the outlook. The index's value is up 6.3 per cent in the first three weeks of the year.

The focus on green recovery and decarbonization is also positive for most commodities, as investors pile into copper, nickel, lithium and other commodities vital for the development of electric vehicles and other clean-energy technologies.

According to the Scotiabank analyst, the fundamental picture suggests that most commodity markets are likely to remain relatively tight over the next few years with relatively little visible inventories, which supports an elevated pricing environment, although we do not anticipate additional material price gains for most metals after an incredibly strong recovery over the past 18 months.

Copper is facing critically low inventory levels over the next few years, even as prices hover near their all-time highs. The metal was trading at US $9,862 a ton on the London Metal Exchange on Monday after surpassing $10,000 in May of last year.

The industry will need a huge re-investment in new capacity to meet the supply challenges expected to arrive by the middle of the decade as depletetions and grade declines at the world's existing production base cause enormous projected deficits beginning in 2025, according to Wowkodaw.

James Ley, a global energy metals expert at Rystad Energy said that lackluster investments in copper mining are stumbling supply, as the pandemic-driven market instability encourages investors to hold onto their capital.

The copper mining industry will need significant investment to keep up with demand as the energy transition continues at a pace and EV adoption grows in populous nations like China and India, according to Ley.

The revival of nuclear energy and ongoing production curtailments in the industry are expected to boost uranium prices.

We continue to forecast a supply induced market deficit, shifting to a demand driven structural deficit in the medium to long-term, Wowkodaw said.

In 2022, Scotiabank expects prices of hard coking coal HCC to surge 22.8 per cent, uranium by 13.8 per cent, zinc by 10.3 per cent, nickel by 1.5 per cent and copper will increase 0.5 per cent, it remains the bank's preferred commodity over the next few years.

Citibank is also bullish on a number of industrial metals, which could see a near-term or medium-term boom if not a multi-year supercycle. The MSCI world mining index generated total returns of 230 per cent during the eight years of the previous super-cycle 2003 - 11 year period, according to the bank.

Over the last five years, the mining sector has returned just over 100 per cent, and if the stocks can return 35 per cent per year over the next three years, it may be on pace to beat the super-cycle return levels by the end of the decade, according to a note by Citibank analyst Ephrem Ravi.

The oil market is in the midst of a bullish run with U.S. crude oil prices at US $85.05 per barrel this morning, a seven-year high. Goldman Sachs Group Inc. rose its Brent forecasts through 2022 and 2023 and predicted US $100 oil in the third quarter.

Oil faces supply-side challenges due to continued global underinvestment in many key producers, ongoing spending discipline in North America and growing adoption of energy transition targets by governments and large investors even as demand seems to be going higher.

Anthony Petrucci, Canaccord Genuity analyst, believes that there is a potential oil price spike if OPEC is unable to keep up with incremental demand.

Canaccord Genuity raised its oil price forecast for US crude to US $75 per barrel from US $70 in 2022, while the benchmark s differential with Western Canada Select will remain around US $12.50 per barrel.

In Canada, the United States, and other producers, the production of oil is ramping up, which will help calm markets, according to Citibank Group.

The bank said that global oil markets in 1Q 22 are in a fragile balance but are poised to move to a structural surplus over the next seven quarters.

Bank of America concurs, noting that US $80 oil prices will encourage U.S. shale producers to push capital expenditure by 30 per cent. As many as 870,000 barrels of new oil supplies could be added to the market each day in the U.S.

Warren Russell, analyst at BofA, said that this price environment provides a strong base for upstream capex growth in the year 2022.

The BofA analyst said that around 2.6 million barrels per day of new barrels from non-OPEC sources could leave the market in a surplus this year.