Commodities ‘supercyle’: why you should be bullish on mining stocks

Mining analyst John Meyer reveals what he thinks will happen to the mining sector in the second half of 2021, his take on the commodities supercycle, and where investors should have exposure.

Lee Wild, head of equity strategy, interactive investor: Hello, I’m joined today by John Meyer, mining analyst at broker, SP Angel. Now John, we’ve seen some volatility in the mining sector during the first half of 2021, but the sector is up around a third in the past 12 months. So what have been the major influences on commodities so far this year? And what will likely influence the second half of 2021?

John Meyer, mining analyst at broker SP Angel: Well, if you think back to a year ago, we were in the midst of the coronavirus crisis, policymakers were just trying to get their heads round how bad this was going to be and they were hitting the start button on stimulus programmes and stuff like that. So we headed into what looked like a fairly deep recession. We were talking about, was it going to be a V shape or a W shape or a U shape recovery or any recovery at all, frankly. And how bad this was for the West and how China seemed to be managing, regardless. So what happened was, China kicked off very quickly with their stimulus programmes. The West wasn’t that slow. I mean, the US and the UK were pretty quick at getting on to it and, of course, Europe was just slightly behind, partly because they’d been stimulating the eurozone for the last 20 years anyway. So there was a lot of that going on.

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Investors panicked to start with a year ago, but then started to buy back into commodities, back into the mining sector. So we started to see confidence return, particularly with a certain amount of supply interruption as manufacturers started to rebuild inventory levels as they saw new demand coming through. Particularly starting off in the construction sector where, clearly, the stimulus money was having most effect. And so that combination of new demand coming through, stimulus money and confidence back into the markets, started to lift commodities, lift mining shares. And we saw that regained new momentum in January and February this year, and it’s nice to see that that is continuing.

Lee: And what about for the rest of 2021? We’re halfway through the year now. Are you positive for the rest of the year?

John: Yes, I feel extremely bullish for the second half. I can see lots of value being added within the junior mining sector. I’m a little more cautious for the bigger mining companies, although they’re still making very large amounts of money off iron ore prices. If you think that these guys are digging up millions of tonnes of iron ore to for an average cost of $30 a tonne and they’re selling it in China at somewhere close to $200 a tonne. So the margin is exceptional. But that is going to pull back because the Chinese government has said they are determined to pull back on commodity prices. They can see that metal prices are hurting their small and medium-sized enterprises where margins are much thinner. They don’t seem to have had much impact on iron ore just yet.

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And let’s face it, the iron ore price is largely driven by local speculation within China on those local futures commodities exchanges. So that’s a domestic problem for the Chinese to deal with. They’re also focusing on metals like copper and zinc, so they’re releasing a little bit of these metals from the strategic reserves stockpile – the SRB. Not very much. I think they’re really keeping their powder dry there, but the threat of further stockpile releases has dampened enthusiasm in the market.  I don’t think that’s a bad thing, myself, because the more metal the Chinese sell into the market, the more they’ll have to buy back at some future point in time. And their economy is much larger than it was ten years ago, so that SRB stockpile will have to grow itself anyway.

Lee: Sure.  I mean, Goldman Sachs have recently talked about a new structural bull market for commodities, so clearly there are positive catalysts for metals and other resources. But what do you think?

John: I don’t think there’s anything new about this. I think this supercycle, it started back in the late 1990s. We saw a very strong bull run up to about 2008, and of course, it got spoiled by the collapse of Lehman Brothers and the subprime crisis. But in reality, I think we’re still very much in that supercycle that started back then. There is a second leg to it, which is driven by electric vehicles and new energy technology, and so there’s more to come. But in reality, when we look back at this in history – maybe in another 20, 30 years’ time – we will see this as very much China growing into a new world superpower, and so much of the metals consumption is driven out of China.

And of course, let’s not forget, America has suddenly woken up and is deciding to catch up on China and it’s frightened of being left behind. And who would ever want to be left behind, economically? It needs lots of new infrastructure – the terrible disaster in Florida where half a tower block collapsed is just one example of many in the States where their infrastructure is failing.

Lee: So is all this extra demand going to be coming through for commodities for the foreseeable future? And if we are in this commodity supercycle, which areas should investors be gaining exposure to? Is it copper? Is it steel, gold, lithium? What’s your view on that?

John: Well, as the cycle develops, different metals will take over. So we have certain metals that we describe as ‘late cycle metals’ – and I don’t think we’re in the late part of the cycle yet. But there are going to be cycles within cycles. We’ve already had the first one from 2000 to 2008. We had a mini boom after that with stimulus. We’re now into another boom, which I think is going to last longer, because I think the structural drivers are bigger. I mean, the US versus China in terms of growth, that’s a very big structural cycle. And unless something derails that, I think there’s going to be a huge amount of new demand for metals and other commodities.

But when we look at what we should be focusing on, clearly the big driver now is electric vehicles and offshore wind farms. So offshore wind farms use loads of steel, rare earths in the turbine, there’s lots of copper in those turbines as well. Aluminium for the blades. Those are the critical components. Nickel in there as well – anything that uses energy seems to require a certain amount of nickel. And electric vehicles. There’s going to be enormous growth in factory output of electric vehicles over the next few years. In fact, it would be worth looking to see when that might peak out. Probably not for another 20 or 30 years or so. So the entire vehicle fleet is going to get changed at some point.

I mean, let’s not talk about lorries and trucks just yet, but the passenger fleet is going to go very largely electric. And yes, again, the commodities there – lithium for the batteries. Because lithium is such a light metal, it’s going to be very hard to replace lithium – the lithium ion battery – because anything you replace it with is likely to be much heavier. Nickel is the heaviest component of a lithium ion battery – believe it or not – so a very important metal there. Quite hard to invest in these days. You really need to buy into Glencore (LSE:GLEN) for nickel. So it’s a key critical component. Let’s say that batteries give way to fuel cells. Again, fuel cells require nickel for collecting the current within the cell, so you’re fairly safe with that as an investment.

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Tin is very important, because tin is used for soldering everything together. And although companies have got very good at thrifting on tin, the problem with that is, it makes it much harder to recycle. So the recycling element might start to fall away at a time when the world actually needs more tin supply. And again, not a lot of tin discoveries in the world to talk about at the moment. Just a few. I mean, I think they’re worth looking at in some detail. So those are critical metals – I would say copper, lithium, tin, nickel and rare earths.

Lee: Well look, you’ve mentioned a few of the metals there that are benefiting from the boom in renewable energy. How else is that impacting the commodity sector? Are there any other metals that will benefit directly from this shift to green energy?

John: Yes. Cobalt, for example. Often talked about. All the companies would love to stop using cobalt because so much of it comes out of the DRC, and cobalt has been used to fund the operations of various warlords in eastern DRC over many decades. The Chinese are producing more of it, and in fact, statistics out today show a huge increase in the amount of cobalt being imported into China as they ramp up their battery gigafactories and megafactories. To give you an idea, there’s about 180 megafactories being built – battery megafactories – in the world at the moment.  In fact, many of them are already constructed and are now expanding. So there’s a lot going on there.

There are other battery commodities we can look at – manganese, phosphate – but in reality, the ones we’ve talked about are the critical metals that I think are important within the lithium ion battery chain. And I’m not sure any other battery technology is likely to take over in the short term.