The Elephant in the Room for Commodities
Bloomberg Intelligence’s H2 view on metals
While Bloomberg Intelligence’s commodities team believe gold may have peaked, they are split on the outlook for copper over the remainder of the year.
BI senior commodity strategist Mike McGlone likened metals to “stock market sock puppets”.
“My key theme I’m thinking about is what is the elephant in the room?” he said during a BI webinar.
“Number one, I’m seeing a pump and dump trend so far.
“At the beginning year, we had Bitcoin, US natural gas that were up on the year and then down. Now that includes gold, silver, platinum, iron ore, and corn.
“I’m worried that’s going to continue expand to the rest of the commodities, and the number one thing we need for that not to continue is the stock market has to go up.”
McGlone said commodities risked a 2008-like trouncing.
He said gold appeared to have peaked and if it got back to its 10-year moving average, it would be below US$3000 an ounce.
“It’s still a bull market, but the one thing I’m really worried about in the metals is copper,” he said.
“Copper has made a new high this year, but I show copper divided by the S&P 500 and it’s a complete dud.
“The problem I have with copper and all metals is if the stock market goes down, copper’s got virtually no chance, so if you’re bullish copper, you’ve got to have the stock market go up.”
Metal drivers
BI global head of metals and mining Grant Sporre had more of a top-down view on the metals market and was more bullish than McGlone.
“There were some very key themes that were driving metal prices prior to the Iran-US war, and it looked as though when we thought there was a resumption to normality or the slow opening up of the Strait of Hormuz, that those structural themes would reassert themselves, and I still think that’s the case,” he said.
“Obviously, we have to deal with the volatility of do we have a deal?”
Sporre said there were five main themes driving metals, four of which started with ‘D’.
The first one is decarbonisation.
“The oil shock, I think, has just reignited the metals green case,” Sporre said.
“I think over the medium term, the Iran war and tightness in the Strait of Hormuz is just going to play into that decarbonisation-electrification theme of most of the metals.”
He said the biggest beneficiaries were copper, aluminium, rare earths and silver.
Despite the war, Sporre said digitalisation remained a strong theme.
“I’m talking about AI and the need for data centre capacity builds, and that plays very much into metals demand, and again, copper, to a lesser extent, silver, aluminium, are all beneficiaries of that,” he said.
“We’ve seen how tightly correlated copper has been to, let’s say, the AI stocks or anything exposed to the AI stocks, and I think we’ll get times when perhaps we’re a little bit too bullish on all the chip makers, etc. and there’ll be a bit of a sell-off, but the whole digitalisation theme, as a sort of almost a third-order derivative, plays directly into the metals, particularly copper.”
Sporre’s third theme is deglobalisation.
“Call it political risk, call it the race for metals, and there are a number of aspects to this,” he said.
“One is there’s a duplication of supply chains, and that obviously is often more metals-intensive, and so that’s good for demand, but there’s also been almost a willingness by governments to say metals are now strategic, and maybe we need stockpiles of these metals.”
Sporre said the Strait of Hormuz closure only amplified the deglobalisation theme.
The final ‘D’ is de-dollarisation, a theme Sporre sees continuing.
“For the past 18 months, the dominant theme that has been driving gold has been de-dollarisation and central bank buying, and whilst I think that still stays – I don’t think suddenly overnight we’re going to see central banks become sellers,” he said.
“I think, overall, central banks still want to add more gold as a form of reserve, so the de-dollarisation trend continues.
“I just don’t think it’s going to be as strong a driver, and I think we’re moving into much more of a real interest rate kind of driver environment, and there, the outlook is a little bit mixed for gold.”
Sporre said he was cautious on gold though most of the positive drivers remained.
Sporre’s final theme for metals was supply.
“The metal with the most tightness, if you like, is copper,” he said.
“It just takes a long time to approve a copper project. It’s very capital intensive, and you know it’s in difficult regions, so structurally, the copper market is tight, and the mining companies have been relatively slow to bring on new production.”
Sporre said while the Iran conflict had disrupted aluminium, the market wasn’t as structurally tight.
“There’s certainly a tailwind for aluminium, but I think that quickly turns into a headwind, and then the copper fundamentals reassert themselves,” he said.
Copper’s fundamentals hold
While McGlone warned the entire commodities market would be “toast” if copper didn’t rise in the current half, Sporre said the fundamentals for copper remained positive.
On BI’s numbers, copper has been in a modest deficit for several years.
“The outlook for this year was – lo and behold – another deficit,” Sporre said.
“So, from a bottom-up perspective, copper looked still looked very well-supported.
“Did the price run away with itself? I think it did when everything moved in tandem at the end of last year and the beginning of this year.
“If you want to use [Mike’s] words – pump and dump – it was maybe a bit of that kind of scenario, but I do think now that we’ve seen a bit of a price correction, copper’s closer to US$13,000 a tonne and the fundamentals really stack up.”
Sporre said he was still grappling with how high inflation, higher interest rates and lower global growth should be a negative headwind for copper.
“I thought if growth goes to zero, there’s zero demand growth for copper this year, then we’re back in a slight surplus market, not massively, but slight surplus, so I guess the longer the Strait of Hormuz is closed or severely restricted, the more that undermines my relatively positive outlook on copper,” he said.
“But in saying all of that, I think what surprised me is that demand in China, despite all the negative property indicators, fixed asset investment still seems to do pretty well, so that does show that the demand in some of the newer sectors, it still keeps copper demand reasonably strong.”
Sporre added that operating costs in the copper sector had surged.
“Let’s say US$10,000 copper is probably equivalent to the US$7000 that we saw a few years ago,” he said.
“Even if oil prices come down, it doesn’t mean that inflation or that embedded cost is suddenly going to dissipate out of the cost base.”
Sporre referred to “geological inflation” including deeper deposits, longer haulage distances and lower grades.
“If you want to go to places where there are attractive grades, it comes with usually a huge amount of geopolitical risk, and not great infrastructure,” he said.
“The point I want to make is why I don’t think copper is going to back to the levels it was previously is because of that that higher cost support, and that I don’t think is going to suddenly disappear.”
Sporre warned the copper market was still at the whim of what happened in the Middle East.
“I do think there is a little bit of downside risk in the second half, but if it comes back quicker than we expect, I think then copper holds pretty firm where it is, and there may even be some upside.”