October Newsletter 21

October 2021

Politics And Economics Will Impact Select Market Segments Over The Coming Months And Years

Note by Andrew Hecht

In the US- Infrastructure rebuilding is on the horizon- 5G, semiconductors, climate change initiatives present a changing landscape for demand
Inflationary pressures will continue to rise
On the global scene- Afghanistan, China, Russia have significant implications for the future
A bullish relay race in raw materials is likely to continue- Demographics continue to underpin the demand
Bull markets rarely move in straight lines- Corrections can be severe

The phrase “when it rains, it pours” comes from a surprising source, the Morton Salt Company. Advertising executives in the early 1900s decided to emphasize the idea that the company’s salt would pour freely, even in damp weather. The saying’s meaning goes way beyond salt. Many people use it to describe the occurrence of multiple events with significant consequences.

Markets across all asset classes reflect the political and economic landscape. In the world of the products that are essentials, supply and demand fundamentals shift for many reasons. The global pandemic caused a wide range of price distortions. Supply chain bottlenecks resulted in either gluts or shortages of raw materials. Meanwhile, the 2020 US election replaced the previous administration with an entirely new set of initiatives and approaches to domestic and foreign policy. The 2020 pandemic-inspired changes were steady rain. In 2021, the political shift turned the shower into a downpour.

Many of the shifts we are experiencing will dramatically impact prices in select market segments over the coming months and years. The ingredients required for technology are global assets. They are essential components of our daily lives. The kneejerk reaction to the COVID-19 pandemic was a risk-off period that drove prices to bottoms in March through May 2020 gave way to an overall bullish trend, reminiscent of the price action from 2008 through 2012. The worldwide financial crisis in 2008 gave way to a bull market that drove prices to multi-year and all-time highs over the next four years.

Two of the leading commodity futures markets moved appreciably higher over the period.

Source: CQG

Copper moved from a low of $1.2475 in 2008 to a high of $4.6495 in 2011.

Source: CQG

Copper moved from a low of $1.2475 in 2008 to a high of $4.6495 in 2011.

Source: Barchart

The chart highlights the rise in the VanEck Rare Earth Metals ETF product (REMX) that moved from $26.01 in March 2020 to its most recent high at $119.76 per share in August 2021. REMX holds shares of mining companies that extract rare earth metals from the earth’s crust. The ETF moved over 4.6 times higher.

Moreover, the perception of a US lack of commitment could accelerate China’s plans to “reunify” with Taiwan and Russian desires to reconstitute a Soviet bloc in neighboring countries. Iran is already enriching uranium for nuclear weapons, and North Korea is even further down that path. The bottom line is the events in Afghanistan have empowered US enemies, destabilizing the geopolitical landscape over the coming years.

Meanwhile, many military analysts believe that the Taliban’s return will increase the potential for terrorism beyond its borders. Uncertainty is a critical ingredient for market volatility. As the world becomes less safe, it impacts logistics, the cost of transporting raw materials and threatens the supply chain.

A bullish relay race in commodities is likely to continue- Demographics continue to underpin raw material demand

At the turn of this century, the global population stood at around six billion

Source: Barchart

A bullish relay race in commodities is likely to continue- Demographics continue to underpin raw material demand

At the turn of this century, the global population stood at around six billion

Source: CQG

The quarterly chart shows the bullish trend in the precious yellow metal that began in the late 1990s and continues to take gold to higher lows and higher highs. In 2019 and 2020, gold rose to new highs in virtually all currencies. Since the high, the price corrected and is consolidating at the $1800 level as it digests the new record peak.

During the first half of 2021, grain and oilseed prices rose to over eight-year highs before correcting. In May 2021, lumber, copper, and palladium reached record highs.

Source: CQG

The quarterly chart highlights copper’s rise to nearly $5 per pound in May. Lumber rose to over $1700 per 1,000 board feet, and palladium to over $3000 per ounce. Over the past months, prices moved lower but remain at elevated historical levels.

In June-August, coffee, sugar, and frozen concentrated orange juice reached new multi-year peaks. In 2021, iron ore and steel prices soared. Freight rates moved appreciably higher, with the Baltic Dry Index moving to over 4,000 for the first time in years. WTI crude oil futures briefly rose to the highest price since 2014 in early July after briefly trading below zero in April 2020. Nearby crude oil reached a high of $76.98 per barrel and was near the $70 level on September 10.

In what has become a bullish relay race to higher highs, one raw material handed the bullish baton to the next over the past year. The latest two to carry the torch are in the energy sector.

Source: Barchart

The chart of thermal coal for delivery in Rotterdam illustrates the rise to the $170 per ton level, the highest price since 2008.

Source: CQG

Nearby NYMEX natural gas futures rose to over $5 per MMBtu in September 2021, the highest price since February 2014. Meanwhile, the seasonal commodity had not traded north of $5 in September since 2008.

The shift in US energy policy under the Biden administration has put upward pressure on prices. In 2021, the administration canceled the Keystone Pipeline project and banned fracking and drilling for crude oil and natural gas on federal lands in Alaska when demand was rising and robust. Rising natural gas prices in Asia are pushing LNG demand higher. According to the EIA, as of September 3, natural gas in storage in the US in preparation for the peak 2021/2022 winter season was 16.8% below the level in 2020 and 7.4% under the five-year average for early September.

Traditional energy prices are a critical input in raw material production. As output costs rise, prices remain in bullish trends. The bullish relay race continues in the asset class as the torch passes from one essential market to the next.

Bull markets rarely move in straight lines- Corrections can be severe

Bull markets rarely move in straight lines. Corrections can turn a parabolic rally into a falling knife in the blink of an eye. Lumber fell from over $1700 to $462 per 1,000 board feet. Copper declined from nearly $5 to under $4 per pound at the most recent low.

As we witnessed in early 2020, the cure for low prices is low prices, and the opposite holds during the recent rallies. However, the trend is always your best friend in markets across all asset classes. The medium-term path of least resistance for the products that are requirements for nutrition, shelter, power, and technology remains higher as we head towards the end of 2021. The prospects for companies that extract them from the earth’s crust or produce or manufacture essential ingredients remain bullish as they strive to keep up with rising demand and inflationary pressures.

The Fed has called inflation “transitory,” but that could be wishful thinking. Meanwhile, the central banks and governments planted the inflationary seeds in early 2020 and continue to fertilize them with their accommodative money and fiscal stimulus stance.

Politics and economics are the fundamental ingredients for the path of least resistance of raw material prices. In September 2021, the landscape has not been as bullish in decades. “When it rains, it pours” is a picture-perfect characterization of the almost perfect bullish storm in the raw materials markets.