While corporates the world over fall over themselves to establish their green credentials, fearful that to do otherwise will harm their share prices, something very strange has been happening. The coal price has tripled since the beginning of last year. Yes, dirty, filthy, immoral coal. How can that happen when ESG metrics (Environment, Government, Sustainability) are all the rage?
The charts don’t lie, however:
Coal is a real breakout when compared with other commodities (the grey line):
The reasons are not especially hard to find. In Europe coal has become a much cheaper form of power generation since Russia has tightened gas markets and caused a supply storage crunch. The International Energy Agency (IEA) says coal-fired electricity production will increase 3% in 2021 and 3% next year after declining by 4.6% last year.
China, and much of Asia, is ramping up its consumption and has no intention of stopping any time soon. That has probably benefited local stocks like Whitehaven Coal. The company's stock price has been firm over the last year:
For at least the next decade China’s growth in consumption of coal, outlined in the Five Year Plan, will outweigh moves underway elsewhere in the world towards a carbon free world.
Investing in a commodity after it has had a huge run may not be the best strategy. So what are brokers saying about the other commodities? Morgan Stanley gives this overview:
“Iron ore – more downside: China’s slowing steel output (Jul -8%yoy) on environmental cuts and weakening demand from the property and infrastructure sectors has been the key driver of iron ore's $90/t fall. We see a 6-month lag before any fresh infrastructure stimulus translates into steel demand, while the 'regulatory reset' in China's property market makes a swift construction recovery unlikely.
Copper – strong support: The macro-driven correction has come just as copper's fundamentals improve – two strikes (Andina, Caserones), a drought (Los Pelambres), and blockades (Las Bambas) highlight the fragility of supply. On the demand side, China’s scrap imports from Malaysia have been disrupted for weeks, and fabricators have been destocking for months, meaning there’s limited excess metal around.
Aluminium – upside remains: Support stems from the impact of China power disruptions on supply, and with China coal prices climbing rapidly (+$25/t mom), it seems unlikely that production will rise significantly into the winter, keeping primary imports high (150-170ktpm)..
Nickel – risk to downside: A series of supply disruptions has kept nickel's price elevated – Norilsk's flooding, Koniambo's extended outage, Sudbury strike, and bad weather in SE Asia. We expect supply to normalise into Q4, and there's some risk that could coincide with reduced output of stainless steel on destocking, particularly in China, where output is +14%ytd, inventories have begun to move higher, and prices have come off the highs in line with the broader steel sector downturn. Risk skewed to the downside.
Zinc – a risky play; lead outperforms: With its heavy exposure to construction and automotive via its dominant end-use in galvanized steel, zinc appears vulnerable on the demand side. US and European markets remain tight even as inventory builds in China, with freight disruption/high rates keeping that material from the global market.
Gold – surprisingly stable: Risk aversion on the delta variant's spread is supporting gold's price in defiance of FOMC minutes suggesting potential for tapering to begin this year, as well as a strengthening US dollar. At $1,783/oz gold is already implying higher rates, and we see it retaining its safe haven status in the near term before coming under increasing pressure as tapering draws closer. Risk to the upside.”
What is notable is how important China is to all these commodity prices. That will not end any time soon.
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