Last week, I harped on opportunities in commodities — clearly a “most hated” asset class if there ever was one. This week I’m going to revisit the topic to point out some of the latent “love” coming to the sector and the size of the opportunity at hand.
But first … a little story. After college, my first car was a Toyota Corolla hatchback. The engine was a nicely engineered piece of machinery. I wish I could say the same for the body panels, which quickly took on the look of rusty Swiss cheese; the holes widening year by year.
In his book, The Dhandho Investor: The Low–Risk Value Method to High Returns, Mohnish Pabrai coined an investment approach known as "Heads I win; Tails I don't lose much." Q3 2021 hedge fund letters, conferences and more The principle behind this approach was relatively simple. Pabrai explained that he was only looking for securities with Read More
Thanks to such episodes, carmakers began using galvanized steel — the body panels “hot dipped” in a molten bath of corrosion-resistant zinc.
But car companies in two of the world’s most populous countries didn’t get that memo. At least, not until recently.
The result? A huge bullish stampede into the zinc market at a time when many of the world’s leading analysts least expected it…
Bloomberg’s recent headline “China’s Rusty Cars Set to Sustain Rally for 2016’s Top Metal” says it all. So does the reaction in zinc prices, up 60% since the start of this year.
Only about one-third of the 19 million cars and trucks made in China last year were built with galvanized steel.
It’s much the same in India, where consumers bought a record 2 million vehicles last year; only about 20% were made with galvanized steel, according to India’s Institute of Technology Bombay.
Don’t Look Now, But…
My point isn’t to run out and buy zinc-mining stocks. It’s just to note that demand for commodities often materializes in ways no one expects until the rise in prices makes it all too obvious.
Take a look at what’s happening with nickel.
The Philippines are a major supplier of raw nickel ore. The new Duterte administration, which took office over the summer, is in the middle of a “review” of the nation’s three dozen or so mines, threatening to put some out of commission for alleged environmental violations.
That’s not exactly “love,” but it certainly helps the case for loving the ongoing run in nickel prices. Analysts at UBS Group AG see nickel prices rising another 25% next year (after the 20% gain so far this year).
Out of all the major industrial metals, copper is one of the most widely watched. The price of the red metal barely moved all year. It’s down 50% since 2011.
Yet Japan’s largest producer, Pan Pacific Copper, sees the price rising 40% to roughly $7,000 a ton by the time 2020 rolls around. Citigroup recently made a similar forecast. Why?
It’s all about supply and demand.
Copper demand has remained relatively firm, even though economic growth in China — the world’s No. 1 consumer of copper — has slowed in recent years.
But copper supply is another matter completely.
Late last year, Glencore — one of the world’s largest copper miners — decided to mothball its largest mines in Africa, taking up to 400,000 tons of copper production off the global market. In Chile, the single largest supplier of copper in the world, the state-run copper commission announced big investment cuts through 2025, eliminating eight mine-development projects worth nearly $23 billion.
Now you can see where these copper-price projections came from. At Citigroup, analysts see widening deficits between copper supply and demand. At the aforementioned Pan Pacific Copper, the company’s president said, “Output will fail to keep pace with demand because of the absence of new mine supply — unless prices reach $7,000 [per ton].”
With the price of copper below $5,000 a ton right now, that provides a lot of leeway for potential profit — and yet another reason to keep a close eye on this class of “most hated” commodities.