2021 has seen an incredibly strong start for resources. The words ‘reflation’ and ‘super-cycle’ have been regularly used by many of the major sell side houses. 
The pick-up in activity as the world emerges from a global pandemic is the primary driver, with governments, primarily focused on unemployment, look to heavily stimulate their economies. Pent-up demand from people working from home, unable to spend on services is adding incremental demand, whilst commodity and industrial supply chains remain disrupted, with many countries still reeling from the fall out of Covid and slow roll out of vaccines.
Whilst a rising tide lifts all ships, we think it is important to differentiate between different commodities, as the outlook from here may differ materially. A decade on since we saw the last commodities peak in 2011, the spending on new supply is highly differentiated.
Oil, for example, has significant excess supply that could return, with OPEC alone having the potential to add back 8 million barrels per day, whilst higher prices will ultimately lead to a return of this supply and US shale production.
The reduction of subsidies in emerging markets will lead to greater price sensitivity, whilst ultimately the transition to electric vehicles will eat in demand, although not overly materially until 2025 onwards.
Copper is a different story, with a lack of investment in new supply and a long lead time to add a new mine of five to 10 years, leading to minimal new supply set to come online and thus any demand growth will lead to tighter markets. Demand growth looks likely given electrification trends, supported by the green focus of government stimulus with a focus on renewables build out, whilst the transition to hybrids and electric vehicles will also be increasingly copper intensive.
The outlook for other base metals is a little more nuanced, with differing supply/demand dynamics.
Precious metals currently find themselves in a tug of war between increasing global bond yields (negative) and ballooning government debt (positive). After a very strong couple of years of performance, this has led to a pause in pricing, with concerns around elevated gold ETF positioning.
We believe going forward that continued easy monetary policy as governments target unemployment and the emergence of inflation, in part led by commodity price rises, will provide a supportive back drop, whilst the much cited $1.9trn US stimulus plan should also be positive when/if announced. As we emerge from COVID lockdowns, the increase in government debt, especially in emerging markets will create pockets of stress, with defaults and currency devaluation a probable outcome.
US stimulus may lead to further US dollar weakness which is supportive for gold, whilst strong emerging market currencies, especially the Chinese yuan and Indian rupee, are leading to lower local pricing in these key demand countries, which is already leading to a strong recovery in Jewellery sales.
Uranium ties in well to the green energy trend, as the only source of zero carbon base load power. Sentiment towards the sector has improved materially, with strong resultant performance from the related miners. The uranium price itself has seen far less activity, although a looming supply shortage looks likely, with limited new supply and a continued reactor build out in the east.
We chose to focus on those commodities with positive demand outlooks but restricted supply dynamics as that allows for superior margin sustainability.
It is important to note that directional moves in commodities are not necessarily the same as equity moves. For example, oil producer stocks are recovering from the lows, so may not need a continued lift in oil prices to perform. Copper mining stocks have seen a degree of expectation transition in the copper price implied in their valuations, whilst precious metal miners look cheap versus historic valuations, thus implying lower precious metal pricing already. These factors are important considerations beyond the pure commodity trend.
Rob Crayfourd is co-portfolio manager of the CQS Natural Resources Growth and Income fund. The views expressed above are his own and should not be taken as investment advice.