The ongoing ‘everything’ rally this past week was particularly noticeable in metals. Leading from the front we find industrial metals where HG copper topped $3.6/lb and LME copper $8000/t for the first time in seven years. That strength has been filtering through to semi-precious metals, with silver trading up by more than 7% on the week after breaking key technical levels, both against the dollar and against gold.
Rising demand, especially from China, looks set to remain strong in 2021 when the rest of the world emerges from the Covid-19 cloud, thereby raising concerns about available supply following years of under investments. The metals rally in 2020 has been the sharpest in a decade with Goldman Sachs seeing echoes of the spike in early 2000’s when Chinese demand started a near decade-long super cycle.
One of the main obstacles for a commodity rally during the past decade has been the ample availability of raw materials. Oversupply during the past decade and especially during the past six years kept the commodity sector as a whole in a state of contango where the spot price, due to ample availability, trades cheaper than deferred prices. The impact on passive long investments can be seen in the below chart.
Since 2014, a portfolio of 24 major commodities carried a negative roll yield which at times was as high as five percent on an annual basis. From an investment perspective, this headwind combined with a generally strong dollar and low inflation reduced the attraction of the sector. In recent months, however, the roll yield has turned positive with the change so far being led by the agriculture sector where key crops have rallied strongly in response to lower production and rising demand.
Looking ahead to 2021 the expected pick up in demand as well as the reflation theme look set to underpin the sector, especially markets where supply may struggle to meet demand. We are focusing on copper, platinum and soybeans to mention a few.