Commodity prices party on as talk of inflation, rising rates and increasing supply grow louder

Another whiff of inflation and hint of rising interest rates stirred financial markets this week, along with a warning of greater risks ahead from two big name investors (and a long-dead economist).
4th June 2021
Tim Treadgold

Larry Fink and Jeremy Grantham sang from the same gloomy hymn sheet, which is a favorite of grumpy old men who have seen countless market cycles -- and so too would Adam Smith, if he had not died 231 years ago.

Fink is the key man in the threesome because he runs BlackRock, the world’s biggest fund manager. He warned that stimulus spending would create an inflation spike which would be a “pretty big shock” for most people, especially novice investors who have little concept of the value-corroding nature of inflation.

Grantham, an 82-year-old investment guru with a well-earned reputation for being a permabear, reckons a stock market “crunch” has already started with the fall of U.S. technology stocks. Termites would soon eat the rest of the market, he said.

“We’ve turned the pressure up and up, more money, more moral hazard, and here we are at the peak,” he said.

Grantham’s other concern is climate change and the way it caught two big oil companies on the backfoot last week when a Dutch court found that Shell was partly responsible, while a shareholder revolt at Exxon injected environmental activists onto the company’s board.

But it is the father of modern economics, Adam Smith, who Australian investors ought to be following, because he nailed the basic trends of supply and demand in his 1776 epic “The Wealth of Nations” in which he explained how supply always follows demand.

Two prime examples of what Smith dubbed “the invisible hand” of the market could be detected this week in copper and nickel where there were unmistakable signs of supply doing exactly what it is supposed to do when there is strong demand.

Copper supply, according to a detailed study of the market by UBS, is forecast to rise by 10% over the next two years as 12 new projects come online, threatening to trim the price of the metal as a deficit this year swings to significant surpluses over the next three years.

Nickel supply, according to Macquarie Bank, will do the same as a series of “mega” projects in Indonesia start producing to catch forecast demand from battery makers.

If 2021 has been the year of demand drive, then 2022 could be the year of supply pull.

Despite concern about the potential for oversupply of key commodities in the next few years, prices continued to roll this week, with gold rising to a five-month high of $US1915 an ounce before easing back to $US1904/oz.

Other significant prices included iron ore moving back above $US200 a tonne. Copper at more than $US10,000/t. Nickel heading back towards $US20,000/t, and even thermal coal selling for $US122/t, a three-year high.

On the equities side of the ledger, share prices followed the lead set on global markets with iron ore leaders BHP again testing the $50 mark and Rio Tinto back above $125.

Fortescue Metals, the top pure-play iron ore producer, added $1.10 to $23.36 while Canadian focused Champion Iron added 27c to $6.81 and Fenix, a relatively new local producer, put on 4c to 33c.

Not everyone likes Fortescue. UBS repeated its price forecast for the stock of $18 in a report which said the troubled Iron Bridge iron ore processing project was still attractive, so long as there were no further delays.

UBS joins Morgan Stanley among the banks concerned about FMG’s outlook. Last month, Morgan Stanley hung a rare sell notice on the stock with a price forecast of $17.45.

Gold stocks, despite the incentive of a rising metal price were relatively disappointing, perhaps a function of the Australian dollar moving up as the U.S. dollar slipped, but also because it is June, a time of portfolio adjustments ahead of the financial year end.

Northern Star was a prime example of a stock which should have ridden the rising gold price but actually had a flat week, eking out a 2c rise to $11.44 despite hosting a broker site visit in Kalgoorlie and receiving a fresh buy tip from Macquarie, which sees the stock trading up to $13.30.

Ramelius was another gold stock which caught the eye of a big-name bank but failed to react, slipping by 1c to $1.95 despite Morgan Stanley initiating coverage with a price rip of $2.30.

Capricorn Metals was arguably the pick of the gold sector with a rise of 18c to $2.02 after reporting that commissioning was underway at its Karlawinda project. Bell Potter reckons the stock is heading to $2.48.

Other gold news included:

  • De Grey shedding 4c to $1.60 despite hauling a team of bankers to Port Hedland for a visit to its Hemi project, perhaps as a warm up to a keenly awaited maiden resource announcement.
  • Alkane Resources adding 12c to $1.02 after announcing a life extension at its flagship Tomingley mine in NSW, which will remain in production beyond 2030.
  • Odyssey Gold added 2c to 16c after raising up to $15 million through a share issue to accelerate work on its Tuckanarra and Stakewell projects in WA, and
  • Predictive Discovery reported an encouraging assay of 32 grams of gold a tonne over 6 metres at its Koundian project in Guinea. On the market, the stock rose by 2c to 12c.

The battery metals theme continued to play well during the week, led by lithium producer Pilbara Minerals, which added 9c to $1.30, and Vulcan Energy, which put on 41c to $8.12.

Core Lithium caught the eye of investors as it started a fresh drilling program at its promising Finniss project near Darwin. The stock added 2c to 26c during over the week.

Macquarie has a buy tip on most lithium stocks, noting that rising prices will see the sector enjoy a price-improving tailwind in the September quarter. Pilbara, according to the bank, is heading for $1.50.

Mineral Resources expanded its iron ore interests with a deal involving a stake in the big but undeveloped West Pilbara project. On the market, the stock added an eye-catching $2.94, or 6.5%to $48.35.

Other news events and market moves of interest included:

  • Whitehaven led a revitalised coal sector thanks to the price surge mentioned earlier. The stock added 18c (11%) over the week to close at $1.79, but with Shaw and Partners tipping aprice of $2.50. In the middle of last year, Whitehaven was selling at 85c.
  • Strandline Resources added 2c to 23c as construction activity accelerates on its Coburn titanium and zircon project in WA.
  • Cyprium reported ore-grade intersections at its Nanadie Well copper project in WA, including a significant 143.8 metres at 0.7% copper from a depth of 25c. On the market, the stock firmed by 2c to 34c.
  • New World Resources, if a Canaccord Genuity research note is correct, could be the most undervalued copper explorer on the market with the broker tipping a price of 30c for a stock which last traded at 9.9c. Canaccord is particularly impressed with the high-grade nature of New World’s Antler project in Arizona.
  • Rumble Resources made headlines with a 23m core assaying 4.1% zinc at its Chinook project near Wiluna in central WA, but failed to move the market the right way, slipping 12c to 48c, and
  • Sultan Resources added 2c to 29c as interest grows in a planned drilling program on its Lake Grace prospect in the south of WA which has geophysical features similar to the Julimar palladium discovery of Chalice Mining.

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