Outlook 2021: Energy in all its forms tipped to lead running of the commodity bulls

Energy, in its many forms, could be the winning investment theme for 2021 as global growth rebounds and vaccine-enabled mobility accelerates.
18th December 2020
Tim Treadgold

Energy, in its many forms, could be the winning investment theme for 2021 as global growth rebounds and vaccine-enabled mobility accelerates.

Old energy, in the form of oil and coal, will continue to recover while battery metals, the new energy, could start to deliver substantial investment returns after a false start in 2018 – which is why Independence Group has jumped at the chance to buy a slice of Greenbushes, the world’s biggest and best lithium project.

Even uranium, the world’s least loved fuel, is showing signs of a recovery thanks to the latest Covid-caused shutdown at the world’s biggest uranium mine, Cigar Lake in Canada. That news lifted local uranium stocks, with Bannerman up 2c to 8c, Paladin up 5c to 26c and Boss Energy up 1c to 9.6c before finishing at 8.8c.

A whiff of what might lie ahead for energy stocks can be seen in the 35% rise in the price of Brent-quality crude oil to $US51.16 over the past six weeks and a pick-up in coal prices despite China’s embargo of thermal coal shipments from Australia.

Lithium, graphite and nickel, three key battery metals, are also moving higher after a roller-coaster year which saw prices fall sharply at the start of the pandemic and then rise to trade above their January starting point.

What has happened in commodities has been repeated on the Australian stock market as measured by the all-ordinaries index which, in the final full week of trading this year, is 1.5% above where it started 2020.

Given that the index plunged by 33% in March, the see-saw year can be clearly seen, with the only worry being that the upward swing might have gone as far as it can for now, until we get a better look at the New Year’s economic trends.

Morgan Stanley, a leading investment bank, is not waiting to see how 2021 unfolds. It reckons the recovery has further to run. “The peak for commodity prices is yet to come,” the bank told clients in London.

Not everyone agrees. The year ahead could actually be quite different, though perhaps not as different as this humorous/perceptive (and outrageous) set of forecasts from Denmark’s Saxo Bank:

There is an argument which says peak prices in the current cycle have already occurred, with the possible exception of gold.

But whether prices have peaked or not, there is the powerful investment incentives of peak profits which are starting to flow – with peak dividends to come.

The upward surge in the share prices of leading miners such as BHP, Rio Tinto and Fortescue Metals over the past three months has been less about underlying commodity prices and more about February’s reporting season and the expected bumper dividends.

Examples of prices bumping against the ceiling include copper, the bellwether metal, which is tipped by UBS, another investment bank, to trade next year around $US3.50 a pound. It is already selling for $US3.53/lb. Nickel’s target for next year is $US7.50/lb v today’s $US7.86/lb.

Gold, on the other hand, looks ready to move back above $US2000 an ounce as after-inflation yields on U.S. Treasury paper look like being stuck below 0%, concerns remain about the fate of Europe after Brexit and China continues to play the international bully.

Banks have mixed views about gold. Credit Suisse this week trimmed its 2021 price forecast for the metal from $US2500 an ounce to an average of $US2100/oz with the peak of $US2200/oz in the September quarter. Citi followed with its own forecast gold price cutback to $US1975/oz.

Local gold stocks firmed in line with the gold price which rose by $US30/oz over the week to be trading around $US1865/oz. Northern Star added 15c to $12.58 and De Grey was up 2c to $1.06.

Iron ore, Australia’s get-out-free-from-a-Chinese-jail card, could stay higher for longer given supply and demand pressures. Brazil is yet to recover from its setbacks and cyclone season has started in Australia’s north-west with port closures a certainty – just as Chinese demand for steel goes through the roof.

The outlook for iron ore was best summed up in the latest forecasts from UBS which ranks iron ore as the commodity likely to be the fourth-best performer over the next three months (beaten by metallurgical coal, lithium and graphite), but the 17th (and worst) performer over the next 12-months thanks to demand peaking and supply rising.

Local iron ore stocks ran out of steam after their stellar rises even as the price of high-grade ore clung to an eye-watering $US155 a tonne. Fortescue was clipped by 70c to $22.46. Mineral Resources lost $2.50 to $32.71 and Champion Iron was down 32c to $4.97.

Lithium and graphite, two of the new-energy minerals mentioned earlier, are seen as being stars in three month and 12-month horizons.

Macquarie Bank freshened its battery metals comments this week with a big boost to forecast sales of electric vehicles next year thanks to consumer demand and governments wielding the carrot of tax incentives and the stick of higher taxes on fossil-fueled vehicles.

On the market this week, most lithium stocks edged higher. Pilbara Minerals added 2c to 76c. Liontown crept 1c higher to 33c, while Orocobre led the way with a rise of 28c to a 12-month high of $4.32.

Much of what’s likely to happen in 2021 will depend on the speed at which Covid vaccines are distributed but as the number of medically approved treatments are released (Moderna’s formula is expected to be approved in a matter of days), a clearer view will be possible of the speed of the fightback.

If global growth does come in at 6% next year (and China is running at 8%) then the overall performance of financial markets could be a lot better than currently seems likely.

Unknowns, the so-called “black swan” events such as Covid, cannot be discounted, especially after this year’s surprise, but nor should a “white swan” event such as synchronised global growth if Europe dodges a Brexit crash, the U.S. quickly bounces back (which it can) and China steams ahead at breakneck speed.

Key risks for the year ahead, according to UBS, are: China growth slowing slow. The U.S. v China trade war flaring up. China’s trade attacks on Australia worsening. Tax increases on resources and tighter environmental laws --- but, even after listing those, the advice from bank is “stay overweight resources”.

Other newsworthy events and market moves included:

 

  • A fresh surge in the fund-raising flood as companies stocked up their cash reserves ahead of the uncertainties which always come with a new year. Share placements this week were reported by Talga, $25 million. Musgrave $18 million. Poseidon, $10 million. Geopacific $140 million. Hillgrove Resources $10.9 million. Pacific Nickel $3.2 million. Okapi Resources $2.5 million, and DGO $10.5 million.

 

  • Potash stocks made waves in the financial sector as a number of them move closer to production. Salt Lake Potash slipped 1c to 40c after announcing a $52 million placement to fully fund its Lake Way project. BCI Minerals got conditional approval from a government agency to provide a $450 million loan for its Mardie project, and Agrimin said it had made progress with funding for its Lake Mackay project with the appointment of an independent technical export.

 

  • Investigator Resources added 0.7c to 6c after reporting encouraging assays from drilling at its Paris silver project on South Australia’s Eyre Peninsula with a best hit of 2 metres at 6247 grams a tonne from a depth of 29m.

 

  • Aurelia Metals reported what it called exceptional new assay results from drilling outside the orebody at its Federation project in NSW. Best intersection was 12.9m at 33.4g/t gold, plus 36.7% lead and zinc, and

 

  • Black Rock Mining rose by 1c to 10c after announcing a $US7.5 million deal with Posco which will see the Korean steel giant emerge with a 15% stake in the Australian company which is developing a graphite project in Tanzania.

 

Image credit: © lassedesignen / Fotolia

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