Goldman Sach: Long Lasting Bull Commodities Market (8 Dec 20)

Goldman Sachs (Jeffrey Currie, Global Head of Commodities Research) predicts the world is entering a long lasting bull market for virtually all commodities as recent underinvestment, dollar weakness, government spending and the energy transition boost demand across the board. 8 Dec 2020

"It is important to separate the vaccine, which is a tactical upside catalyst, from the pandemic itself, which is a structural catalyst to a longer lasting bull market. As we look out to 2021 the vaccine creates that V shaped recovery... but looking beyond that we believe it's the beginning of a structural bull market across the entire commodity complex.
-You have structural under investment in supply. it's metal, mining, the entire old economy has shortages in investment.
-Demand story: The big catalyst that the pandemic shifted around social needs, and social needs create a redistribution of wealth towards lower income, income constrained households that consume a lot more...demand is relatively strong across the board. Policy driven demand is going to create a capex cycle that is bigger than the BRICS in the 2000s, that kind of a bull market in commodities. The policy side of the new cycle would be kick started by a potential $500m($1b) stimulus likely to be approved by the US Congreve in the coming days.
Weakening of USD: A weakening USD was also providing tailwinds for the commodity sector, with the effect already evident in price rises in oil and commodities such as copper and iron ore, with iron ore prices hitting seven year high on Dec 7. This is not something we are forecasting, we are inside it right now.

In addition to the above as highlighted by Goldman, one of the key factor for the rise in ferroalloy alloy prices has been the strict implementation of China pollution policy. In 2018, when China undergoing strict pollution control policy with the shutdown of heavy industries furnaces, the alloy prices esp FeSi shot up to a high of US$1800 per ton. However, with the onset of the trade war in 2019 and Covid crisis, they have relaxed the implementation and strict control of the pollution to prevent massive unemployment and thus resulted in the Chinese furnaces continuing production without restriction at the expense of environmental issue. Alloy prices for most of 2019/2020 has been depressed as a consequent. However, with Chinese economy back again and expected to continue to grow and unemployment is no longer a big concern, the Chinese government has started implementing environmental control on heavy industry production recently and we begin to see huge spike in alloy prices again. I expect the Chinese government to continue the strict environment control again and this should be good sign for a more sustained higher alloy prices in the future. OMH should be a big beneficiary of a greener Chinese environmental policy. In addition, we have also seen a lot of news of closure of sheltering plants outside China which should also reduce the supply going forward. If we are lucky, we might even see bull market for ferroalloy in 2021/2022 due to reduced supply (closure of furnaces and underinvestments) and increased demand as mentioned by Goldman Sach.