How the coming recovery will impact commodity prices

The COVID-19 pandemic has impacted the economy at a time when it looked like nothing could stop it. After a very high S&P 500 return of over 29% in 2019, the novel Coronavirus infused some volatility in the markets. This has tempered spending, consumption, and some would argue brought about the final chapter of retail apocalypse, as we embark on the road to recovery. Many analysts are predicting infrastructure spending will be the way it happens, and that the recovery will boost commodity prices.

This CNBC article talks about exactly that. With government pledging ridiculous amounts of money to breathe some life into an economy that may be telling us we need to take our medicine, where that money goes is of the utmost importance.

The next phase of the economic recovery is likely to be driven by commodity-intensive infrastructure investment, analysts have told CNBC, potentially setting the stage for further gains across the industrial space in the coming months.

 

One sign the recovery may be gaining momentum, however, came as the world’s second-largest economy reported industrial output expanded the most in eight months in August.

China, which has been in recovery mode for months now, published data on Tuesday that showed industrial output growth accelerated to 5.6% in August when compared to a year earlier. It bolsters the view that Beijing’s demand recovery continues to gather pace, with government stimulus helping to fuel a rebound.

“We’ve already seen a metals-intensive response in China, highly metals-intensive,” Max Layton, head of EMEA commodities research at Citi, told CNBC via telephone.

This would lead to the likelihood of infrastructure spending, which will mean demand for steel.

Iron ore prices could ‘skyrocket’

“I do think that a lot of the stimulus will be infrastructure driven. We already know that there is a massive infrastructure deficit in a lot of developed countries and that is something that could be addressed in this period,” Nitesh Shah, director of research at New York-based WisdomTree Investments, told CNBC via telephone.

“Why waste a good crisis? You can actually get through a lot of the infrastructure programs that you’ve been waiting decades to actually get through the door in this time,” Shah continued. “I’m not as optimistic on a big ‘V-shaped,’ rigorous recovery but even some sort of recovery is good for the industrial space.”

A V-shaped recovery refers to a sharp decline in economic activity which is then matched by an abrupt rebound.

 

“We saw this back in 2008-2009 in response to the financial crisis (and) what did we get out of that? We got a rally in some of the industrial commodity markets — it was a super-cycle,” he said.

“I’m watching things like iron ore very closely now because those sorts of industrial commodities are going to skyrocket if we do get this bounce-back driven by infrastructure and then that will filter into oil.”

Spot iron ore prices climbed to fresh six-and-a-half-year highs on Monday, trading close to $129 a dry metric ton on the back of a construction boom in China.

The steelmaking ingredient has since pared gains, changing hands at $126.59 on Friday. Iron ore prices have climbed more than 37% year-to-date.

Iron Ore has performed fairly well this year. While it may not be an exception, given that commodities like Gold, Silver, etc. have also performed well, over some periods it had outperformed gold on a percentage basis. An infrastructure based recovery will mean this commodity will certainly go up, and potentially “skyrocket”.

Along with this government sponsored commodity cycle, there is also the not-so-minor detail which is China and Australia are really not getting along. We have covered this fairly extensively, and it seems the reason Australia has a significant degree of leverage is because they are the largest exporter of Iron Ore to China.

Conclusion

We remain bullish on Black Iron Inc (TSX:BKI), and have seen at least a 20% appreciation in the price thus far, and expect a far greater return in the future. With a high grade Iron Ore deposit (which sells at a premium), a large asset outside of Australia, and a border shared with 2 producing mines, this is a very undervalued opportunity. The link to our research can be found here.