Commodity boom expected

FNB Wealth and Investments’ Wayne McCurrie said it is close to the bottom of the commodity cycle and is now very bullish on commodities.

“We are probably right at the bottom of the commodity cycle. It always happens when interest rates peak and economic growth slows,” he said.

Commodity shares take a bit longer to recover with looming interest rate cuts but should start to recover soon.

“When global growth picks up, it is going to happen in an environment where there is virtually no new supply of commodities,” he said.

It is because the commodity companies faced a very challenging time in 2015 and, since then, spend virtually no money on new projects.

In recent years, many mining companies favoured paying dividends instead of investing excess cash in expanding their operations.

McCurrie said increased capital expenditure (Capex) must happen to satisfy the expected demand and, therefore, expects a boom in the commodity sector.

South Africa, which is a large exporter of commodities, is expected to benefit from increased demand.

Gold, ores, and basic metals form 27.5% of South African exports and contribute significantly to South Africa’s gross domestic product (GDP).

Due to the significance of commodities within South Africa, many economists look to the commodity cycle to predict economic growth and slumps.

For example, the commodity cycle is also often referred to when explaining increases and decreases in the strength of the South African rand.

Periods of high commodity prices generally correlate with periods of rand strength, while a commodity cycle slump leads to a weaker currency.

Daily Investor considered the prices for various commodities year-to-date to see how these assets have performed.

Copper

Copper trades at a similar level to the start of the year. The commodity had a strong start to the year but consequently dropped back. The price of copper achieved 1.36% growth in the year to date.

While many economists expect copper supply to be a problem in future, others argue that demand has not lived up to expectations.

The launch of large copper mines in recent years should also ensure strong supply and prevent huge price increases.

Iron ore

Iron ore started the year strong, trading above $130 per ton, but dropped significantly in April as China gave hints of a slowdown in iron demand.

The price of iron declined by 4% year-to-date.

Oil

The oil experienced some relief in the year-to-date, coming down from above $80 a barrel at the beginning of the year to dipping below $70 at times.

However, it is uncertain whether the price of oil will continue to fall as Saudi Arabia announced it would cut its oil production by 1 million barrels a  day starting in July.

Gold

In contrast to the declining trends seen in the production commodities, gold has seen a price increase.

The gold price strengthened from around $1800 per ounce to over $1900 per ounce over the last six months.

Gold is known as an inflation hedge and tends to perform well during high inflation and high interest rates.

This difference could explain the different price movements in productive commodities compared to gold.