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Laurium: This is a cyclical commodity recovery, not a multi-year supercycle

The fund manager believes that commodity prices look ‘frothy’.
Image: Waldo Swiegers/Bloomberg

Laurium Capital believes the current commodity price boom is a cyclical recovery that could peak in the next six to 12 months, and not the beginning of a multi-year supercycle.

‘There is a lot of debate out there,’ said Laurium’s Murray Winckler during a Nedgroup Investments webinar this week.

‘A couple of commentators have said this is a supercycle for commodities now because there is no fresh supply in many metals. Our view is that this is very much a cyclical recovery.’

Listen: Commodities super cycle: Is it ending or just beginning?

China 

In an interview with Citywire South Africa, Winckler said that, in order to sustain higher commodity prices, there has to be strong demand, particularly from China. However, he is concerned about China’s slowing credit impulse. In addition, China is moving to deal with the level of commodity prices and is releasing material from its strategic stockpiles.

Winckler said the global fiscal and monetary stimulus will start easing over the next 12 months. As a result, he expects international interest rates and economic growth will do well into next year, but growth will moderate after that.

‘China’s growth is expected to see a slowdown, more commodity supply will come to market, and we see lots of mergers and acquisitions – that normally happens at the top of the cycle.’

Frothy 

Winckler said commodity prices look ‘frothy’.

‘I think the prices are extremely high and will come down. If you look at the demand and supply fundamentals for copper in the long term, the demand will be strong, but the prices are quite full and will come down.

‘The longer these prices stay up, the more the likelihood there will be a few people that break ranks. In iron ore, we are already seeing smaller projects coming on. I think that will continue and bring the prices down. Platinum group metal (PGM) prices look like the one that will probably stay elevated.’

Lots of risks 

Winckler said there are many risks related to the commodity boom, especially China, a major consumer of commodities like iron ore, copper, platinum and palladium. However, investors are expecting the price of iron ore to come down.

‘The iron ore price is still above $200 a tonne. Interesting if you look at BHP Billiton and Rio Tinto. Their cost of production is $30 a tonne. They are making an 85% operating margin on these products. If we look across, the 90th percentile sits at about $60 to $65 a tonne. Everyone expects iron ore to come back down to around about $60 a tonne. That has been a view for a long time.’

Dwayne Dippenaar, Laurium Capital portfolio manager, said during the webinar: ‘We are a little more cautious around certain commodities, like iron ore. Over 80% of the iron ore seaborne market goes into China. So we are concerned about a slight slowdown in China.’

‘Unbelievable’ 

Winckler said: ‘You can buy Billiton now on a free cashflow yield of about 18%. Now that is unbelievable because iron ore will probably be 80% of the company’s earnings. So, the markets are discounting that many of these prices will come off, particularly iron ore. But each month prices stay high, then the mining companies generate more cash.’

There is no fresh metal supply in PGMs, so that could help sustain the high prices of these metals, he said.

‘The market is discounting a lot of this, but we think the earnings surprises will probably continue, and people will have to revise their earnings higher. There is still momentum in the cycle, which we think will remain for a while. It is not a fundamental long-term view. But we think there’s still at least the next six to 12 months. We are very wary of the risks and are very selective about what stocks we choose.’

Nedgroup fund merger

Following an investor ballot, Nedgroup has now merged the Nedgroup Investments Value and Nedgroup Investments Growth funds into the Nedgroup South African Equity fund. Laurium is the appointed manager of the combined fund.

During the year to the end of April, the Nedgroup South African Equity fund returned 36.9% compared to 36.2% for its benchmark, the FTSE/JSE Capped SWIX Total Return Index. Over three years, the fund returned an annualised 4.5% compared to the benchmark return of 3.2%.

The fund holds just over 21% of its portfolio in platinum and diversified mining stocks, in particular Anglo American, BHP Billiton, Impala Platinum and Anglo Platinum.

This article was first published on Citywire South Africa here, and republished with permission.

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Murray, thanks, finally someone is talking sense. Only area I’d disagree with you is the duration of the upside of PGM’s (especially Pd and Rh); you may be too bullish.

If China is consuming from its strategic stockpiles then at some stage metal prices will shoot up again, or go back to pricesses seen a week ago.

Whether it is the start of a decade-long supercycle or merely a correction depends on your view of the dollar movement. Any supercycle needs inflation in credit creation. Long-term cycles are driven by increasing liquidity. A weakening dollar and low interest rates create rising liquidity for emerging markets and create a sustainable boom in the demand and prices of commodities.

A strong dollar is a deflationary force that drains liquidity from emerging markets, lowers the price of commodities, creates an economic depression, rising unemployment, ballooning Debt/GDP ratios, and a sovereign – and banking crisis for some. The Fed is in control of commodity prices, and as such, the Fed determines when irresponsible emerging-market countries go broke.

I believe we will see a weaker dollar over the next decade. Therefore, I am a commodity bull once again, after I have been neutered for the last decade!

End of comments.

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