Goldman Sachs sees the beginnings of another commodity super-cycle of the kind that was rudely interrupted by the 2008 financial crisis.
That scenario is predicated on a green industrial revolution, with policymakers prioritising the goals of full employment and increased income for low-income households, which in turn will drive demand for commodities and power a capex-driven recovery.
It’s a bold call by the bank, and not one shared by everyone. A good bellwether for industrial production is the copper price, up more than 30% over 12 months. Copper currently sells at around $8 000 a ton, but Goldman Sachs sees it rising to $10 000 a ton by 2022 as Covid restrictions are relaxed and industrial demand gathers pace, first in China and then spreading to the rest of the world.
Prices of other commodities like oil, coal, aluminium and tin have been resurrected from the February 2020 Covid slump as tentative signs of economic recovery .
It’s worth noting that copper and the raw materials index are closely correlated to emerging market stocks. If that’s the case, and Goldman Sachs is correct, the JSE over the coming years may be a less risky bet than many believe.
Copper price in USD – a bellwether for global industrial demand
And then there’s this chart from Janus Henderson Investors showing we are in the early stages of a commodity cycle that may extend for another 25 years. The last financial crisis in 2008 prompted an orgy of financial stimulus from central banks around the world, though most of this ended up in the pockets of higher-income groups. Very little filtered down to poorer households.
Goldman reckons the post-Covid recovery is likely to be accompanied by pro-poor policies that should stimulate demand for houses and accompanying infrastructure, and rising wages.
Is there a danger of a repeat of the 2008 collapse? Goldman Sachs sees the current environment as similar to the US super-cycle of the 1970s rather than the 2000s, where massive wealth creation under the rubric ‘War on Poverty’ created the world’s largest middle class.
The coming super-cycle is further undergirded by chronically low investment in commodity supply, which will have to be rapidly rectified.
China has been buying up stocks of metals such as aluminium and iron ore, and that’s benefitted companies like Kumba which reported earnings before interest tax, depreciation and amortisation of R17.4 billion at an astonishing 55% margin – with most of its product destined for China and the Asian markets.
Four years ago, obituaries for South African mining were everywhere in evidence, in large part because of a dysfunctional mining ministry ready to sacrifice a key economic sector on the altar of transformation and political meddling. With commodity prices now surging and mining keeping the country’s balance of payments in some kind of equilibrium, mining has reasserted its muscle in the economic life of the country.
The chart below shows the JSE Mining Index (blue) against the All Share index (red). The extraordinary gains in platinum stocks over the last two years is explained by the move by governments to tighten air pollution regulations. Stocks like Implats and Amplats helped keep the JSE All Share index afloat. Nine out of the 20 largest stocks on the JSE are miners, with stocks like BHP and Anglo American doubling since the Covid crash of March 2020.
It’s clear that mining is back. And if Goldman Sachs is correct, it will be around for a while.
JSE All Share Index versus JSE Mining Index