Commodities after Coronavirus. Make Hay While the Sun Shines


  • Pivoting away from China = Global supply chains being reset / supply issues
  • Fiscal Stimulus / Infrastructure Spend
  • Inflation
  • Opportunity. All measures are being set up to counter the ‘worst case scenario’. If the ‘worst case scenario’ doesn’t occur…stimulus packages will create tail winds for commodities.

The Impact

By the end of the 1st quarter 2020 we will have witnessed a huge global economic contraction (-12% according to JP Morgan), a decade long equity bull market come to the kind of abrupt end not seen since the Great Depression and a 50% fall in the price of Oil.

All of this coming after the 2008 global financial crisis with the one shining light since then, a relatively healthy labour market, now also faltering as unemployment numbers rise at a spectacular rate. 

  • Social distancing measures have been forecast at impacting 92% of global GDP

Within the commodity realm, prices have fallen on aggregate some 38% to the end of March. However, within that broad spectrum of commodities there are some that have performed better.

Gold, the much-lauded hedge in financial stress, has performed as advertised. Base metals, the industrial barometer of Asia, have fared well given the seasonal slowdown and protracted trade war during 2019, ditto agricultural products. On the other hand, the largest and most volatile of commodities, Oil, has suffered the greatest - falling over 30% on one day alone.

Global Supply Chains

One consequence of the Coronavirus pandemic and resultant re-evaluation of global relationships may be that of supply chains. Western governments have become acutely aware that relying on distant countries, who may not share similar democratic values, is a strategic risk.

Global supply chains will be reset.

From a commodity perspective, rare earths are an example of this. China produces about 90% of global supply. From the early 90’s China was selling rare earths at such low prices that suppliers such as the Mountain Pine Mine in the USA (once the largest rare earth producer in the world) were unable to compete, resulting in the shuttering of their mines.. This has happened throughout the commodity supply chain with western producers unable to compete without government subsidies

The issue is much broader than rare earths alone, however. Of the 35 metals the US has identified as ‘strategic’, many are mined and refined in countries the State Department would not classify as friendly - like China & Russia.

Outside of our asset class, the most topical breakdown in supply chains currently is in PPE (Personal Protective Equipment). The majority of global production was outsourced to China. Shipments had been delayed to other parts of the world during Jan/Feb, leading to shortages internationally.

Add strategic risk to an already increasing protectionist movement (Trump/China trade war, etc) and we’re likely to see a monumental shift in international trade and strategic supply dynamics.

The result of Covid-19 will mean supply chains are relocated from China back to a number of countries either under the guise of national security or perhaps in actuality being nothing short of an employment drive.

“As resource constraints tighten globally, countries that depend heavily on ecological services from other nations may find that their resource supply becomes insecure and unreliable. This has economic implications – in particular for countries that depend upon large amounts of ecological assets to power their key industries or to support their consumption patterns and lifestyles.” Dr. Mathis Wackernagel, President of the Global Footprint Network.

Fiscal Stimulus / Infrastructure Spend

The most useful kind of fiscal stimulus is a physical one. Governments spending money on infrastructure is of far more benefit than simply writing people checks (see $10k Hong Kong handout to all citizens). It employs people to work on the projects and creates durable assets that can help boost long term economic growth. 

  • Trump has called for a $2 trillion infrastructure package
  • UK’s Rishi Sunak pledges £600bn on roads, rail, housing & broadband infrastructure scheme
  • The EU has lifted spending limits for all members in order to fight the pandemic

Those government infrastructure projects all require building large and capital-intensive public and private buildings and transport systems. These need mined metals like copper for wiring & base metals required for producing steel (iron ore, coking coal, Nickel, etc).

The issue is that very little additional mining capacity has been added over the best part of a decade that will be required for these projects to complete. There WILL be supply issues.

The Bloomberg Commodity Index (BCOM), which tracks a broad basket of commodities, reached its lowest level since 1986. But as the adage goes “the cure for low prices is lower prices”. Eventually mines and other commodity producers shut operations that are no longer profitable…and this is not a tap that can simply be turned back on. It takes years of planning and expense to re-start or begin these projects.

This is the current position we find ourselves in - with aggregate prices running at lows not seen since pre 1990’s. Price levels which have caused the reduction in production of a number of essential commodities.

To date governments have been posturing around an increase in infrastructure spend. Our argument is that the Coronavirus pandemic will now push them over the edge in terms of implementing these projects in bipartisan agreement. The issue is that should demand then increase, the commodities required for these projects are either unavailable or under the clutches of an unfriendly global foe.

After the Great Depression of 1929 US President Franklin Roosevelt pushed through a huge infrastructure spend…he called it “A new deal for the American people”. Back then it took a few years before commodities boomed. This time around we have a combined $15 trillion of globally coordinated fiscal and monetary policy seeing off traditional deflationary forces. 


When, and it is a when, fiscal stimulus is combined with extremely loose monetary policy there are only two likely outcomes: a deflationary spiral or an inflationary spiral. It is the latter that we believe as the likely outcome. This will start with wage inflation as supply chains are relocated from China back to a number of countries under the guise of national security when in actuality being nothing short of an employment drive (as mentioned earlier).

Where China has been a major source of deflationary pressure on both wages and prices over the last 20 years, the reversal of this trend will help drive a recovery in inflation. 

  • US CPI inflation has risen steadily over the past six months, from an annual rate of under 2% to nearly 2.5%.
  • Over the same period, the FED has cut the federal funds rate by 75 basis points, before anyone had ever heard of the coronavirus.

The collapse of both demand and supply since the 2008 global financial crisis means that we’re unlikely to see the falling prices and deflation that we experienced since then to date.

There will more likely be a surge in demand as the coronavirus abates, people go back to work and businesses and consumers borrow at historically low rates creating an uneven recovery of slow output growth vs accelerating prices and inflation…otherwise known as stagflation.

The FED would then usually counter this by increasing interest rates. However, this is now less likely to happen at pace when you combine a President who regularly pressured the committee to keep rates down even with record low unemployment and a country fresh out of a recession. 

Over the past month:

  • Balance sheet of ECB has grown by $600bn or 12%
  • Balance sheet of FED has grown by almost $2 trillion or a staggering 40%

The Opportunity

The past decade of investing has been very simple; move trillions of global equity capital flows into the US, chasing yield and stock buybacks and away from cyclicals. However, we believe the macro environment no longer suits this.

As we experience government after government pledge trillions of dollars in fiscal spending the appeal of hard assets in an inflationary environment becomes irresistible, the debasement of the USD continues and so too its correlation to commodities.

The plethora of policy’s built into the financial system after 2008 has benefitted a vast majority of asset classes, in particular equities. However, it’s always been a delicate balance. The FED has long been attempting to lift the low inflation rate we’ve seen since the financial crisis closer to their long-term objective. There is a real possibility that this epidemic pushes a little too hard and they get more than they bargained for.

Combine the potential rise of inflation with additional stimulus in the form of a global infrastructure spend and very little new commodity supply entering the market, the stars may very well be aligned.

Markets are priced-in for deep deflation. Any positive news-flow coming out of the Coronavirus epidemic or normalisation of those expectations could potentially deliver spectacular returns in a previously unloved asset class.



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