The Weight of Money Signals Continued Growth For Commodities

The MSCI World Metals & Mining Index is well up since the start of the year. It signals strong demand for raw materials, and is further proof that global growth is still in place.

The once in a generation infrastructure spends, not only in Australia, but also the US, China and throughout the world, are going to require a lot of raw materials. Such as steel, aluminium, and copper, to name a few.

Demand from new industries is driving commodity prices higher. New industries like the generation and storage of renewable power, the electrification of transport and high-tech devices of all kinds, are also stoking demand for raw materials.

What’s going on in the auto industry right now is absolutely incredible.

For example, in March this year, Mercedes-Benz announced it was going to invest 10 billion euros to release a range of electric vehicles by 2022. That’s just short of $15 billion in Aussie dollar terms.

And all the other major car manufacturers are doing something similar. That requires a lot of aluminium for the body, rare earths for the magnets which drive the motor, battery materials such as lithium, cobalt and copper for the wiring.

China is scaling up production and spending billions on plug-in vehicles, which seem to be gaining traction among drivers.

More electric cars are sold in China than in the rest of the world combined. And, by 2020, Beijing wants five million plug-in cars on its roads.

They need them, to combat the severe air pollution gripping their capital cities

The air quality index in Beijing has been rising steadily, and is reaching levels at which even perfectly healthy people can start to feel unwell.

This is providing an added tailwind for metal prices, as China is enforcing new environmental rules.

For example, China is targeting the illegal mining and smelting of various metals to meet air pollution targets. That further decreases supply.

Many have called the death of commodities since they came off their tops in 2011. But this sector might have further to run.

That’s not based on my opinion. It’s based on the work of Nikolai Kondratieff, a long-dead Soviet economist.

His studies found a long wave cycle in the movements of commodity prices, which peaked and troughed in roughly 30-year cycles.

This cycle predicted the run-up we got in commodity prices from the low in 2001. And if history is to repeat, commodities will run up further, roughly into the middle of the next decade.

And it’s not unlikely that demand for raw materials will increase from here, with Beijing’s trillion-dollar plans to recreate the ancient ‘Silk Road’ Marco Polo followed, which connected Europe to Asia.

This colossal program will not be of camels and caravans but new roads, high-speed rail, power plants, pipelines, ports, telecommunications, airports and more. Connecting China with 60 other countries in Asia, Europe, the Middle East and North Africa.

Combine that with President Trump’s call to spend $1 trillion updating US infrastructure and our own once in a generation infrastructure spend. All that infrastructure will require a lot of raw materials to complete.

We’re getting a hint of that now with the prices for copper hitting their highest level in nearly three years last month, and zinc sitting at its highest price in a decade. Aluminium climbed to three-year peaks last month, and iron ore has rallied 35 per cent since the end of May.

Your take away from all this?

With the prices of industrial metals all busting into multiyear highs like this, it suggests that the likelihood of a global recession is low, despite what the analysts and academics say.

On the contrary, it suggests further global growth. And with global infrastructure plans and the electrification of transport gathering pace, it suggests further that this trend still has steam to run.

The metals sector is presenting opportunities for investors at the moment. Go here to find out more.


Terence Duffy,
Editor, Money Morning Trader

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.

Money Morning Australia