Scotia Capital Rationale The outlook for commodities has “significantly improved” in recent months, according to Scotia Capital analyst Orest Wowkodaw, who thinks the “risk-reward proposition for the equities remains attractive despite the impressive performance post the COVID-19 pandemic collapse in early 2020.”
“Although most of the world continues to battle the COVID-19 pandemic, the recent development of several vaccines and clarity on the governing U.S. administration has significantly improved the outlook (and sentiment) for commodities,” he said. “There is little doubt that the remarkable Chinese economic recovery beginning in Q2/20 rescued most commodity markets from complete disaster last year given the pandemic-induced demand implosion outside of China. Looking ahead, massive coordinated global stimulus will be required for most nations to successfully navigate through and eventually recover from the current pandemic. In our view, this stimulus should serve as a very positive tailwind for commodities particularly given the heightened focus on a ‘green recovery.’ Our base case continues to assume that global commodities demand strongly recovers in the 2021-2022 period supporting an improved pricing environment for most metals. In the medium to long term, we believe that severe under-investment in new capacity in the context of a declining existing production base combined with growing demand from global decarbonization efforts has set the stage for the next commodities super cycle ahead.”
In a research report released Monday, Mr. Wowkowdaw said he “strongly” prefers copper exposure among base metals, expecting the market to “post a meaningful 2021 deficit driven by demand recovery before transitioning to a large medium-term structural deficit due to supply erosion.”
“Moreover, we anticipate Cu to be among the biggest beneficiaries of growing global decarbonization efforts,” he said. “We forecast near-term over-supply in both Zn and Ni markets. While we still see downside pricing risks for Fe from current elevated levels as supply recovers, the market appears to be tighter for longer than we previously envisioned. We anticipate HCC prices to gradually recover as ex-China steel markets improve and current trade tensions inevitably ease. U3O8 fundamentals are slowly improving on supply constraints and the increasing role for nuclear in green energy.”
“We have increased our average 2021-2024 prices for Zn, Ni, Cu, and 62 per cent Fe by 9 per cent, 14 per cent, 14 per cent, and 16 per cent pa; U3O8 is unchanged; HCC declined by 7 per cent pa. In 2021, we anticipate year-over-year improvements in 62 per cent Fe, U3O8, Zn, Ni, and Cu prices of 6 per cent, 16 per cent, 17 per cent, 20 per cent, and 21 per cent, with HCC declining by a minor 2 per cent.”
With those changes to his commodity price deck, Mr. Wowkodaw raised his 2021 EBITDA estimates by an average of 26 per cent and his 2022 projections by 28 per cent. His 8% NAVPS estimates by an average of 32 per cent.
“With different fundamentals, each commodity appears to be at a somewhat different stage of its own respective cycle stage (i.e., peak and trough),” the analyst said. “Our analysis suggests that copper fundamentals are tightening while nickel and zinc appear to have moved into multi-year surplus positions. Of the three base metals, the recovery in copper appears the most advanced by far. Iron ore currently remains the closest to its peak-cycle levels given the perfect storm of material ongoing supply side constraints combined with surprising strength in Chinese steel markets. On the other hand, met coal remains near its bottom of its cycle due to relatively weak ex-China steel markets and the over supply dislocation caused by the China-Australia trade dispute.”