Anatomy of a bull market: Morgan Stanley research MORGAN STANLEY RESEARCH
January 18, 2021 01:00 AM GMT
Commodity Matters | Europe
Anatomy of a bull market
A look at past and present commodity bull markets Testing the upside: 2021 has begun with commodities in a bull market – fuelled
by both fundamental and exogenous drivers. There's some risk of a pullback
across the complex into the seasonally-quiet demand period – dominated by the
northern winter, lunar New Year, and with added risk of Covid-19 weakening
demand – although in some markets (notably copper), supply disruption risk is
also re-emerging. But we would buy any dip – we remain bulls into 2Q21
But accurately calling the peak for bull markets is notoriously difficult, and risk is
clearly to the upside versus our base case forecasts for 2021-22. We
also take a look at historical consensus forecasts (Exhibit 4), which highlights the
tendency for analysts to call the peak too soon in bull markets.
Market fundamentals and inventories: On a fundamental basis, we see most
support for copper, nickel and iron ore, where we forecast deficit markets
through 2021.
Copper, on the other hand, has support from very low exchange inventories and a global stock:consumption ratio <3 weeks, which is associated with historical price highs. Any incremental supply disruption could be enough to send copper's price to historical peaks, while stronger-than-forecast demand growth (base case +2.2%) could keep the market tight well into 2022.
Value: Today's spot price levels remain below historical peaks across the commodities.
At $3.70/lb, spot copper is 30% below its Jan-11 spot high of $5.30/lb ($11,684/t) in real
2020$;