Consider commodities after broad-based price strength

Shortages helped strengthen prices for raw materials this year, with increases seen across corn, soybeans, lumber, copper, oil and more. Whether this price strength can be sustained depends on various factors.

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“Shortages have driven commodity prices to multi-year highs as demand has rebounded and supply has not been able to keep up,” said Daniel Greenspan, senior analyst and resource team director with CIBC Asset Management, in an interview in late June.

Whether prices will remain high in the near term is uncertain, Greenspan said, particularly as certain economies try to limit price gains.

“In metals, specifically, China is working to curb speculation and manage prices lower in the short term, which has weighed on the sector in recent weeks,” he said.

Also, China’s auction of strategic reserves from its base metal stockpiles would put more tons of aluminum, zinc and copper on the market and “into the hands of end users,” Greenspan said. That could help balance the market and pressure prices lower.

On the other hand, demand from regions such as the U.S. and European Union should increase as their economies continue to reopen, supporting commodity prices.

Still, “given its size, China’s impact on commodity markets will remain a key driver,” Greenspan said.

One commodity for which he has a positive outlook for the rest of this year and into 2022 is oil.

“OPEC [Organization of the Petroleum Exporting Countries] continues to manage supply, and U.S. producers are showing discipline as investors continue to push them for a return of capital rather than growth,” Greenspan said.

This week, OPEC called off a meeting after talks broke down over production levels. Crude subsequently surpassed US$76 per barrel for the first time since fall 2018.

On the demand side, Greenspan sees oil as “a good way to play the reopening trade” as industrial production and travel increase.

One name he likes is Calgary-based Cenovus Energy Inc. The company acquired Husky Energy Inc. earlier this year and is now integrating that acquisition. “That process is going very well,” Greenspan said. “They’re making the necessary adjustments to get the most out of the new assets.”

He expects Cenovus to meet its leverage targets in the near term. Thereafter, “free cash flow could be allocated to a share buyback or modest dividend increases, which would help support the stock,” he said.

Through asset sales, Cenovus could support its balance sheet and “modestly” simplify its business, he said. “The capital allocation strategy resonates well with us, and we think the stock could outperform in the second half of 2021.”

He’s also positive on the outlook for steelmaking coal and fertilizers, such as potash, in 2021’s second half.

Global trade flows of steelmaking coal have been disrupted amid disputes between Australia and China, Greenspan noted. “As India and Europe ramp up steel production and demand increases, we expect seaborne metallurgical coal to benefit as the displaced tons from Australia find new homes and the market balances,” he said.

For fertilizers, strong crop prices have made for strong farmer economics. As a result, “We expect that farmers making planting decisions this year will look to maximize the yield on the acres they plant, which means full allotment of fertilizers including potash,” Greenspan said.

A complicating factor is the European Union’s recently imposed sanctions on Belarus, which could potentially affect global potash supply.

A name that Greenspan favours in steelmaking coal and base metals is Vancouver-based Teck Resources Ltd. In addition to benefiting from commodity price strength, the company has “a few catalysts coming up,” Greenspan said.

Through a subsidiary, Teck is part owner of North Vancouver’s Neptune Terminals, and a port expansion at the facility could decrease Teck’s costs in its coal business, he said. The company is also moving ahead with construction of its large-scale copper project in Chile, Quebrada Blanca Phase 2.

“As this major new mine gets closer to production, we expect the stock to re-rate to reflect the potential of this asset in the portfolio,” Greenspan said.

Also, potential asset sales include development stage copper projects and the company’s stake in the Fort Hills oilsands project in Alberta.

“Teck’s balance sheet is in good shape, and the valuation on the stock remains reasonable,” Greenspan said.

In the fertilizer sector, he cited Canadian producer Nutrien, which is set to benefit from its wholesale and retail fertilizer businesses as demand for potash increases.

“The balance sheet’s in very good shape, the capital return program is strong, and we see upside potential to annual guidance when the company reports second-quarter results later in the summer,” Greenspan said.

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