Commodity producers expect a happy holiday this year as synchronized global growth supports robust industrial demand, says commodity economist Rory Johnston in a Scotiabank report.
This past year, outperformers were driven higher by a combination of strong demand and inflexible by-product supply (cobalt and palladium) or exogenous events like trade action and forest fires (lumber), he says.
Against this backdrop of broad commodity sector strength, underperformers were those already expected to experience price rationalization (iron ore), suffering from poor luck, such as warm weather (natural gas) or struggling against idiosyncratic headwinds like infrastructure constraints and pipeline outages (Canadian heavy oil), he says.
Here are Johnston’s naughty and nice lists:
Naughty (worst performers)
1. Natural gas (-27%)
2. Canadian heavy oil (-14%)
3. Iron ore (-12%)
Nice (best performers)
1. Cobalt (+127%)
2. Palladium (+51%)
3. Lumber (+36%)
Cobalt rode the feverish buzz around electric vehicles and growing concerns about future supply availability, says Johnston. Its value has more than doubled over the past year to more than $US33 per pound.
On the demand side, the world is increasingly running on battery power and cobalt is a core feedstock for most battery chemistries, he says. “The present excitement about electric vehicles is the perfect driver of a bull market for cobalt.”
Despite being top performers in 2017, both cobalt and palladium suffer from their by-product status, with supply driven by what’s happening in bigger markets, says Johnston. “High cobalt prices aren’t going to bring more cobalt to the market, but higher copper and nickel prices likely will,” since virtually all cobalt is sourced from copper and nickel mines. Palladium supply will be kept in check by weak platinum and nickel prices, he adds.
For more details, read the full Scotiabank report.