While discussions of a green energy-driven commodity supercycle have been building within the commodity industry in recent years, Société Générale’s global head of commodity research and strategy, Michael Haigh, was keen to highlight the difference between the current cycle and ones which have taken place previously.
Speaking at the FIA International Derivatives Expo on Wednesday June 8, Haigh noted that there have been three commodity supercycles historically.
The first commodity supercycle took place during the industrial revolution, the second in the post-war period following the Second World War, and the third following China’s entrance into the global market as the world’s dominant consumer.
“What is common to those [previous supercycles] is there were no commodities that were in and out of favor,” Haigh noted.
“This one is different,” he added.
This new apparent supercycle, focused on energy transition is now focused on specific commodity groups such as metals important to energy transition with capital flowing away from traditional energy markets into these markets, as markets and investors seek to improve their Environmental, Social and Governance (ESG) standards and approach.
This, according to Haigh, creates a paradox in which “you have metal demand that will grow due to the energy transition, but a lack of investment in oil and gas,” which is crucial in order to provide the energy required to produce these metals.
“Commodities are part of the problem [in terms of climate change] but they are also part of the solution,” Haigh noted.
“There is going to be a very bumpy, yet upward move for commodities in the next several years if not decades,” he said.
Base metals’ role in energy transition
“The base metal complex is the one that is front and center in the energy transition,” Haigh told audience members.
“The reality is that if you want to go down the path of investing in more material to transition off of energy, you actually need more energy to produce these metals; it’s a very circular situation,” he added.
“The amount of base metals required to achieve what people say they want to achieve is ginormous,” Haigh noted, adding that whilst the material is available the industry “requires more investment to get it out and higher prices [for material].”
Haigh noted that additional challenges for base metals were in the localization of material, with ore deposits for metals such as copper and nickel often in countries prone to political instability and with environmental challenges, further complicating the issue.
“The energy transition, driving demand for commodities and supply constraints could lead to reflation and stagflation,” Haigh warned. “Prices won’t come down, it’s just the rate of change that will change.”
“It’s going to be so tricky to avoid greenflation,” he said.
Energy market challenges
The Russian invasion of Ukraine on February 24 has highlighted globally the energy vulnerability of regions such as Europe, who rely on Russia for imports of oil and natural gas.
“Before Russia invaded Ukraine, the energy markets were poised to be in a very structurally strong position through to a lack of capital expenditure over the years and geopolitical tension outside of Russia,” Haigh noted.
Haigh told the IDX audience that current Organisation for Economic Co-operation and Development (OECD) oil inventories are set to plunge dramatically, noting that the current inventory that Société Générale is forecasting is similar to that seen in 2003, during the last commodity supercycle.
Haigh said that upward volatility is likely “here to stay” within oil markets, and that the bank is forecasting prices of $120-130 per barrel, but options markets are currently looking closer to $150 per barrel.
The West Texas Intermediate (WTI) crude benchmark was trading at $120.66 per barrel at the time of publication.
“There is no way that Europe can wean itself off Russian gas,” Haigh said, adding that even if Europe maximized all other energy methods such as renewables, nuclear and other natural gas imports, Europe would likely experience a 10% deficit without Russian imports.
“Elevated oil and natural gas prices ripple through other markets,” Haigh said.
Higher energy prices have already impacted underlying prices of many base metals, as well as physical premiums within Europe.
As a result of production costs, stemming from high energy prices, aluminium and zinc premiums have reached record high levels. Fastmarkets’ assessment of the aluminium P1020A premium, in-whs dp Rotterdam, reached a peak of $600-630 per tonne on April 29, up by 44% since January 4.
The premium has come off slightly amid concerns around the macroeconomic situation muting demand, with the premium most recently assessed at $590-625 per tonne on Tuesday.
In the zinc market, Fastmarkets most recently assessed the zinc SHG min 99.995% ingot premium, dp fca Rotterdam, at $450-500 per tonne on Tuesday, up by 55% since the beginning of 2022, amid persistent tight supply within Europe.
Haigh noted that a further knock-on effect of the Russian invasion of Ukraine, and the following price spike in commodities such as oil and nickel, was that producers across commodities were reducing their hedging which Haigh noted was “troublesome,” because it reduced liquidity and increased volatility.
This is supported in nickel, following the price spikes and subsequent suspension of trading by the London Metal Exchange, there has been a significant reduction in the volumes in which the contract is traded. The average lots traded on the three-month nickel contract was 2,635 per day in May, compared to an average of 7,140 lots in February, prior to the suspension.
LME underlying nickel prices remain elevated, with the LME official nickel cash price closing at $29,307.50 per tonne, up 41% since January 4.
