The end of raw materials

After college, my first car was a Toyota Corolla hatchback. The engine was a very well designed piece of machinery. I wish I could say the same for the body panels, which quickly took on the look of rusty Swiss cheese; the holes widen year after year.

Thanks to these episodes, automobile manufacturers began to use galvanized steel: the body panels are “hot dipped” in a molten bath of corrosion resistant zinc.

But auto companies in two of the world’s most populous countries didn’t get that memo. At least not until recently.

The result? A huge bullish stampede in the zinc market at a time when many of the world’s leading analysts least expected it …

From Bloomberg The recent headline “China’s Rusty Cars Prepare to Hold 2016 Top Metal Rally” says it all. So does the reaction in zinc prices, up 60% since the beginning of this year.

Only about a third of the 19 million cars and trucks made in China last year were built from galvanized steel.

It is very similar in India, where consumers bought a record 2 million vehicles last year; only about 20% were made from galvanized steel, according to India’s Bombay Institute of Technology.

When you think of the vehicle sales forecasts in any of the countries for 2020 (24 million in China, 5 million in India), that’s a lot of zinc.

Don’t look now, but …

My point is not to rush out and buy zinc mining stocks. It’s just to point out that demand for commodities often materializes in a way that no one waits until rising prices make it all too obvious.

Take a look at what’s happening with nickel.

The Philippines is a major supplier of raw nickel ore. The new Duterte administration, which took office over the summer, is in the midst of a “review” of the country’s roughly three dozen mines, threatening to take some out of service for alleged environmental violations.

That’s not exactly “love”, but it certainly helps in the case of loving ongoing nickel prices. Analysts at UBS Group AG see nickel prices rising another 25% next year (after a 20% increase so far this year).

Of all the major industrial metals, copper is one of the most viewed. The price of the red metal barely moved throughout the year. It’s down 50% since 2011.

However, Japan’s largest producer, Pan Pacific Copper, expects the price to rise 40% to about $ 7,000 a ton by the time 2020 rolls around. Citigroup recently made a similar forecast. Why?

It’s about supply and demand.

Demand for copper has remained relatively strong, even though economic growth in China, the world’s largest copper consumer, has slowed in recent years.

But the supply of copper is another matter entirely.

Late last year, Glencore, one of the world’s largest copper miners, decided to exploit its largest mines in Africa, taking up to 400,000 tonnes of copper production out of the global market. In Chile, the world’s largest copper supplier, the state copper commission announced large investment cuts through 2025, eliminating eight mine development projects worth nearly $ 23 billion.

Now you can see where these copper price projections are coming from. At Citigroup, analysts see a growing deficit between copper supply and demand. In the aforementioned Pan Pacific Copper, the president of the company said: “Production will not be able to keep up with demand due to the absence of a new mining supply, unless prices reach $ 7,000.” [per ton]. “

With copper prices below $ 5,000 a ton right now, that provides a lot of potential profit margin, and yet another reason to keep a close eye on these “most hated” commodity classes.