Supply deficits will keep prices high across multiple sectors in Q2, says Saxo Bank

Danish investment bank Saxo says those looking for more commodity and cryptocurrency value will have something to smile about in the second quarter of 2021, as supply deficits put upward pressure on prices. A vaccine-led recovery in global activity, the green transformation and emerging tightness in several key commodities has seen the Bloomberg Commodity Index rise 45% since April last year. Saxo head of Commodity Strategy Ole Hansen says this year-to-date performance has elevated commodity-related stocks to the top of its equity-themed baskets. The commodities outlook Many commodities have finished the first quarter of 2021 in the black, with lithium carbonate, cobalt, rhodium, neodymium and soda ash the top five best-performing commodities in the year so far. Hansen says this reverses a trend lasting nearly a decade, as countries around the globe look to adopt greener technologies and economies broadly recover from the horrors of COVID-19 and its associated lockdowns. “The sector has embarked on a strong rally with individual commodities reaching multi-year highs, and while witnessing periods of strength in individual commodities during this time, the rally has in recent months become noticeably more synchronised across all the three sectors: energy, metals and agriculture,” he says. “This is against a backdrop of the tightening supply of several key commodities following years of under-investment. “These developments increasingly drive expectations that we have entered a new dawn for commodities, raising the prospect for a new supercycle.” A supercycle can be seen as a prolonged period of mismatch between surging demand and fluctuating supply, and the post-pandemic commodity demand is putting pressure on supplies. Hansen says there are particular reasons for investors in the gold, silver and copper markets to be buoyant. “We maintain the view that gold can reach $2000 per ounce this year while silver may do even better to reach $33/ounce,” he says. “This is based on the additional tailwind from an in-demand industrial sector driving the gold-silver ratio lower towards 60. “Copper remains one of the commodities with the strongest fundamentals, something that has already driven a doubling of the price since the COVID-driven bottom in 2020.” It bodes well for the slew of gold, silver and copper explorers and producers listed on the ASX. Cryptocurrency could be on the move Interestingly, supply deficits could also drive higher cryptocurrency prices, according to Anders Nysteen, senior quantitative analyst at Saxo. Already in 2021, we have seen cryptocurrencies go on a run, highlighted by Bitcoin rising to all-time highs of over US$60,000. Its movement since late 2020 has been exponential, after five years of trading between hundreds of dollars and highs of US$20,000. Cryptocurrencies need to be mined, and cryptocurrency mining relies heavily on semiconductor chips, and currently, there is a global shortage amid rapidly surging demand. Lead times on semiconductors in February stretched to 15 weeks on average for the first time since data collection started in 2017, according to industry distributor data from Susquehanna Financial Group. And Nysteen says the shortage is having an impact on a range of sectors. “The car industry has been hit especially hard, with General Motors cutting production in several plants, and the chip shortage is in general estimated to have caused a reduction in automobile sales of more than $60 billion,” he says. “The shortage has spread to a variety of other sectors such as gaming consoles, smartphones and other advanced electronic devices. “Many chip suppliers are now booked beyond capacity and the timeline for acquiring equipment to ramp up the production seems long.” Nysteen says the crypto bull run which started in autumn last year has made the cryptocurrency mining industry significantly more profitable due to increased activity in the crypto space. “A continuing crypto rally will likely make miners even more profitable, giving them a lot of bargaining power when competing against other industries for a limited amount of semiconductor chips,” he says. However, Nysteen says, crypto mining may become a thing of the past. “The energy-intense verification of crypto transactions through mining seems to belong to a past generation of cryptocurrencies; they are not viable for large-scale implementation of a scalable transactions infrastructure, and they do not fulfil the increasing global requirements for power consumption.” - Daniel Paproth