The scenario for commodities in the second half will depend almost entirely on China, which should return to growth in the coming months even if the rest of the world goes into recession, said Thiago Lofiego, Managing Director, Head of Metals & Mining, Pulp & Paper, Cement Equity Research at Bradesco BBI, in an interview with Bloomberg Línea.
According to him, the current prices for metals are contaminated by negative market sentiment linked to restrictions against Covid-19 in China -- and once that is water under the bridge, the levels should rise again.
In the interview, conducted from the Nasdaq studios in New York, Lofiego also said that Vale (VALE3) should continue to gradually recover the level of iron ore production, while Brazilian steelmakers will surf on the resumption of construction and auto production -- albeit subject, once again, to steel prices in China, which are a reference for prices in Brazil. The interview was conducted by Jimena Tolama, Bloomberg Línea’s news director for Mexico.
Here’s the interview, which has been edited for clarity:
Bloomberg Línea: We talk a lot about market sentiment and what to expect in the future. On commodities, are we overreacting?
Thiago Lofiego: Commodity prices are generally driven by a few factors. First is the balance between supply and demand, then macro expectations. And the third point is sentiment. Right now, sentiment is dominating. The data flow coming from China is the main one because of the Covid situation. In addition, there is a growing fear of a recession, inflation, and rising interest rates. All this environment increases risk, so investors basically demand a higher premium to buy these metal futures or the commodity-related stocks.
And leaving that market sentiment behind, what would be the driver for commodities soon?
I think when we look at iron ore or copper, prices have already corrected quite a bit. We may be closer, in the next six months, to a bearish plateau. Once the data flow improves on the margin, sentiment may improve as well. Right now, prices are compressed, and multiples are compressed. Once we start seeing better data coming from China, I think we will have better prices.
Yes, there are risks and concerns about the US and Europe going into recession. But for commodities, China represents 50% to 70% of demand for most. Once we see an improvement there, and we think that will happen, we may even see an increase in prices.
Looking at more recent economic data from China, everything is growing. What to expect?
The latest data points to improvements at the margin, but not enough for this sentiment to improve. At the same time, the news flow on Covid has deteriorated in China. We are dealing with variables that are in constant conflict. Regarding data flow, the economic stimulus cannot be ignored. More incentives, fewer restrictions, and tax incentives.
What is missing is consumer confidence and that is linked to Covid. As long as we continue to see this negative news flow linked to Covid, consumer confidence in China will lag. The combination of the stimulus and perhaps the stabilization of the Covid situation could be powerful in the second half of the year.
So will China be the driver for commodities this half year?
China will be the big driver. Not just in the next six months but maybe even in the next 12 months. Again, considering the scenario where Covid does not get worse in China. The stimulus will dominate and then we may see China going in a different direction relative to the other economies. We are not heading into bullish territory, however. The iron ore price is around $100, while the normal is $70. We think in the coming months we may see price recovery, not back to the US$150 we saw a few months ago, but some recovery. If China picks up, we could see a difference.
What can we expect from Brazil, Chile, and Peru?
From Brazil’s point of view, iron ore is the main commodity, with Vale being the main producer. The accident in 2019 [in the town of Brumadinho in Minas Gerais] caused operations to be partially halted. They have been recovering the production level very gradually, so Vale will continue to increase production.
For Peru and Chile, the main focus is copper. The political situation in those countries has changed in the recent past. This, in our view, may translate into delays in some projects because it is not yet completely clear how the new governments will act in these sectors. In the medium term, this could be positive for copper prices, as there will be less supply coming from these two countries. But for companies based there, such as Southern Copper, we may see delays in projects and lower value for these companies.
In the case of Brazil, looking at other companies besides Vale, what are your expectations? How are they going to develop in the short term?
As you know, it is an election year in Brazil. Vale has exposure in Brazil, but it doesn’t depend on that to make money. But the steel companies do. So now there is a growing concern in the short term, but we are more on the positive side when we look at some specific data coming from construction in the country. The level of property launches over 6 to 12 months is driving construction demand.
The auto sector has suffered from microchip supply and that is a global situation, but it is now starting to see some recovery. We will see some improvement in demand for steel in Brazil, on the margin. But about prices, it depends much more on what happens in China. So, going back to what I said before if there is a recovery in China, prices in Brazil can go up.
Now, in Mexico, companies like Kimberly Clark are trying to hedge against the prices of these commodities. Is this a good time for them to readjust?
I think the hedge will depend on the policy that each company sets for itself. It’s hard to say whether this is a good time to hedge or not. I think hedging is a philosophy and a policy that you decide for your company. Once they go down that route, sometimes it can bear fruit.
From an overall perspective, what is your outlook for metals prices over the next 12 to 18 months?
We are going to see a healthy backdrop. I understand the risks of a possible recession, but as I mentioned earlier, China is the main driver of commodities. So even if we see a recession in other countries, if China is growing, we could see commodity prices trading higher. There will be volatility, but commodities will remain at a healthy level, but no longer in bullish territory.
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