Thread on sharp rise of metals (both industrial & base)in the past few months. Most prices are now ruling at multiyear high levels.

Jury is out whether this trend is driven by the “supply shock” or a “demand shock”

Even though one is reading multiple opinions across these two spectrums, it is likely that we are in a unique situation of having both a supply and demand shock.

Ex 1 : Growth of electric mobility & accelerated adoption of reviewable (solar & wind) energy could be driving the demand of copper faster than the supply.

Ex 2 : China’s curbs on steel production to control emission levels may have extended a supply shock to global trade.

Ex 3 : Massive Covid stimulus by developed countries (US announcing one for infra) may have added to demand acceleration for steel, aluminum etc.

Ex 4 : Renewed mobility restrictions in many jurisdictions, Suez logjam, container shortages etc have added to supply restrictions.

Apart from this, usual conspiracy theories of (a) China building strategic reserves of commodities creating artificial scarcity and (b)debasement of currencies in favour of digital/physical assets has been added to the mix.

@Nouriel wrote this post in Mid-April about Inflation and is pertinent to the commodities discussion https://fox-world-news.blogspot.com/2021/04/why-stagflation-is-growing-threat-to.html

Most commodity stocks have already gained significantly from their recent lows and are no longer available at cheap valuations. The margin of safety in trading these stocks is obviously low.

In past decade, the commodity cycles have been short and deep. If this cycle also turns out to be a usual cycle, against a super cycle as widely assumed, the corrections could be quick and deep.

There is no doubt about the FOMO being built in this theme at the moment. One look at the institutional portfolios confirms the under ownership in them. Will this continue or die a sharp death? Time will tell.

Disclosure : We hold and recommended few sugar and steel stocks to our clients. Please consider our bias. we continue to hold them for the time being to see how the situation evolves. But we are watching it on the edge!

End of thread.