Global tailwinds driving commodities higher

Underpinned by a number of global factors, including rising demand for smartphones and increased consumer confidence, nickel and copper are two commodities that we believe represent a strong investment opportunity. Buoyed by an improving economic cycle and strong currency growth, both commodities look set to  capitalise on strong global tailwinds.  

Copper and Nickel in the Economic Cycle

Industrial commodities such as copper and nickel have seen their prices steadily decline since China began to taper its enormous GFC-driven stimulus package in 2011. While the US dollar surge associated with the ending of QE and the beginning of the rate hiking cycle by the US Federal Reserve in 2014-2015, produced the final selloff in the commodities cycle. Since the second half of 2016, we have seen unusually globally synchronised growth in an environment where copper and nickel inventories are slowly being eaten into and supply is increasingly adjusting to a new lower normal of Chinese commodities demand.

Many companies waited cautiously on the sidelines for a possible recession during 2015-16, but the sustained uplift in the global economy has businesses feeling confident enough about the future to begin investing for growth again, prompting increased capital expenditure levels. As well as businesses that were waiting for more certainty around the outlook before they invested in fixing up their operational expenditure (opex) demands as well. Copper and Nickel are key industrial inputs that benefit from the improvement in the economic cycle.

In a wider sense, these trends are likely to benefit cyclical firms that benefit from the pickup in global growth and investment. But the pickup in global growth and investment may drive increased demands for capital, pushing real interest rates up, which could cause issues for some of the yield focussed equity sectors such as utilities and telecoms.

Copper and Nickel are benefiting from global tailwinds

2017 saw a major boom in the technology product cycle. Significantly improved versions of the Apple iPhone and Samsung Galaxy are being released in late 2017, fuelling demand for copper and nickel, which are involved in the manufacturing process. 

China has also been taking major strides in tackling its pollution problems, including subsidies and restrictions that are seeing a significant uptake in electric vehicles (EVs). China already accounts for half of global EV sales, and Bernstein Research is predicting EVs will account for 22% of Chinese auto purchases in 2025. Nickel and copper are key inputs into EVs, and will continue to benefit from these trends.

Easy global liquidity and contained US dollar strength further support copper and nickel's upward trend (see below graph).

The Copper and Nickel investment opportunity

As a result of demand from smartphone and EV manufacturing, we expect copper and nickel to see further uplift in the long run and have taken advantage of a recent pullback in prices, due to the US dollar strengthening and China's data momentum slowing. 

We believe exposure to commodities like copper and nickel can deliver strong returns to investors (see below graph for 2017 YTD returns), with a lower correlation to equities than traditional asset classes. 

To capitalise on this opportunity, an allocation has been made to copper and nickel within ASX:DMKT.

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