Aside from the emergence of electric vehicles, the demand for raw commodities from China is still a dominant driver for metals prices, said Colin Hamilton, commodity analyst at BMO Capital Markets.
Hamilton commodity analyst at BMO capital markets joins us today to talk about the outlook for the broad commodities complex calling. It is not often. We have you on the show. I believe last year we spoke while you and I have never had the privilege of speaking, but I last year you're on the show, but a year ago, wasn't it.
Yeah. It was a year ago after our global metals mining conference. Yeah. I'm looking forward to finally being able to see you live. Uh, but for now we'll doing the conference virtually. So it's a, it's a privilege to be with you, you know, over zoom now call and let's start by talking about the commodities and what you think has the best investment potential for this year, the remainder of the year, at least.
Yeah, absolutely. It's been a strong period of course, for commodities on the hall. Um, and of course that's probably about the Supercycle debate. Again, I'm not so much a big believer in that. I think you'd need a lot more gyration for it to be a Supercycle, but at the moment we have a constrained supply side.
We have very strong demand coming through the metals lead the way we had gold of course, rising last year. Industrial methods are followed. Now you're passing on a little bit to the oil and agricultural site. Um, Tina's is tightening a little bit, and that makes you a little bit nervous to those, some of these industrial metals.
So I think as we move into the second half of the year, where's the like bean Buffy raw materials actually. At the buttery, Sabre's seeing some very strong numbers coming through and that helps things like nickel, cobalt, lithium equities have run a bit, but I do think the underlying commodities are looking pretty good.
I also think the precious metals they've suffered recently, they'll hold up better than industrial metals in the second half of the year. But obviously I still think we have some momentum coming through on the energy and the agriculture side. They probably have a little bit more runway at the present time.
Okay. So you brought up a few. Sub sectors. Let's start with the, um, with the, uh, battery metals. Now, cobalt lithium, you brought up, is that the, uh, electric vehicle play that you've mentioned? Yeah. So I think electric vehicles are we're in an upgrade cycle for electric vehicles. Actually we've been downgrading numbers for the past two or three years.
Partly that's in global loss of sales downgrades. But now we're at the point where there's enough momentum starting to come through. Again, some of the numbers coming out with China are phenomenal. We're talking obviously a little base, but then most of battery demand up over 300% year on year. So it's almost back to what we saw in 2017 and 2017.
Everyone wants it to be a catheter and precursor manufacture and was coming into these commodity markets and trying to secure raw materials. But we're seeing exactly the same again, as we head into 2021, there's get factories popping up all over the world. The raised up fear there again about security of supply.
And that will lead to, I think, a pretty strong pricing over the coming months, uh, and lithium and cobalt. And the did Nicole. Nicole has, uh, has been up and down a little bit, but I still think it's underpinned by stainless steel and it has a bit of a battery kicker as to the rest of the year. Okay, Colin, uh, walk me through the Evie story with thesis.
Now I know that the growth of electric vehicles will inevitably lead to the growth of demand for these base metals. However, electric vehicles still only occupy a small portion of total vehicle market share across the world. When can we see a pickup in this? And is it too early to be buying into the ed space?
You think. No, of course there are a lot of unknowns and in metals and mining, of course, we're used to things changing very slowly over time. And what we have here is a market where there's a whole range of forecast out there, both in terms of EVP sales, in terms of cathode makeup. So in terms of what's actually going into the buttery itself in terms of battery size or a lot of unknowns, But it's definitely a growth area.
And therefore, I mean, if we look at metals and mining as a whole, it's not really been a growth sector for the past. At a while, you can definitely start putting some gross multiples on, on equities in this area. Is it too early? Well, I think there's enough critical mass there that the MarTech is certainly coming through.
And I say for once it wasn't China leading the way over the past 12 months, it's been Europe. We've actually seen strong European sales. I'm sending here in London. If I want to buy an Evie while I'm going on a waiting list. So consumer demand is definitely coming through this small in terms of the grand scheme of things, but it's definitely a gross area.
And we were talking, growing off a small base, actually for some of these commodities like lithium and cobalt, you can get it to supply constraints pretty quickly. And that's definitely an area of where I think there will be those naturally be cycles and you will always get cycles and this type of, um, at least stage and use.
But I definitely think there's some opportunities there because we are starting to need projects. And that's, that's the key thing that we have to start developing new assets and bringing them to market over the coming years to meet that future demand that we know see coming through. So it is a long-term play is what you're saying.
I think it's a, if we look at the, a hockey stick, the hockey set kind of takes off in the middle of this decade. But even by 2025, we are looking at 10% of global water sales coming from pretty much nothing, three or four years ago. So it's definitely a growth area, the whiter decarbonization theme. And it's also important to know that because we're seeing a huge inflows into sustainably funds at the current time running kind of three to four times, the level that we saw and the last six months of last year, well, they're all looking for places to put the money.
So you're getting a distinct rerating in these sectors at the moment. Okay, let's talk about industrial metals. Now I know in the early two thousands, the rise of China and the industrialization of China, if you will, was the dominant theme behind industrial metals. Is that still the dominant theme today?
China's still a, it's still, if I sat in my seat and I say, well, what do I have to do? I have to get Chinese demand. Right? Yeah, Chinese demand, right? You go a long way to getting industrial methods right after the first time in history last year, China was more than 50% of demand for steel or copper, probably menu for Nicco, for zinc.
So realistically it is still China. That leads the way what I would say. As with the wider energy transition, there think things that renewable energy and an EVs, which we talked about before, which are global themes. What we're looking for, we're a lot more balanced the months going forward, met industrial methods of basically what engine for the past 20 years, very strong engine in terms of the China engine.
But no, what we're looking at going forward as a bit more balanced, demand growth going forward, and you can make the case knows that develop world demand. It's going to start to grow again with some of the infrastructure schemes that we're seeing come through. So in terms of industrial metals, with the benefits of the law, from the restock, the global recovery that we've had has been a very metals intensive one over the past six to nine months.
I am a little bit nervous in the short term, purely because Shane is starting the tightening process. Having led everything through the cycle, but a point in the nowhere chain, that's just starting to normalize monetary policy. I'm pulling back a little bit on fiscal spending, just because you're running into inflation bottlenecks, and therefore the Raleigh without an industrial Metro space is way above the cost curve.
I think we're coming towards the leech runnings of that. Okay. I'd like to just bring up something that happened in 2011, uh, with gold and I'll tie it back into industrial metals. As we saw gold rise to a peak in 2011, a lot of semiconductor and electronics companies that use gold in their chips, uh, began a process known as thrifting whereby they reduce their input of gold it, and look for substitutes.
In some cases, could you see that happening with any of the industrial metals and, uh, and perhaps the heavy metals that you mentioned, if prices do rise. Absolutely. Yeah. Uh, I mean, I, I'm a firm believer that commodity markets always self solve and price always gets you there in the end. So when prices go up, naturally, you looked for alternatives.
So you'll either encourage more supply or you'll destroy some demand. Um, and the industrial methods at the moment, we've got a very strong corporate price. I always look at the corporate to aluminum ratio because that's where you start to see a substitution coming through. They both can be used in electrical conductivity.
So with that. I think the point, no for low voltage cable. And you could see a better for switch into the, uh, the aluminum site in terms of a semiconductor is a very interesting point. You bring up, of course, that is one of the bottlenecks we have in the world. One of the lesser thought about metals 10, uh, the 10 market, uh, benefits a lot from semiconductor spending and actually with the, the issues we have in Myanmar at the moment, which is a big 10 supplier, um, with strong demand side and with an industry that's been, frankly, under-invested in for a number of years.
That's been the best performing base metal lights a year to date, and you are still seeing a goats. Interesting one in terms of that, uh, electronic site, it often offers a pathway to the R and D for new technologies coming through, but eventually just doing to cost as drifted out. Silver is actually the natural beneficiary of that quite often.
And it's interesting if we look at the silver market, obviously spending on the solar side is likely to grow while we're still thrifting, silver rights have solar panels. Well, that's been more than offset by the increase and the installation growth that we're seeing. Okay. Colin I've heard from other analysts have stuck into that.
The rise in base metals and other commodities has, has contributed to inflation in our economy. And I can't help a wonder if this is a chicken NAPE problem, which comes first, the chicken or the egg. So which comes first, the rise in base metals and walk them already input prices or aggregate inflation as a whole.
Yeah, it's interesting. I suppose the answer is we get the very loose monetary policy coming through, which tends to drive a lot of spending, which in turn drives choice of bottlenecks and which drives up base metal prices. These things are always a cyclical in their own way, but. What do you tend to find in the inflation indicators?
Actually, they tend to lag a little bit and, uh, some metal prices will move up. Obviously that gets passed through the OEM structures to the manufacturing chain. It doesn't hit the end consumer. And when it does a heads-up is a little bit of a buffer. Uh, so you, you are actually seeing some of the manufacturing industry absorb, uh, the rise in metals in the short term.
Many of them have hedged as well to try and offset some of the risks. But definitely we're at the point where we're getting that inflation in the Chinese economy already, we could see producer price, inflation print six, 7% growth over the coming months. And at that point that's when you start to see as sea bottlenecks appearing and you do see policy changing a little bit, so that will come through in the emerging markets.
So first. And the developed world. I think we still have a, a little bit of a runway, which is why things that us steel prices for example are doing so well at present. Colin, do you think base metals are a better hedge against inflation than precious metals? It's a theory that I've heard from some people I've spoken to, uh, both of them have, uh, elements to base metals tend to do well, um, to benefit from the early stages of inflationary cycle.
Whereas in terms of a hedge against inflation now, typically precious metals are still where people look know, what do you find is there's more investment options available now, which is why in the old days, it was purely a precious metal, uh, option that you can get exposure to base metals in different ways.
But I would still say that there's good value in precious metals and a longterm hedge against inflation. Okay. No, that's perfect. Segue into the precious metals now, gold and silver have not been performing well relative to some other metals in the commodity space. Tell us why. Yeah. Um, you're marginal buyer of gold and silver in any given days, a Mike alligator who has been nervous of the rising use that we're seeing and what thought that's been a little bit of rotation away.
So we we've seen the steady ETF flows from gold. And that has weighed on the gold price. Uh, it's interesting to me, if we think about it, it's a complete flip in terms of gold demand. From last year, last year, we had very strong ETFs. Uh, we had year pretty strong central bank demand as well, but jewelry was very weak under the COVID scenario.
That's what Bruno jewelry is extremely strong, but ETF has seen Oak floors and that is the bigger impact on price formation on any given day. I would say that the gold price we're at the moment, it's still a very good gold price by historical terms. It's still one where you'll see a lot of the gold producers, generally, a lot of cash.
And the question is still going to be, what do they do with it? Well, where gold goes, silver tends to follow. Now. Obviously we were seeing some adventures and silver market this year on the whole. Um, but if I look at it, sober still looks to a situation where my supply is struggling a little bit. I can make a case for good industrial.
And if you want infrastructure demand over the coming years, Okay. Now I think, um, I think what investors would like to know is how to tie everything together, how to pick winners for themselves. What are some of the macro variables you're looking at? The changes in the economy, so to speak that would indicate to you, Oh, right now, steals a buy or a nickels, a buy or 10 or a Gold's going to recover.
What happens in the world that drives these prices? Calling. Sure. Well on the macro side, realistically, I look to China first and I'll be looking at the numbers coming through there, particularly in terms of things like housing starts, they're going to be key for industrial metals in INR. I think they lead the cycle.
And I think that if we're starting to see a bit of weakness coming through there, That's when you maybe start taking a little bit of money off the industrial side and switching it into the precious and the precious side, like it's the same that really the global monetary policy is easing it at the moment.
I still think it's going to remain very A-list. Obviously we are looking at things like the FOMC meeting and changes to expectations and the dot plot, uh, for how that will work with gold. I still think the gold market trays extremely well with the inverse of real yields. So that to be for nominal use have gone up real yields have remained negative.
And I think we'll keep a bit of exposure in the Goldmark overall, and they're the things I'm watching for, but I really am looking for bottlenecks as a commodity, unless you look for bottlenecks in the chain, just in the short term, inventories are very low and the manufacturing chain for steel in particular, us steel prices me have a little bit more duration at these exceptionally high levels at the moment.
And the market thinks, and that can lead to some good cyclical returns. And finally you started by talking about super cycles. You say you don't really subscribe to that theory of everything climbing up together. Well, can, can something outperformed the other then? Uh, absolutely. And a different, uh, at the end of the day, fundamentals always drove commodity prices and always drove that commodity price differential.
So if we're looking for a situation where constraints, supply, strong demand growth, things will do well. And to me, Uh, although I'm not a believer in the super cycle. I am a believer that we are in the metals intensive part of the cycle at the current time. And I would also highlight in terms of returns from the metals and mining industry as a whole, uh, the cash generation at the producer level.
And this could be a record year. So there is a lot of cash allocation potential coming, but the shareholders in a number of these industries, Record year for what exactly call-in. I said record year for tests, generation, uh, of the metals of mining level, certainly in terms of sustainable throughs. Like we, we did see a couple of weeks before, of course, 2008 and 2011.
But I think now if we look at it, the dividends that could be offered by these companies in a more sustainable basis and across some of the big commodities iron, or a gold copper, well, a that is a very interesting thing from an investor standpoint. All right, Colin. Thank you very much for coming on the show.
I hope to speak to you again soon and we'll dive a little deeper on, uh, on some specific sub-sectors that we brought up. We might have the whole gamut today. Thank you very much. Thank you for watching Kitco news. I'm David Lynn, stay tuned for more.