Commodity markets have had a wild ride in 2021, however lumber certainly takes the cake! On balance it’s been a solid beginning of a bull market for commodities: metals and energy.
Lumber: Gravity Sets In
Lumber prices surged to record highs this year on the back of booming demand from homebuilders and renovators. The price surge was so big and sudden (spiking 93% by May), it became a symbol of what some economists feared: rampant inflation.
Since lumber prices peaked in May, however, demand has cooled sharply. With vaccines rolling out and the impact from the pandemic easing, do-it-yourselfers have eased off significantly – especially for items like decking and fencing.
In April Capital 10X highlighted the factors behind the parabolic rise in lumber and warned that there weren’t enough fundamental long-term supply constraints to justify prices remaining at their significantly elevated levels.
We believe the drop in lumber prices is very constructive for pricing in the rest of commodity complex as it reduces the overall inflation impulse for the consumer.
Oil: The Resurrection
Just over a year ago oil was in the depths of a bear market unlike anything we’ve seen before; specifically negative prices. Fast forward to today and we’re sitting at a crude oil price over $70/barrel.
US oil exploration stocks (NYSE:XOP) are up 40% year-to-date, handily outperforming the S&P 500 which is up 18%.
However, it’s worthwhile panning further back to see how much pain energy stocks have endured over the last decade. In this period the S&P 500 is up 226% while the S&P Oil & Gas Exploration Index is down -68%.
We believe that we are likely at a near-term top / consolidation range for the oil price; this will present investors with the opportunity to accumulate high quality producers.
Copper: Fundamentals Remain Bullish
The global copper and base metals markets continue to remain constrained on the supply side. The prospect of surging demand comes after years of exploration and development cutbacks when prices were low and as the supply side grapples with rising social and environmental expectations and falling ore quality.
Given this low level of investment, the copper market is setting up to be in a large deficit position relative to supply post 2025. Current global mine production and projects in development simply can’t keep up with the strong demand.
Looking back over the last 5 years copper mining equities have outperformed the metal copper; a healthy environment for the underlying equity investors.
The Global X Copper Miners ETF (NYSE:COPX), which has risen by 264% from its March 2020 low, has seen cumulative fund flows into the ETF up nine-fold over the same period.
In comparison fund flows into the oil producer ETF, SPDR S&P Oil & Gas Exploration & Production ETF (NYSE:XOP), have risen by only 8% since June 2020 even though that ETF is up 179% from the 2020 low reached last March. A clear indicator that much of the rally in the oil equities has been likely driven by short covering vs. new fundamental buyers.
Sierra Metals: Solid Q2 2021 Production Results Despite COVID-19 Headwinds
Sierra Metals (NYSE:SMTS, TSX:SMT) announced solid second quarter 2021 production results and record throughput at its Yauricocha Mine in Peru.
Sierra Metals delivered +9% year over year growth in copper equivalent production for the quarter despite the headwinds of COVID-19. The company anticipates improved production results in the 2nd half of 2021 vs. 1st half as they manage the impact of COVID-19 on operations.
Key catalysts going into the 2nd half of 2021:
- Implementation on a 500,000 tonne per year magentite concentrate plant at Bolivar which will be operational next year.
- In June Sierra Metals received the final permit required for the construction and operation of the expansion of throughput at Yauricocha to 3,600 tonnes per day.
- Completion of Preliminary Feasibility Studies for all three mines to support planned expansions at all mines starting in 2024.
Bitcoin Awakens
Late Sunday July 25th Bitcoin investors got a much needed green jolt, the cryptocurrency rose 12% to $38,472. This surge resolves a troubling grinding wedge lower over the last 2 months. A break over $40,000 would certainly give Bitcoin bulls renewed energy to test its previous all time high of $65,000.
Sierra Metals is a market awareness client of Capital 10X.
