The dramatic slide in lumber prices has further to go, as speculators pull out of the market and supply catches up with demand, Saxo Bank’s chief commodity strategist has said.
Lumber prices have fallen more than 42% since May’s record high of over $1,700 per thousand board feet, although they remain more than 150% higher for the year.
Ole Hansen, head of commodities at the Danish bank and a leading authority in the field, said a number of factors meant prices likely have further to drop.
“Something like lumber has been very much a pandemic-driven spike,” he told Insider. He said a lack of mill capacity and “people going crazy in their backyards, redoing their houses or buying a bigger house” had caused prices to soar.
Skyrocketing prices had sucked in speculators such as hedge funds, who are now pulling out of the market as prices dip, Hansen said.
“Some of that activity is bound to slow [and] supply is starting to meet the demand,” he said.
Hansen said the curve for lumber futures contracts is sloping downwards, showing that “the market is looking for quite some weakness as we head into the autumn and winter months.”
Hansen also said copper could drop another 10% from its current level over the summer, before rebounding later in the year. Copper is down roughly 10% from May’s high of around $10,750 per ton.
One reason for this is that investors think the chances of a dangerous rise in inflation have died down, he said. That means they are moving away from commodities like copper, which are seen as good stores of value at times of rising prices because they’re widely used in industry and technology.
Paul Donovan, chief economist at UBS Wealth Management, told Insider that commodities prices can be taken as a barometer of wider forces in the economy.
He said soaring home prices had cooled down some of the “frenzied” buying in the market, weighing on lumber. And he said peoples’ spending in many other areas had cooled after an initial splurge when economies first reopened.
Meanwhile, investors continue to weigh inflationary pressures ahead of the FOMC decision due Wednesday. Most economists are anticipating that the central bank will leave its policy mostly unchanged. Investors will be focusing on tapering discussions, the latest economic projections, and inflation.
“Despite the ‘transitory’ message regarding inflation, some on the Committee must be twitching a little uncomfortably,” said Marcus Dewsnap, head of fixed income strategy at IGM, which is part of Informa Financial Intelligence.
Hard data so far hasn’t quite suggested the sort of second-quarter that will force economic growth to hit the Fed’s 2021 projection, Dewsnap added.
The 10-year Treasury yield hovered near 1.5% for most of the day.
In March, Fed officials saw consumer prices rising 2.4% in the fourth quarter of 2021 from a year earlier. That pace, they said, would be consistent with their goal of 2% average annual inflation over the long run.
Here’s where US indexes stood at the 4:00 p.m. ET close on Tuesday.
Solid Power, an electric-vehicle battery producer, announcedit’s going public by merging with blank-check firm Decarbonization Plus Acquisition Corporation III in a deal valued at $1.2 billion.
In cryptocurrencies, bitcoin finally hit the $40,000-level on Monday after trending below that level to date in June.
Still, a new survey found that hedge fund bosses are planning to ramp up their holdings of cryptocurrencies, predicting that an average of 7.2% of their assets under management will be held in digital tokens by 2026.
Legendary investor Jeremy Grantham said US stocks are hugely overpriced, predicted copper prices should shoot higher in the coming years, and that he had an “overprivileged” lockdown in an interview at the Morningstar Investment Conference Australia this week.
The cofounder of asset management firm GMO also ripped into the major oil companies, saying they’re too cynical to engage with. And the 82-year-old said the SPAC boom and the Nasdaq had probably peaked.
Here are the 14 best quotes from the interview.
On the investing landscape
1. “The developed world is merely overpriced, no big deal on its own, but the US is heroically overpriced, and emerging markets is actually fairly cheap… I have complete confidence that if you bought the intersection, cheap emerging market stocks, that you would get a perfectly handsome 10- or 20-year return. And I am pretty darn confident that you will not get a handsome ten-year return from say the S&P 500 or Nasdaq.”
2. “[The] Nasdaq has, by the way, peaked quite a long time ago, two months ago…. This time, my guess is the super SPACs peaked in January, the Nasdaq peaked in February. And maybe in a few months, the termites will get to the rest of the market.”
3. “The super crazies are really anything to do with electrification. EVs, for sure, Tesla is the king of that group, [and] they’re down 30%. The SPAC index is down 30%, the last 10 SPACs having announced a deal are now [trading at] less than the $10 that they do these deals at.”
4. “There is no way copper will not rise hugely from here because of the electrification of everything. And that goes for cobalt, that goes for lithium. And all of the metals except iron and aluminum are really scarce… You have to be reconciled in the long run for a different world of commodity prices.”
On dangers for markets
5. “The higher an asset price is, the lower the return. So having high-priced assets is great for retirees, old folks like me selling off my assets. But for everybody else, it means you compound your wealth more slowly… So I welcome lower asset prices, which I’m confident will come.”
6. “It won’t take bad news. It won’t take a thoroughly bad economy to start bringing this market down. It will take a perfectly good economy and perfectly optimistic outlook, but a little less than it used to be a week ago, a month ago.” – Grantham also spoke of “pessimism termites” that would start to eat away at investor confidence.
7. “You look around and you find that real estate is suddenly pretty bubbly in almost every interesting market in the world… You can’t keep an asset class like housing, where the house doesn’t change, and you’re just marking it up in real terms year after year. Eventually, there’ll be a day of reckoning.”
8. “Don’t pull a Japan. Japan had the biggest bubble in history in land and real estate, bigger than the South Sea Bubble in my opinion. It also had the biggest equity bubble of any advanced country. [Now] 32 years later their land is not back to where it was in 1989 and their stock market is not back in nominal dollars to where it was in 1989. And that’s a perfect example, as the higher you go, the longer and greater the fall.”
9. “We had a totally overprivileged existence. We’re down in beautiful countryside with 50 acres of our own of woodland… And I did quite a lot more research than normal because I wasn’t wasting my time on airplanes. So my carbon footprint was magnificent, and I was reduced to worrying about rather small things like amortizing my tie supply. If I could wear three at a time, I would.”
On the oil companies
10. “The oil industry ran a deliberate campaign of obfuscation, political propaganda, to deliberately mislead the world… That should be criminal. It certainly has had a very damaging effect… It’s cost the world perhaps as much as 10 years of progress on climate change action and government support and sensible regulation.”
11. “I think engagement for the routine concerns [with companies over climate change] is the way to go… But with oil companies, I think they’re simply too cynical and too clever for engagement to count.”
On value investing and venture capital
12. “[Value investing] has had a brutal 11 years. It was the worst 10 years in history for value versus growth. And then last year was by far the worst single year. So you had the worst decade followed by the worst single year… We’ve had a lot of problems over the last 11 years.”
13. “American capitalism seems to me past its prime, a little fat and happy, not aggressive enough. There’s only half the number of people working for firms [that are] one and two years old than there were in 1975. So we’re losing some of our dynamism.”
14. “But there is one thing where the US is still exceptional and that is venture capital. And venture capital is really attracting the best people these days. They don’t go to Goldman Sachs to write algorithms. They go into venture capital or to start a new firm, and they should.”
Investors should view digital currencies as a substitute to copper, rather than gold, Jeff Currie, global head of commodities research at Goldman Sachs, told CNBC on Tuesday.
“You look at the correlation between bitcoin and copper, or a measure of risk appetite and bitcoin, and we’ve got 10 years of trading history on bitcoin – it is definitely a risk-on asset,” Currie told CNBC’s “Squawk Box Europe.”
He said both bitcoin and copper work as “risk-on” inflationary hedges, or situations where investors have higher risk appetite. Gold is a more “risk-off” asset, where investors seek shelter when stocks are selling off.
Copper prices topped $10,000 a ton for the first time in a decade last month, as economic reopening triggered a rally in the metal. Demand has been surging as it’s seen as a critical component to the transition to a green-energy economy. Although prices suffered a sharp decline towards the end of May, they again rebounded.
Currie’s comments came after a wild few weeks for cryptocurrencies. Bitcoin was last trading 2% higher around $37,190 on Wednesday, and is up about 28% so far this year. The digital token lost more than 25% of its value over the last three months amid a broad crypto sell-off after Tesla suspended bitcoin payments and China announced digital tokens can’t be used for business.
Currie, who is one of the most widely followed commodity experts, pointed out bitcoin and copper are more similar when it comes to acting as an inflationary hedging – a strategy that involves investing in assets that outperform the market when central bank policy causes prices to rise.
“There is good inflation and there is bad inflation. Good inflation is when demand pulls it, and that is what bitcoin hedges, that is what copper hedges, that is what oil hedges,” Currie told CNBC.
“Gold hedges bad inflation, where supply is being curtailed, which is focused on the shortages on chips, commodities and other types of input raw materials. And you would want to use gold as that hedge,” he said.
In a research note published Monday, Currie and his team said commodities remain the best inflation hedge because they rely on demand, not growth rates. “Commodities are spot assets that do not depend on forward growth rates but on the level of demand relative to the level of supply today,” the strategists wrote.
“As a result, they hedge short-term unanticipated inflation, created when the level of aggregate demand is exceeding supply in the late stages of the business cycle.”
The firm said copper is the most critical raw material in the world’s path towards net zero emissions because it’s used in everything from electric vehicles to wind turbines and solar power.
In a recent Goldman Sachs podcast episode, Nick Snowdon, one of the researchers, broke down why the soft metal is facing a record supply shortage that will propel the price higher.
“The long-term supply gap in the markets, so when you look forward ten years, that gap currently stands at just over 8 million tons, so nearly 40 percent of the size of the market in terms of the long-term shortfall,” said Nick Snowdon. “That’s larger than anything we’ve seen in the history of the copper market.”
The market will need an enormous number of copper mine projects approved to meet demand, he said. He stressed that the shortage of supply isn’t in copper itself, but in mining projects.
“There is enough copper out there. This isn’t a story of the depletion of copper ore. But there is a very limited list, currently, of copper projects,” Snowden said.
Snowdon said the supply side is completely underprepared for the demand surge in copper that is set to come as countries move towards renewable energy initiatives. Over the last 12-18 months, he said hasn’t seen a single new major copper project being approved.
“Essentially we’re sleepwalking to huge deficits and scarcity. And prices will have to rise even higher than is currently our base case,” Snowdon said.
One reason for the mining-supply shortage is because the mining sector has been in a very conservative setting in terms of its balance sheet activity, said Snowdon. The sector hasn’t invested in early stage project development and so now, the quality of projects compared to 10 years ago is “very poor,” the researcher said.
Even now, record price levels haven’t caused a shift in supply investment like one might expect, he added.
That’s because in the early 2010’s, the mining sector invested heavily in projects, only for the price in copper to collapse shortly after, punishing any producer who invested heavily in new projects.
“That memory lingers really amongst the current generation of producer management,” Snowdon said.
He also explained that ESG initiatives slow down the process of getting a mining permit approved. Additionally, the coronavirus created operational challenges in copper mining.
Snowdon said right now, the quality of mining projects is lower and the costs are higher, and the price of copper will need to move up even further before there’s an incentive to invest in more projects.
“It’s not an easy proposition of saying, “Okay, let’s just invest in growth,” because the economics are not as attractive as they were if you go back to the mid/late 2000s,” said Snowdon.
He continued: “So, I think all of those are combining to generate this restraint. And really, the only thing that can break that has to come from price dynamics and an incredibly high price. And we don’t think the current price is, yet, at the level to generate that shift.”
“We expect the biggest jump in oil demand ever – a 5.2 [million barrels per day] rise over the next six months, 50% larger than the next largest increase over that time frame since 2000 and almost twice as large as the biggest 6 million supply rise since 2000,” analysts led by Jeffrey Currie said.
The analysts also upgraded their 12-month price target for copper to $11,000 per tonne, a jump of 11% from current levels. If the green capital expenditure is at the center of the commodity supercycle, they said copper is at the center of this trend. Copper is a critical raw material for green infrastructure and has an under-invested supply side, they said.
“The only way this record-sized and fast approaching supply crunch can be solved is via a surge in price to new record highs,” the analysts said. “We essentially see the copper market sleepwalking to a classic case of ‘Revenge of the old economy,’ just as oil did during the 2000s commodity boom.”
As for gold, the analysts see the price of the yellow metal rising 12% to $2,000 an ounce over the next six months, highlighting its “real use” compared to bitcoin.
“While bitcoin benefits from greater liquidity, it suffers from lack of real use and weak [environmental, social, governance] scoring due to its high energy consumption which makes it vulnerable to losing store of value demand to another better designed cryptocurrency,” the analysts said.
Edmund Moy, former Director of the US Mint and now chief market strategist at gold seller Valaurum, agreed.
“Cryptocurrencies like bitcoin are many things but I do not consider them a store of value yet because they do not have a long history of maintaining its value, the way gold has,” he told Insider. “I could change my mind…Ask me again in two thousand years.”
Copper will be crucial in achieving decarbonization and replacing oil with renewable energy sources, and right now, the market is facing a supply crunch that could boost the price by more than 60% in four years, Goldman Sachs said in a report on Tuesday.
Increased demand and likely low supply are set to drive up the price from the current levels of around $9,000 per ton to $15,000 per ton by 2025, the bank said.
As a cost-effective metal, copper is majorly important in the process of creating, storing and distributing clean energy from the wind, sun and geothermal sources as it has the physical attributes needed to do so, Goldman’s team of analysts, led by Jeff Currie, said in a report titled “Copper is the new oil”.
“Discussions of peak oil demand overlook the fact that without a surge in the use of copper and other key metals, the substitution of renewables for oil will not happen,’ the report said.
Copper will be needed to create the new infrastructure systems required for clean energy to replace oil and gas, however there has not been enough of a focus on this so far according to the report.
Demand will therefore significantly increase, by up to 900% to 8.7 million tons by 2030, if green technologies are adopted en masse, the bank estimates. Should this process be slower, demand will still surge to 5.4 million tons, or by almost 600%.
Copper is a key part of sustainable technologies, including electric vehicle batteries and deriving clean energy. As the deadline of the Paris Agreement comes closer, political and economic pushes towards renewable energy and green technology are becoming stronger.
Just two weeks ago, US President Biden announced an infrastructure package worth $2 trillion, which specifically encourages new sustainable technologies and infrastructure projects.
In its current state however, the copper market is not prepared for the increased demand, Goldman Sachs argue. The copper price has risen by about 80% in the last 12 months, but there hasn’t been a matching rise in output.
“The market is already tight as pandemic stimulus (particularly in China) have supported a resurgence in demand, set against stagnant supply conditions,” Goldman said.
The benchmark three-month copper futures price on the London Metal Exchange was last up 1.4% at around $9,022 a ton, while NYMEX copper futures were up 1.5% at $4.09 a pound.
As the expansion of mines and creation of new copper production fields takes years, this is likely to lead to shortages of the metal. To prevent a depletion of copper supply within two years, prices must rise now to encourage investment and an expansion in output, Goldman said.
At present, Goldman Sachs “now estimate a long-term supply gap of 8.2 million tons by 2030, twice the size of the gap that triggered the bull market in copper in the early 2000s”.
Copper production declined in 2020 due to government restrictions and lockdowns during the Covid-19 pandemic. The world’s largest copper producers, Chile and Peru, were hit especially hard by the pandemic, which could impact supply until 2023, according to commodity analysts S&P Global. Last week, prices spiked following Chilean border closures related to the pandemic.
Global copper production is however predicted to increase by 5.6% in 2021 after declining by 2.6% in 2020, according to a GlobalData report published in February.