In this PDAC interview, Paul Robinson of CRU Group shares two important commodities trends that resource investors should watch this year.
It’s a few months into 2018, and at this year’s PDAC convention, CRU Group Director Paul Robinson shared his thoughts on two trends investors should be aware of this year.
The first is a “ratcheting up … of the trend around electric vehicles.” As Robinson explained, “electric vehicle demand is coming, it is affecting and impacting a range of commodities.”
He noted that while there is some hype that is driving prices “a little bit higher than they should be, a little bit earlier than they should be … it’s also worth noting that in general analysts are revising up their expectations of electric vehicle auto forecasts every year. “
Robinson also pointed to China’s continued environmental awakening as a trend to watch this year. He commented that a couple of cities in the country have talked about extending steel cuts into the summer, which should “be supportive of steel prices and … of iron ore high-quality prices and met coal prices.”
Watch the video above for more insight on the resource space from Robinson. You can also read the transcript below or click here to view our full PDAC playlist.
INN: We’re here at PDAC on the second day of the conference. Have you had a chance to get a sense of the mood?
PR: The mood is definitely optimistic. If I go back 12 months, there was a sign of cautious optimism in the mining sector, and a hope rather than a belief that things were starting to turn. I think in the last 12 months we’ve certainly seen some solid foundations formed. The demand — that has helped on the supply side, and that’s feeding through to the delegates and the exhibitors that are here this year, they are definitely more optimistic than they were 12 months ago.
INN: And it’s a justified optimism?
PR: It’s certainly justified in the short term. We’ve definitely seen a pickup in demand across a range of metals in the last 12 months, and I think that is feeding some of that optimism.
INN: Every year when you come to PDAC, you do a review of the previous year and you share your outlook for what’s coming in the current year. Can you tell me what overall resource trends stood out to you last year?
PR: Last year, 2017, I think there were two — actually there were three important resource trends. The first one was across the board, we saw a stronger-than-expected pickup in demand. And there was nothing special about that, it wasn’t one particular country or one particular sector that drove that; it was the fact that actually we had growth across the world. And we haven’t had that in a decade, so we haven’t had Europe and the US and China and Southeast Asia all performing well, and that lifted prices across base metals in general.
The second trend that happened which was a little bit more unexpected was some of the environmental closures that took place in China, driven by their … blue-skies policy. And that led to some capacity restrictions in bulk commodities and in steel, and again that lifted prices further, particularly for iron ore and for met coal and for steel prices. That’s a trend that we think is ongoing in 2018.
INN: Any surprises for you there, [either] positive or negative?
PR: The positive surprise was the fact that the world got its act together and we had that growth across the world. And although our predictions last year in terms of the running order … strongest to weakest commodities we were bang on, so I’m quite pleased with that. We underestimated the scale of that price uplift because we underestimated the scale of that demand uplift.
I think the positive surprise for me is how strongly China appears to be tackling this absolute pollution level within China, and I think that’s good for the environment and it’s good for the steel sector and good for the raw materials sector. As I said, that’s a trend we think is going to continue throughout 2018.
INN: Any new trends we should expect to see this year?
PR: I think there’s two new trends. One is a continuation really, but maybe a ratcheting up a bit of the trend around electric vehicles. Electric vehicle demand is coming, it is affecting and impacting a range of commodities. There is a little bit of hype there that is driving prices a little bit higher than they should be, a little bit earlier than they should be. But it’s also worth noting that in general analysts are revising up their expectations of electric vehicle auto forecasts every year. We’re still trying to catch up with that trend. And only … at the end of last year the Chinese put subsidies in place to increase the volumes of their battery electric vehicle market, and that doubled our forecast for [the] Chinese battery electric vehicle market by 2025. So I think that’s one interesting trend.
The second trend is around the environment. We are starting to see announcements from China — it’s not a done deal yet — but we’ve seen two announcements from [two cities]. [They] have both talked about extending some of their steel cuts now into the summer of 2018. And again, if that happens, despite section 232 and the tariffs, then that should again be supportive of steel prices and be supportive of iron ore high-quality prices and met coal prices.
INN: You mentioned tariffs, and we just had last week the whole US tariffs announcements. What are your thoughts on that?
PR: I can understand the principles behind trying to protect the US aluminum sector and the US steel sector, and certainly we have tariffs on a variety of things within the EU, so it would be hypocritical of me to sit here and say that tariffs are a bad thing. [But] I think these tariffs are ill founded, so I don’t think they will achieve the result that the Trump administration is looking to achieve. On steel, China is just a minuscule importer of steel products into the US, and actually there is a whole host of jobs and work associated with re-rollers on the west coast of America and other facilities that rely on some of that imported steel for their workers.
My concern there would be it won’t have the results that they expect on aluminum. Even before this tariff announcement at CRU we already had the US aluminum sector returning because of the growth in demand. So our base forecast had all of that smelting capacity returning, and some of it was already energized to return. Therefore this is just attacks on aluminum for North American consumers.
INN: What activities should mining companies be engaging in right now? M&A, financings, something else?
PR: That’s a really interesting question. If you look at the other thing, of course, that has happened over the last year, [it’s that] the free cashflow and the profitability of the mining companies, particularly those big corporates, has gone through the roof. And now we have arguments over what to do with all of that excess cash. Which is a much better, healthier argument to have than how to cut costs.
Really they’ve got three choices. It’s about paying down debt — well that’s already been done, so we can tick that box. It’s about returning cash to shareholders; I think that that is the major trend that we will see in 2018, because shareholders need rewarding for sticking with it over the last 24 to 36 months.
And then you’ve got M&A activity. At CRU, we expect M&A activity to restart again, but it will still be muted — it’s too early yet, and there is too much pain associated with mad M&A activity previously for it to be a massive splurge. Having said that, we think there’s going to be opportunistic M&A and acquisitions and opportunistic brownfield expansions.
We’ve seen First Quantum Minerals (TSX:FQM) recently put out to raise capital to complete the Cobre Panama project, which is a very interesting market to be in. We have seen Southern Copper (NYSE:SCCO) [win] the tender for the Peruvian Michiquillay copper asset, which again is another right step for the copper market. And we’ve seen [another] successful [copper] IPO last year. So there is some activity, but we don’t expect to go back to the M&A frenzy that we saw before the last downturn.
INN: And investors — as an investor, how should you be behaving in this type of market?
PR: As an investor, you’ve got to know your own risk appetite, and you’ve got to know your own risk tolerance. It’s not for me to tell an investor which company is right for them, but what I would say from the environment, the macro, the commodity trends — at CRU we certainly favor the base materials and steel over bulk commodities, so that’s number one.
The second thing we favor is we favor high-quality, lower-environmental-impact commodities over the more polluting commodities. So high-quality iron ore over low-quality iron ore, high-quality thermal coal, high-quality met coal projects over low quality. And we believe the premiums and discounts on that quality benchmark are only going to grow over the next few years. So base and steel over bulks, but high-quality bulks over low-quality bulks.
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
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