Bases

Copper and Aluminium crushed it in March 💪 and contributed the most to the fastest pace of price increases i.e., the speed at which growth in prices occurred, in the base metals complex over the past 12 months as implied by RBA commodity price index data.

While Nickel and Lead are also part of the complex, their weightings are small and that makes Copper and Aluminium the dominant pair.

Copper and Aluminium are mostly responsible for the massive 11% price acceleration in March which meant prices grew more than 2.5x faster than in February, and almost twice as fast as all three peaks over the historical 12 month period.

The trendline in Chart 1 indicates a lop sided smile, with more of the smile (price rise acceleration) coming now.

Chart 1 implies we will soon see higher prices reflected in higher second half profits and potentially dividends for base metal producers.

And as more global mines come back to full strength post-COVID delinquencies and lockdowns, it will be a commodities feeding frenzy.

On the other hand, it means that input costs into finished products will also rise, thereby increasing inflation in goods (durables, equipment, etc.) and services (electricity, rents, etc.).

Bulks

While the rate of price growth in Iron Ore and Coal prices accelerated to a 12 month high in January, i.e., growing 22% faster than in December, that rate of growth more than halved in February before accelerating 🚀again at nearly the same pace (19%) in March which confirms the uptrend.

It’s an old story.

Short of central banks tipping countries into recession while attempting to fight inflation with interest rate hikes, these bulks are still on a rip.

China demand for Fe and coking coal continues and adds to the more recent acceleration in demand for thermal coal for heating due to the still underinvestment in renewables and issues with European energy.

Volatility

Like the base metals complex, Iron Ore/coking coal and thermal coal are also completing a lopsided smile 😁 as per the Chart 2 trendline - but with significantly higher highs and lower lows.

It’s an important point from an investment perspective.

The base metals complex has been far less volatile in terms of the monthly rate of change - deviating between +11%/-4%.

Whereas, the bulks zig zag within a channel of +22%/-16%.

That’s fine for a large diversified company like BHP with a foot in each camp. But for pure play iron ore companies where the ‘crack and stack’ cost base can’t come down much more (to influence profitability) the upside and downside in profits are almost exclusively driven by exports prices, not costs and therefore more prone to geo-political and other tail risks..

The Aussie

All of these commodities are shooting the lights out in terms of accelerating price increases, and that plus future expectations that it will continue are what’s lighting a fire under the Aussie dollar (AUD).

The AUD is up 30% since the darkest days of COVID lockdowns.

I should firm for some time and possibly increase because Australia’s terms of trade recently hit an all time high - hence the AUD should probably be higher despite some ‘growth tax’ from higher oil prices.

Perhaps the AUD feels lower than it should because the USD is a lot stronger than what only one rate rise (so far) by the Fed might suggest.

Why? It might be because there’s less USD required to buy oil given the U.S. is a net energy exporter, so a higher oil price no longer floods the market with, and depresses the USD.

If that’s right, and if they’re both strengthening at the same time for different reasons, the growth in the AUD won’t look as dramatic.

Try as we Aussies might to invest in software, education and other export industries, we have a commodity currency that continues to strengthen against an already strong USD (which says a lot) as we dig and drill more holes in the ground and below the water line.

Given the underinvestment in renewables and the ‘social ban’ on nuclear energy, we will need to drill way more holes.

You may not like this, but it doesn’t matter, and the result is that Australia’s share price (measured by its terms of trade and expressed as the AUD) is up and this is likely to continue.

The benefit of this in light of Putin is that it should help to ameliorate the extent to which we import inflation, even if it does mean that we receive a little less AUD back for each USD received and converted. Will it be enough to avoid interest rate hikes in Australia. Only one person knows, and it’s not me!

In any event, Aluminium, Copper, Coal and Iron Ore prices are on 🔥🔥 while the growth tax from higher oil prices (minus 22.1 cpl helicopter money and flood relief transfer payments) and food prices are levied on households, consumers, farmers and miners, with variable effect.

Mike.