It gave the world COVID-19 and now it looks like China is giving the world some inflation, and while some people may not see the connection between COVID-19 and inflation, they are both a threat. and an opportunity for investors.

To understand the importance of an inflation epidemic, one need only look back 18 months to see how a disease can turn financial markets upside down. Heavy losses at the start and big profits later.

AUTHOR: Tim Treadgold (Rising Stars Resources)

Inflation, if it rises too much, is an equally dangerous infection that destroys the value of certain types of investment (especially cash), but the flip side is that it improves the performance of physical assets such as property, gold and other commodities.

A headline on a website yesterday, probably written by someone under the age of 40, highlights the lack of understanding of inflation. He said “Base metals are increasing despite Chinese inflation”.

The truth was that base metals rose “because of inflation” as did the rest of the commodity complex, with investors and commodity consumers buying now to avoid higher prices later, which is the essence of inflation.

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The next few months should see a better understanding of the inflationary threat, but to see how it might spread, take a look at China, where factory prices as measured by the Producer Price Index are up 9% from 12 months earlier, the largest increase since 2008.

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These higher prices in China are driven by the commodities boom that China launched with its economic stimulus and fueled today by the United States with its big spending budget that will send a wave of higher prices in. all countries because China, which was once the center of deflation with its cheap labor, is now the center of inflation.

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To give some figures on inflation, consider a 50% increase in the price of copper which currently sells for US $ 10,000 per tonne but which Ivan Glasenberg estimates needs to increase to US $ 15,000 / t to encourage investment in new mines. , a point taken up by Jefferies, an investment bank.

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As the founder of mining and commodities trading giant Glencore, Glasenberg knows exactly what he is talking about and while copper at $ 15,000 / t may alarm some people, it will cause prices to rise sharply. shares of copper companies with Sandfire rising 18c this week to $ 7.22 for example. – just like the 35% increase in OZ Mineral since the start of the year.

Inflation, which happens whether you are ready or not, will be one of the main investment themes for the next few years because of how it will initially push up commodity prices and eventually cause central banks to hike. interest rates to combat rising prices.

The other major theme for the next few years is the one that has been hiding in plain sight for three years, the electrification of transport and everything that can be powered by batteries.

This week has seen a flood of positive reports on battery metals, particularly lithium, with Macquarie Bank telling customers that “a major upturn in sales of electric vehicles is leading to a huge increase in demand for battery metals.” .

Macquarie said global electric vehicle sales in the first four months of the year were up 151% from depressed sales in the same period of 2020, a point echoed by Bloomberg New Energy Fund in its EV report. Outlook, which expects EV sales to grow from 4% of the market last year to 70% by 2040.

Locally, the EV theme continued to support stocks exposed to lithium. with Pilbara Minerals adding 8c to trade at a six-month high of $ 1.38. Liontown also hit an all-time high of 61c, while Galaxy and Orocobre fell 13c and 12c respectively.

Other banks stepped in during the week with their views on lithium, all positive bordering on enthusiasm, as Credit Suisse demonstrated in its opening words: “The lithium market has turned, buckle up. for the acceleration of electric vehicles ”.

Like Glasenberg’s remarkable forecast of a 50% increase in the price of copper to encourage new mines, Credit Suisse estimates that lithium supply “must grow by 50% from 2025 onwards. new projects which are not yet approved “.

A modest lithium supply deficit of 16,700 tonnes this year will drop to a deficit of 58,000 t next year, then explode to a shortfall of 248,000 t in 2025, dragging lithium prices with it. or marketed in the form of spodumene, carbonate or hydroxide.

JP Morgan estimates that the prices of spodumene, the substance produced by companies such as Pilbara and Galaxy, will increase by 10-25% over the next five years.

The rush for commodities amid rising inflation fears can be seen in the latest report from Citi, another investment bank, which says global assets under commodity management hit a new record in May, rising 3.4% to $ 723 billion.

“Across all commodities sectors, precious metals posted the largest monthly gain in May of $ 31 billion and the price of gold continued to recover,” Citi said.

Much of the strong performance of gold in recent months (up 12% since the end of March) can be attributed to the inflation factor, although this week saw the precious metal pause, opening and closing at US $ 1889 per ounce.

What happens next with gold will be seriously interesting because on the one hand there is the positive factor of inflationary fears while on the other hand there is the increasing likelihood of the end of the interest rate era. ultra-low as central banks begin to get their feet wet from the stimulus and begin a rate hike process – cut time (which can also trigger a tantrum).

Iron ore, which looked set to undergo a sustained correction, got another boost from Brazil when Vale, that country’s largest miner, was forced to temporarily shut down two of its small mines due to concerns about the stability of tailings dams.

The Vale effect has helped keep iron ore above US $ 200 per tonne and even with a price that represents huge profits, most local iron ore stocks haven’t budged much and those who do. did so down a few cents in another indicator of a lagging iron ore correction.

ABOUT THE AUTHOR:

Tim Treadgold brings decades of experience to Resources Rising Stars, providing readers with a sharp and insightful analysis of current events and breaking news.