Upcoming ‘feedstock’ supercycle: what shares take a closer look at

Photo: mos.ru

Today I would like to talk about the upcoming “feedstock” super-cycle. Optimism about the world economy’s recovery and growth recently led to a significant rise in prices for some feedstock: copper, nickel, iron ore, silver, oil, wheat, corn and soya beans.

In the last hundred years, there have been four feedstock super-cycles. The last one began in 1996, reached the peak in 2008 (after 12 years of expansion) and hit the bottom in 2020 (after a 12-year fall). Apparently, now we are entering the development phase of a new supercycle.

For the Russian economy, this will become a ticket to success, as it seriously depends on exports of a wide arrange of feedstock. Budget replenishment, pension indexation, national projects and many other programmes directly depend on export prices for feedstock.

Causes of supercycle development

Let’s find out why the new feedstock supercycle is developing. There are different reasons:

• Recovery of China’s economy. As one of the world’s top 3 economies, the country not only produces good for the whole world but also consumes more and more itself. Besides, China’s government launched a 6-trillion yuan programme, which accounts for 6% of the country’s GDP, designed to stimulate the economy. The digit is enormous, we must acknowledge. This was money was spent on the construction sector that consumes a lot of feedstock.
• Mass vaccination launched in the world will allow the world economy to win the fall in the consumption level back (here we are talking about not precisely about the consumption of feedstock but the general consumption of all goods in the world) due to the coronavirus epidemic. As exchange trade and production planning rest on expectations and outlooks, which are optimistic in this case.
• Investors are betting on feedstock assets in fear of inflation growth. This is seen well in the gold and copper markets. Large measures stimulating economies taken by different countries bring to higher inflation pressure. The world economy starts to have too much money, at least more than usual. To put an example, the latest package of incentives in the USA will amount to 25% of GDP, which is around $5 trillion.
• The development of the so-called green economy, as paradoxically as it might sound, will facilitate the growth of prices for feedstock, including hydrocarbons. What’s the problem? The answer is simple — the creation of low-hydrogen infrastructure (solar batteries, wind turbines for power plants, e-cars, charge points), will require a lot of key metals: copper, nickel, lithium, cobalt. According to some forecasts, there will be a deficit of supply of some raw products in the mining industry by 2023, the outlook on particularly copper and nickel (for accumulators) is about 20% shortage.

Hydrocarbons will play a bigger role in the construction of the green economy because of a higher level of economic activity and employment of the population, which, in turn, leads to higher demand for consumption of other commodities. All this resembles a big vicious circle, which the world economy is, in fact. We shouldn’t forget that nowadays electricity is mostly generated by burning hydrocarbons (natural gas, mazut, for instance). The world is on the threshold of the fourth energy transition whose initial stage will be provided with feedstock.

One question left: how Russia will feel after this transition and if it can adapt to it. In my opinion, Russia should carefully develop nuclear energy at the first stage of the energy transition to replace hydrocarbon exports with electrical energy exports. Hydropower has huge potential, considering the number of rivers in Siberia. Hydrogen can develop in Russia too. Generally speaking, the fourth energy transition is worthy of a separate article, since the issue is topical and vital for Russia.

Three companies to look at

Considering all the above-mentioned words, an interesting period when the world economy’s recovery will allow private investors to earn awaits us, luckily, the feedstock market has a lot of interesting companies trading on the exchange.

One of the major exchange traded funds of this sector — Invesco DB Commodity Index Tracking Fund (NYSE: DBC) — has grown by 16% since February 2020. To compare, S&P 500 Index has increased by 4% over this period of time.

Let’s talk about several companies whose shares have good potential for growth and we will certainly add to our benchmark portfolio.

Southern Copper is one of the world’s largest copper manufacturers whose shares are traded on the exchange (NYSE: SCCO). The company owns mines, copper smelters mainly in Mexico, Peru, Chile. Apart from leading positions in copper, Southern Copper is one of the world’s leaders producing gold, silver, zinc, molybdenum, lead.

In March 2020, the company’s shares were traded at $27-28 per share. The auction on 23.03.2021 closed at $68,21. The Mexican enterprise’s capitalisation is now around $60 billion.

The growth of prices for copper, which has topped $4 for the first time in the last decade, allows the company to confidently look into the future. In January 2021, there was published a report on the company’s profit and revenue that outperformed analysts’ forecasts due to a rise in sales and growth of sales for copper, silver and zinc. The company’s EPS (earnings per share, a financial indicator that’s equal to the ratio of the company’s net profit, which is available for distribution, to the average annual number of common stock) rose by 90% last year and totalled $0,76. Moreover, the company’s board of directors fixed quarterly dividends at $0,60 per share.

EOG Resources is one of the largest US independent oil and gas companies (NYSE: EOG). Exploration, drilling, production and sale of crude oil, natural gas and LNG (liquefied natural gas) are the foundation of the business. The company is headquartered in Houston.

In March 2020, the company’s shares were sold for $36-37. The auctions on 23.03.2021 closed at $63.63. The capitalisation of the company from Texas is nearly $40 billion. With this indicator, EOG Resources ranks fourth in the USA after ExxonMobil, Chevron, ConoсoPhillips. The company has low oil production expenses, the average price at $36 per barrel allows the company to hold the current production amount and pay out dividends at 2,6% per share.

With the current oil prices, the company can augment the free cash flow to partly repay the corporate debt, buy out shares in the market, increase dividends. Dividends are forecasted to be $0,36 per share. The company’s revenue is equal to $2,89bn. Investors who bought these shares should stay tuned for news about the progress in oil production from new drilling fields (Permian, DJ Basin, Powder River Basin).

Deere&Company is the world leader in equipment and machinery engineering for agriculture, construction, the timber industry and the mining sector (NYSE: DE). Due to a rise in prices for agricultural goods and metals, sustainable demand for equipment manufactured by the company is expected. In March 2020, the company’s shares were sold for $123-126 per share. The auction on 23.03.2021 closed at $357,49. The capitalisation of the Illinois company is approximately $106bn.

The results of the first fiscal quarter in 2021 became known on 19 February 2021. They turned out to be much better than forecasts for revenue and profit. The EPS (earnings per share, a financial indicator that’s equal to the ratio of the company’s net profit, which is available for distribution, to the average annual number of common stocks) of the company rose by 137% last year reaching $3,87. Revenue rose by 23% to $8,05bn. All this enabled the company to improve its profit outlook from $3,8 to $4,8 billion.