Scene Set for Another Super Cycle: ANZ at RIU

THE CONFERENCE CALLER: ANZ senior commodity strategist Daniel Hynes told the 2023 RIU Explorers Conference Day Two audience that China’s reopening has set the scene for another commodities rally. By Ngaire McDiarmid

The Asia region’s major consumer had weighed on global economic weakness in 2022 due to its zero-COVID approach, but following rare social unrest late last year, China reopened “quite dramatically” in December which Hynes said broadly speaking was a very positive event for commodity markets.

“It’s not all going to be roses,” he told delegates, pointing to fundamental issues in the Chinese economy, in particular the heavily indebted nature of property developers which was expected to continue to restrict activity.

According to Hynes’ presentation, however, the uptick in demand came against a backdrop of constrained supply and record low inventories, setting the scene for a super cycle.

Growing demand

Hynes said China once again stood out as a centre of global growth, compared with Europe emerging from its energy crisis and US interest rate rises expected to weigh on activity in America.

China’s GDP was forecast to rebound 5.4 per cent in 2023, Hynes said, with its manufacturing sector picking up.

“We’ve seen a couple countries move back into expansionary territory, in particular China in January, which is quite promising given the surge in new COVID cases during the month and certainly leading up to the Chinese new year,” he said.

Another issue was major consumers moving to address security of supply.

“China is particularly keen to build up its own import growth as a result of that,” Hynes added.

Hynes identified other evidence of growth, including a strong pick-up in retail sales and vehicle sales.

“Registrations for new vehicles…in the week just prior to this were up about 200 per cent year-on-year, so clearly, you know after being restricted and being scared to travel across the country, consumers there are quite active,” Hynes said.

“Already we’ve seen some key commodities record some relatively strong growth rates and imports after a pretty weak 2022.

“We certainly think that something that’s going to go to continue in 2023.

“On the metals side, we’re seeing some really positive signs already.

“Our China copper indicator here shows that we’ve already seen a pick-up and I suspect that’s only going to get greater as we see those real drivers of copper demand kick in.”

He said one driver was the growing investment in China’s power grid which had been inhibited by a lack of inter-provincial connectivity.

He noted renewable energy was heavily reliant on copper and said there was a “significant build-up of capacity in that country as well”.

In terms of electric vehicles, Hynes said China was now the world’s largest market, with more growth forecast.

“We did see a fall-off in January but that was more related to subsidies which came off at the end of last year, but foot traffic through some of those showrooms at the moment show that that’s going to continue for the foreseeable future,” he said.

“But even if we do have some weakness, we’re expecting to see export driven demand really pick up – certainly the demand for EVs in Europe and the US is growing quite strongly and I think China is really earmarking itself to fill the gap in there.”

Moves to build energy storage capacity, which boded well for the vanadium and lithium sectors, were “accelerating quite sharply,” he said.

Falling supply

The pick-up in demand comes as inventories dwindle and there was relatively low growth in supply, Hynes said.

He told Resources Roadhouse on the sidelines that there had been a level of copper restocking ahead of the expected pick-up in manufacturing activity.

“But when you look at it on a longer-term scale, my initial chart showing 20 years of inventories on a days of supply consumption, which is more critical, we’re actually at record lows,” he said.

“It does feel like we’re setting ourselves up for another commodity rally,” he told delegates.

“The strong demand coming from China initially, then the advanced economies, against the backdrop of low inventories and relatively low growth and supply, so we think that commodity rally is really setting the scene for further gains over the near-term.”