Setting Up for a Supercycle?

A “supercycle” in the commodity market is defined as a multi-year and even decades-long period of time where a structural change in demand keeps supply constrained and prices elevated. The rapid industrialism of the United States in the late 19th century and post-war reconstruction in Europe and Japan in the 1950s are two examples, notes Scott Gates, Chief Investment Officer, Friess Associates in the firm’s quarterly investment letter, Looking Forward. “More recently, following a two-decade-long bear market, commodities rose in the early 2000s as China and other emerging counties turned toward internal growth. Evidence is mounting that we are on the cusp of another cyclical boom for commodities,” Gates said. Here are his observations for crude oil, petrochemical demand, lumber, copper, corn and soybeans, Gates also profiles The Mosaic Co.

The global spread of Covid-19 quickly changed the demand profile for commodities. Prices reacted strongly to the crisis, reflecting changes in supply and demand due to policy measures to limit contagion before reversing quickly as the trend toward reopening economic activity accelerated. Beyond the health crisis and the sudden pause in commerce, many countries faced turmoil linked to commodity dependence and related supply chains.

Between the $935 billion spending bill passed in late December and the $1.9 trillion aid package of early March, the U.S. economy should see a staggering 15 percent of GDP worth of fiscal support. That’s on top of the multi-trillion-dollar CARES act of 2020. At the same time, the Federal Reserve Bank is committed to keeping rates low for a lengthy stretch, creating a path for commodity inflation. After growing just 2.3 percent last year, China also looks to rebound on stronger exports and accelerating growth on the mainland.

Spot prices for crude oil turned negative for the first time ever in April last year as demand seized up during global coronavirus lockdowns. Prices recovered since then, currently standing above pre-Covid levels, amid hope that vaccines will help restore consumption. While not as widely discussed as crude barrel prices, related increases in chemicals and plastics prices are starting to show up around the globe.

Over the longer term, petrochemical demand is poised to increase due to the increased use of plastic in consumer goods globally. Polyvinyl chloride, or PVC, has seen a dramatic cost increase, driven by a combination of higher feedstock prices, rebounding global consumer demand and production outages from an unusual winter storm in Texas. The cost of high-density polythene, used for shampoo bottles and shopping bags, is its highest since 2008.

March nonfarm employment rose by 916,000, the largest increase since August 2020. Big gains in leisure and hospitality contributed as many states eased Covid restrictions. They were accompanied by strength in mining, logging and construction.

Lumber, one of the biggest costs in home-building after land and labor, has never been more expensive. The Covid-19 pandemic shuttered lumber mills in early 2020, handcuffing homebuilding crews all over the country and forcing home prices upward. The elevated price of lumber is in many cases easily adding more than $20,000 to the price of a new home at a time when housing supply is tight and demand is elevated.

Supercycles can be in part fueled by synchronized socio-economic policies across the globe such as those related to population growth, income inequality, climate change and decarbonization. For example, as demand from broad economic activity improves, mining and precious metals are also beneficiaries from new policies aimed at lowering carbon footprints. Copper and other metals are considerable components in solar panels, wind turbines, electric vehicles and batteries. Global automakers recently curtailed production because of a lack of semiconductor chips as well as shortages of nickel and cobalt used in batteries.

Corn and soybean prices on the Chicago Board of Trade rose significantly throughout 2020 to reach multi-year highs. Prices continued to rise in the first three months of 2021, driven by global demand, weather disruptions and plantings that came in under some industry estimates. After a wild year in 2020 for farmers that saw prices drop sharply only to recover by the end of the year, surging demand for proteins in emerging countries such as China is likely to continue. The weaker U.S. dollar against other major currencies also boosts export prospects for grains. Concurrent global infrastructure spending is also increasing as a solution to help reaccelerate economies, again boosting demand for many commodities. President Biden’s $2 trillion proposed plan includes massive new spending targeting transportation and utilities upgrades. Infrastructure development may also play a key role in the implementation of a European Green Deal and stimulus programs throughout Asia.

Mosaic: Demand for its
Nutrients and Fertilizers Soar

With prices for key crops such as corn and soybeans selling near their highest prices in years, The Mosaic Co. (NYSE: MOS) benefits from positive pricing trends for the key fertilizing ingredients it produces. Spring planting for corn and soybeans fell below U.S. Department of Agriculture forecasts, making it likely that upward pricing pressure on phosphate and potash will continue.

As a company focused on helping farmers capitalize on what they plant, Mosaic has seen demand and pricing for its nutrients and fertilizers soar. The Mosaic Co. is the world’s leading integrated producer of concentrated phosphate and potash, which are two of the three most important nutrients in agriculture. The company employs more than 13,000 people in six countries to serve farmers all over the world. Mosaic mines, produces and distributes millions of metric tons of phosphate and potash annually. Sales topped $8.6 billion in 2020.

December-quarter earnings grew to $0.57 per share from a loss of $0.29 a year ago. Sales increased 18 percent as commodity prices rose due to global supply conditions and large purchases by China, the first country to rebound economically from the pandemic. Farm economics improved materially across most geographies, while diminished inventories and limited supply in the U.S. market led to nutrient price improvements in the second half of 2020.

The Friess team spoke with Chief Executive Joc O’Rourke regarding the outcome of a trade case filed by Mosaic in the middle of last year. The U.S. International Trade Commission recently determined that subsidized phosphate fertilizer imports from Morocco and Russia materially injured the U.S. phosphate industry. As a result of this ruling, the U.S. Department of Commerce will issue countervailing duty orders on phosphate fertilizers, which will remain in place for at least five years. Based on the consensus estimate, Wall Street expects Mosaic to grow earnings more than 200 percent in 2021.

Editor’s Note: Founded in 1974, Friess Associates is a growth-oriented investment manager driven by individual-company research. Friess Associates conducts exhaustive research to isolate companies with fundamental profiles that position them for share price appreciation. This bottom-up, company-by-company approach is put to work for institutions, corporations, high net worth individuals and retail investors. Friess Associates offers its growth-equity services through mutual funds that span the market-cap spectrum. To learn more about the funds they manage, visit www.friess.com.