012. Raw material cycles current situation and future trends with Tim Clark

“Welcome to “I LIKE TO MOVE IT”, the Rulmeca podcast that explores the latest trends and innovations in the world of material handling world. 

I’m your host, Mr R, and I’m very excited to dive into today’s topic raw material Cycles current situation and future Trends. Raw material Cycles are the fluctuations in the supply and demand of natural resources that affect their prices and availability. They are influenced by various factors such as economic Developmental and Technical Cycles as well as geopolitical events, Environmental issues and consumer preferences. Understanding these Cycles is crucial for investors producers consumers and policy makers who want to make informed decisions and anticipate future scenarios.

To help us explore this topic in more depth we have a special guest with us today Tim Clark the head of mining research for SBG securities a division of Standard Bank. Standard Bank is the largest bank on the African continent and is deeply involved in supporting clients in the mining manufacturing and commodity sectors. Tim has been a mining paper and commodities analyst for nearly 20 years and specializes in bulk materials base Metals energy and paper markets. Tim covers the large Global Diversified and South African Diversified mining companies as well as South African listed paper companies.

MR R: welcome Tim and thank you for joining us!

TIM CLARK: thank you for the for the kind introduction Mr R and thank you for allowing me to share a few thoughts on the the topic of material handling and about commodity markets demand and Mining of material

MR R: Let’s start right away with the first question. We often hear about the commodity cycle, how do you think about commodity Cycles?

TIM CLARK: it’s a very interesting topic as to as to how we think about commodity Cycles. It’s a question that I get asked very regularly where are we in the cycle and it’s some time for me to realize that it’s not a very easy question to answer. Over time I’ve realized that I think it’s best to think about Cycles in categories and certainly I’ve divided it into three specific categories, there’s firstly the economic cycle, secondly developmental cycles and thirdly Technical or technological Cycles. So let’s run through each one of those one at a time. The economic cycle is the most familiar to all of us we’ve got Rising inflation caus caused by strong demand resulting in higher interest rates causes demand to slow down and we run through a normal economic cycle and as economic Cycles play out demand for materials follows cyclical demand and drivers of demand. Where are we in the cycle today we’re probably right at Peak interest rates and so we’re in the latter parts of that demand cycle. The second cycle though is has  until recently been much more relevant  and certainly more important to commodity markets and that’s the developmental cycle that we’ve seen recently in China.

Let’s talk about developmental Cycles what are they? Basically they are the urbanization and industrialization of economies and the move from  rural environments where commodity consumption is relatively low to build inventories into cities all the way from  owning an apartment and riding on an escalator to driving a car and and traveling on a train all of these things are commodity intensive and they require a significant amount of commodity which is beyond the normal economic cycle of demand, we’ve rarely if you look back had a number of these events over time but the most significant more recently are the United States from the late 1800s to the 1960s, Japan in the 1970s, the Asian tigers through the 1980s and into the early 1990s and then the really big super cycle where the biggest urbanization event that we’ve ever seen happened in China and developmental industrialization event happened in China um from the late 198 1990s and all the way through to today and demand remained strong up to today. There’s a third cycle though and that’s really interesting and really exciting and those are technological step forward type of Cycles. In technological Cycles something has to change in the way that we live as a society or something has changed which results in significant amounts of demand for Commodities and for materials. The current environment of energy transition is highly demand intensive for commodity markets and for mind materials you’re not going to build out renewables,  you’re not going to redo the electricity grids, you’re not going to replace all of the transportation fleets without significant commodity demand and I think we plan to speak about these through some of the podcast series and hopefully we can unpack into a little bit more detail.

MR R: That is a very interesting perspective speaking about the current economic cycle. There are reports of recessionary risks this year for most of the developed World though shallow and limited how are you thinking about the economic cycle at present and what is the Outlook?

TIM CLARK: Let’s start with recession. Recessionary conditions are by definition backward looking at they recessions are declared when we’ve had two quarters of negative growth and certainly there are indications of this emerging as we speak right now but as I point out it is somewhat backward looking. I think when we talk about recessions we must differentiate between inflation and demand so let’s talk about inflation firstly inflation peaked especially with with Energy prices and caused the rising interest rate environment as central banks tightened over the last couple of years but certainly inflation has turned and is falling and as a result rate expectations are likely to see falls or drops um in different quantums over the rest over the course of the next year or two. Demand though is a little bit different, demand has been relatively weak for materials in Europe it’s slightly less so in the US and Japan in many ways the IRA and other  stimulus events have held up those two economies in terms of a normal economic cycle. We do anticipate that as rates come down European demand will recover and certainly there are indications of restocking and of better order books coming through in Europe and the Outlook does look more positive from a US Japan point of view though I think there will be some support but the base is a little bit higher so as we think about recessionary conditions we expect it to be fairly shallow, we expect demand to start to recover certainly from the second half of this year.

MR R: Do you think commodities prices are reflecting the current point in the economic cycle?

TIM CLARK: In simple terms the answer is probably no. At this point of of the demand cycle which is relatively weak we’d really be expecting prices to have moved from an incentive or an inducement price towards a cost curve intersect and we are seeing some sort of cost curve intersects coming through with manganese thermal coal nickel aluminium and pgms but they’re right at the top end of the cost curve so they’re not very deep into the cost curve and certainly in normal recessionary conditions you fall down towards let’s say the 90th percen out of the cost curve we’re not there right now. There are a couple of other Commodities or commodity baskets which are better supported copper prices are trading well above the cost curve but disruption levels are very very high we had two major events with Cobra Panama and with Los bronzes cutting production last year massive disruptions coming through in Copper and inventory levels are very low and hence well supported the market also knows that energy transition is coming and so it’s a bit of a mugs game to bet against a strong demand Outlook. The other one is steel making raw materials steel steel making raw materials have been better supported I think it comes from strong steel demand which is flat out of China around about a billion tons just a little bit over a billion tons but then also growing steel demand coming out of India so he an answer probably at this point in the cycle we would normally have expected prices to be a little bit lower than they are but there are good reasons why they’re well supported and with relatively low inventories across the board certainly the Outlook does remain supportive.

MR R: How does the outlook for the dollar and Fed rate Cuts impact Commodities?

TIM CLARK: The recent March inflation data out of the US was an increase month- on month and was somewhat sticky, the result is that it’s unlikely that we’ll see a rate cut before June by the fed and also the likelihood of back-to-back cuts that thereafter seems to be less likely but I think what is important is to note that we’re moving into a rate cutting cycle and in a rate cutting cycle the dollar tends to weaken and demand outside of the of the US therefore is sees lower commodity prices and it’s generally supportive of demand in addition to that a new phenomenon has emerged really and that is the financing of commodity markets on a derivative trade type of basis on an ETF type of carry basis which results in the fact that lower interest rates do um create demand for Commodities naturally um and so certainly the Outlook is somewhat more positive as rate cutting Cycles commence  and as the dollar weakens.

MR R: What about in the longer term you mentioned Developmental and Technical Cycles which we plan to discuss in a later podcast but as a teaser what are you thinking?

TIM CLARK: To be honest the economic cycle that we’ve been speaking about has actually lost some of its luster since the emergence of China in the late 1990s just to put some context to that China’s gone from 36% to 66% urbanization or even higher from 2000 to 2023 and the degree of industrialization is in the high in the high 80%. China’s Central planning is has allowed construction of infrastructure ahead of demod and as a result of this it’s the largest just taken to account there are 1.4 million billion people in China and fastest development cycle in in history because infrastructure cities factories have been built ahead of demand rather than as a result of demand. China’s also driven and also risen from a negligible level to around about 40 to 60% of world commodity demand over the last 20 years, but in truth this trend is really maturing debt levels are higher in China and industrialization and urbanization levels are peing and China’s starting to transition towards a consumption and a Services type of economy far less so than,  less commodity intensive than the  infrastructure real estate and build that we’ve seen over the last 20 years but demand does still remain relatively well supported at these levels. We’re going to discuss China in detail in a later episode and also introduce India’s emergence as a developmental demand driver there’s some really exciting advances from India coming present at the same time energy transition is a highly commodity demand intensive and we’re at the early stages of this emerging Mega Trend and we’ll discuss that in a later episode so I guess in conclusion economic Cycles are getting a little less relevant or important but we’re right at a turning point on those. China has been a massive driver of commodity demand for the last 20 years or more and we’re at a peak and maturing level in that developmental cycle and we’re right at the transition towards new Demand on a global scale from energy transition.

MR R: Thanks Tim these are very interesting perspectives on commodity cycles and on the outlook for the year ahead we look forward to discussing China and energy transition in later podcast episodes.

TIM CLARK: Thanks MR

MR R: Thanks again for listening we’ll see you next time on “I LIKE TO MOVE IT”, the Rulmeca podcast.

Thank you for your attention and I look forward to seeing you next time to explore new trends and the most interesting developments in the world of material handling.  

Take care and keep being handsome!

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