By Alex Kimani
- Commodities have been among the most volatile asset classes over the past year
- Oil was one of the biggest gainers in the commodities sector in 2021, but not by any means the best
- Lithium prices soared 477% since the beginning of the year
Beginning in 2020 and extending into 2021, massive monetary and fiscal stimulus packages by the world's governments helped to facilitate the fastest economic recovery after the March deep slide.
With factories humming again and consumers flush with cash, a broad commodity rally sputtered into life thanks to the so-called reflation trade. In fact, Wall Street even predicted a commodity bull market that would rival the oil price spikes of the 1970s or the China-driven boom of the 2000s.
Market experts, including Goldman Sachs, believe the commodity boom could rival the last "supercycle" in the early 2000s that powered emerging BRIC economies (Brazil, Russia, India, and China). These expectations are supported by the fact that the price movement of most commodities has historically been both seasonal and cyclical.
Peering at the 10-year charts of leading commodities reveals a clear pattern of mean reversion where prices tend to oscillate backward and forward towards their mean or average. And so far, Wall Street appears to be right on the money, with supply chain bottlenecks adding fuel to the commodity rally and sending commodity prices even higher.
Commodities have been among the most volatile asset classes over the past year, with supply chain disruptions and surging inflation sending prices into the stratosphere. Rising commodity prices, particularly energy, have been as much a reflection of soaring demand as a lack of supply.
The year 2020 will be remembered not just as the year when the entire globe grappled with a pandemic for the first time in more than a century, but also as the year oil prices went into negative territory for the first time ever. With the global economy gradually reopening in 2021, oil demand shot up and prompted a massive price rally to multi-year highs. A big part of that rally can be chalked up to unprecedented levels of self-control by the world's largest oil cartel:
"You have a cartel that is traditionally as disciplined as Charlie Sheen's drinking, and for the last year they've been as disciplined as Olympic gymnasts," Tom Kloza, president of Oil Price Information Service, has hilariously told CNBC.
OPEC is historically known for incessant price wars and jostling for market share, but the painful lessons of that spectacular oil price crash appear to have injected some sense into its 13 member countries.
Oil was one of the biggest gainers in the commodities sector in 2021, but not by any means the best: that honor goes to lithium, the metal that is powering the green revolution. Crude oil enjoyed a rare annus mirabilis, finishing the year with a 57.8% gain. However, that qualified it as only the 10th best-performing commodity, highlighting how bullish the commodities sector has become.
Here are the 10 best-performing commodities in 2021.
1. Lithium
- 52-Week Change (2021) : 477%
- Price (Dec. 31): $42,256 per tonne
The transition from ICE vehicles to EVs has become a focal point of the global electrification drive. In 2020, global sales of EVs increased a robust 39% year on year to 3.1 million units, an impressive feat right in the midst of a major health crisis. Bloomberg New Energy Finance (BNEF), however, says 2021 is "yet another record year for EV sales globally," with an estimated 5.6 million units sold, good for 83% Y/Y growth and a 168% increase over 2019 sales.
That's a big reason to be bullish about one of the most important commodities that go into those EV batteries: Lithium.
Last year, Mining.com launched the EV Battery Metals Index, a tool that tracks the value of lithium, cobalt, nickel, and other battery metals flowing into the global EV industry at any given point in time. The index combines two main sets of data: prices paid for the mined minerals at the point of entry into the global battery supply chain and the sales-weighted volume of the raw materials in electric and hybrid passenger car batteries sold around the world.
That index has quadrupled from May 2020, indicating an industry that's been expanding at breakneck speed this year—even despite challenges such as the ongoing pandemic, supply chain constraints, and rising raw materials costs.
Back in 2009, around the time when Tesla (NASDAQ:TSLA)'s first Roadsters hit the road, electric and hybrid cars sold around the world contained a paltry 31 tonnes of lithium in their batteries worth a combined $182,000. Fast forward to the present, and the industry has grown 3,330-fold for a value of $609 million. Over the past five years alone, the annualized value of lithium in EVs has gone up more than 1,000%.
Source: Mining.com
The average value of lithium on a per-vehicle basis climbed 20% year-over-year in 2021, while total material deployed jumped 196% over last year, with lithium carbonate making up roughly half of the total vs. lithium hydroxide, with the latter favored in the manufacture of high-nickel content batteries. Lithium carbonate prices are up 91.4% in the year-to-date to $13,769.20 per tonne, a massive jump compared to the situation in 2020 when prices spent several months under $7,000 a tonne.
Despite the impressive rally, lithium could remain bullish for years.
Supply shortages
Last year, Chile's second-largest lithium producer, Albemarle Corp (NYSE:ALB), warned that global supplies of lithium were on course for a major shortfall in a few years' time if prices continued to fail to reflect the costs of funding massive expansions amid the EV boom. Specifically, ALB highlighted the chasm between discount-hunting EV manufacturers and lithium producers who could not meet growing demand at persistently low prices.
But maybe Eric Norris, operations manager for Albermarle's lithium business, rushed his fences: lithium carbonate prices have nearly doubled since then.
Despite lithium carbonate prices doubling from those lows, another giant lithium producer has been singing the same tune.
Jiangxi Ganfeng Lithium (SZ:002460), the world's largest lithium mining company with a market capitalization of $19 billion, says that lithium prices will continue to rally as lithium production struggles to keep up with massive demand for EVs. The Chinese company has some decent street cred—after all, it counts leading EV automakers such as Tesla and BMW (OTC:BMWYY) among its customers.
Ganfeng Lithium has gone into an acquisition spree as it anticipates an extended lithium boom, as reported by Bloomberg, thanks to a global supply squeeze.
Another reason to be bullish: prices for copper, nickel, cobalt, and lithium could reach historical peaks for an unprecedented, sustained period in a net-zero emissions scenario, with the total value of production rising more than four-fold for the period 2021-2040, and even rivaling the total value of crude oil production.
According to Eurasia Review analyst, in a net-zero emissions scenario, the metals demand boom could lead to a more than fourfold increase in the value of metals production—totaling $13 trillion accumulated over the next two decades for the four metals alone.
This could rival the estimated value of oil production in a net-zero emissions scenario over that same period, making the four metals macro-relevant for inflation, trade, and output, and providing significant windfalls to commodity producers.
2. Ethanol
- 52-Week Change (2021): 125%
- Price (Dec. 30): $3 per gallon
According to a report published by a market research firm IndexBox, U.S. ethanol prices climbed sharply in 2021. Based on data from USDA, the average ethanol price grew from $1.4 per gallon in January to more than $3.2 per gallon in November 2021, with the biggest gains coming in November, when prices for alcohol leaped up by more than 30%. Ethanol prices have been on a tear on strong demand for biofuels as more and more drivers hit the road and climate awareness increases.
U.S. ethanol fuel production has rebounded after a downturn in 2020, with 3.9M barrels of ethyl alcohol produced through the first eight months of 2021, compared to 3.7M barrels and 4.0M barrels manufactured in similar timeframes in 2020 and 2019, respectively.
Despite the growth in demand and increased prices in 2021, the last synthetic ethanol facility in the U.S., Tuscola Plant, owned by petrochemical giant LyondellBasell Industries (NYSE:LYB) announced that it would close at the end of 2021 thanks to ballooning energy and production costs making it increasingly difficult for synthetic ethanol to compete with bioethanol.
Meanwhile, prices for corn, which is widely used to produce alcohol, have gone down this year: Eastern Cornbelt average corn price decreased from $7.60 per bushel in May to $5.60 in November, giving bioethanol plants an edge. Fuel-ethanol prices have steadily declined over the past decade.
Industry experts have predicted that government policies will continue to support the development of the bioethanol market. The U.S. Department of Agriculture (USDA) has announced that it will invest $26M into building biofuel infrastructure in 23 states as part of the 'Higher Blends' program.
The subsidies will facilitate replacing old-style fuel pumps and storage tanks with blended pumps and tanks suitable for E15 and E85 fuels, as well as biodiesel. The USDA projects that these grants will help increase potential sales for biofuels by 822M gallons per year. To date, the USDA has invested $66.4 million in projects that are anticipated to increase biofuels sales by 1.2 billion gallons annually.
3. Coal
- 52-Week Change (2021): 111%
- Price (Dec. 30): $170.10 per ton
A severe shortage of natural gas, declining wind power output, nuclear outages, and cold weather have conspired to hand Europe and the rest of the world one of the worst energy crises on record. This has been a major boon for 'greener' fossil fuels such as natural gas and LPG, but also for the out-of-favor coal sector.
For years, coal prices have fallen off a cliff as power companies continued closing down their coal plants in favor of natural gas generation. In 2020, the EIA reported that 121 coal-fired plants had been closed or replaced with natural gas, leading to nearly 80 GW of coal capacity being retired or plants repurposed to burn natural gas.
But a massive spike in natural gas prices and huge shortages in 2021 tipped the balance in favor of coal, leading to a sharp increase in demand. Indeed, the EIA said coal-fired electricity generation was on track to increase for the first time since 2014, rising by 22% compared with 2020. Carbon dioxide emissions from the energy sector were estimated to increase 7% as a result.
Consequently, U.S. coal prices have jumped to their highest level since 2009 as miners attempt to keep pace with the surging demand for the fossil fuel.
A cross-section of U.S. miners remains bullish about the coal outlook in 2022, with some already having contracts to sell almost all of their expected output. Others are less sanguine, with Jefferies bullish about mining metals, but less so on iron ore and coal.
"We are bullish on mining for 2022 based on fundamental factors and valuations."
Jefferies said in a note entitled: "Same old song and dance for 2022."
"We are most constructive on the base metals, and especially copper and aluminum, while we are most cautious on iron ore and coal."
Prices of most base metals have remained stubbornly high, with experts predicting more of the same in 2022.
4. Oat
- 52-Week Change (2021): 90.4%
- Price (Dec. 31): $686.75 per bushel
5. Coffee
- 52-Week Change (2021): 78.4%
- Price (Dec. 30): $228.85 per pound
6. Gasoline
- 52-Week Change (2021): 61.7%
- Price (Dec. 31): $2.27 per gallon
7. Naphtha
- 52-Week Change (2021): 61.5%
- Price (Dec. 31): $3 per ton
8. Propane
- 52-Week Change (2021): 60.6%
- Price (Dec. 31): $1.04 per gallon
9. Heating Oil
- 52-Week Change (2021): 60.4%
- Price (Dec. 31): $2.74 per gallon
10. Crude Oil
- 52-Week Change (2021): 57.8%
- Price (Dec. 31): $76.54 per barrel
Related: OPEC+ Sticks To Plan To Add 400,000 Bpd Oil Production In February