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Global Conditions Align to Support Commodities in 2018


GILLIAN KEMMERER: Welcome to the broadcast, I’m Gillian Kemmerer. Commodities have experienced no shortage of headlines in 2017 and may face favorable macro conditions moving into next year. Today I am joined by VanEck Commodity Strategist and Portfolio Manager, Roland Morris, who will share his outlook for the asset class and how he believes commodities would react to increasing inflation. Thanks so much for joining us here today.


ROLAND MORRIS: Happy to be here.


KEMMERER: I alluded to the macro backdrop in the beginning, but I want to get your take. What do you like in 2018 and do you think it’ll be a good year for the asset class overall?


MORRIS: We think of this commodity cycle as having started in the first quarter of 2016. So, in early ‘18 we’ll be in the second year of what we think is going to be a cyclical bull market that should last a fair number of years – maybe five to seven years. When thinking about the outlook for next year, we’re positive. We think that we’ve seen the beginning of markets rebalancing. 2017 was the first year where we saw an upturn in global growth. And, partially, that was due to the weakness of the U.S. dollar that we experienced this year, which actually was somewhat unexpected: the U.S. dollar declined 8% in 2017. When you look out to 2018 that should provide stimulus for the globe: think of it as a rate cut for the world and with a lag that should continue to improve the growth outlook globally, from our perspective. That should help the demand side. Cyclically, we think the supply side has really worked itself through. The oversupplied markets that we experienced for a number of years actually are in the process of rebalancing pretty aggressively. When we look out to next year, we’re looking at markets that we think will be well supported by global growth. Additionally, we think supply will continue to start to become constrained. That’s what we’re pretty excited about. We think that this could be the beginning of, maybe, the most exciting part of the cyclical rally for commodities. I think that could be something that we experience over the next two years. I’m actually very constructive and I think 2018, hopefully, will be a resumption of this up move that we’ve experienced.


KEMMERER: So you would say that we’re in the first innings of the bull market, but that we still have some room to run after this?


MORRIS: Absolutely. I think we’re early in the game and I personally think that the most exciting part of what we hope is the cyclical bull market is actually in the next couple of years. So I’m constructive. We at VanEck are excited about many of the products we have in this space and we think it’s going to be an important time for investors more broadly to think of allocations towards commodities and natural resources.


KEMMERER: Excellent. If there’s one elephant in the room that everyone is talking about, it’s inflation. Where is it? Will the U.S. Federal Reserve (Fed) stoke the coals? When you look across commodities, how are you thinking about a potential uptick in inflation? How will they react?


MORRIS: That would be just an additional positive, a catalyst for the whole space. When you think about inflationary periods, really the best things to own are hard assets, gold, and commodities. These are things that will benefit from an inflationary environment. It’s unclear that we’re going to experience inflation. We certainly haven’t had any inflationary pressures over the last five, six, seven years, well, really a decade. But if you think about it, the U.S. economy really is approaching capacity. We’re about to introduce some stimulus in the form of tax reform and tax cuts, particularly business tax cuts. Quite frankly, with unemployment down close to 4%, it’s very conceivable that we see some unexpected inflationary pressures build over the next couple of years. We also think, as I mentioned earlier, that commodities will be one of those things providing some inflationary pressures, because the supply side has rebalanced and global demand seems to be fairly steady. That should be a positive backdrop for appreciating commodity prices.


KEMMERER: For many asset classes, inflation is “Be careful what you wish for,” but in commodities it’s quite the opposite?


MORRIS: Absolutely, that’s where we shine.


KEMMERER: Are there any particular sectors within commodities that you’re really excited about going into next year?


MORRIS: We have always felt that the two major sectors, the most important sectors and the sectors that are most leveraged to global growth, are the industrial metals space and the energy space. Energy in 2017, from a commodity perspective, was about as expected. It was a grind higher in the commodity. And we think that’s the type of thing you’ll see to continue to develop in the oil market. But equities were pretty disappointing in 2017. I think there’s been somewhat of a “disconnect.” I suspect people are discounting the need for oil more than they should be. I think that this next year could be exciting for the energy space. We think the oil markets will remain relatively range bound, but at higher prices. That should be a really good environment for the U.S. shale oil industry. We think that those companies control the cheapest marginal barrel [of crude oil] in the world. And as the oil market continues to tighten, as we expect, over the next several years, U.S. supply will be critical for the world. So we’re very excited, in particular about energy and the U.S. shale oil producers.


KEMMERER: Excellent. So, it’s the energy complex and industrials to keep an eye on?


MORRIS: Yes, industrial metals are exciting. One of the nice things about the metals space is they also are rebalancing. There is expected to be quite a bit of growth in demand for particular metals associated with electrical vehicles, copper being probably one of the more exciting ones from my perspective. The interesting thing about the industrial metals space is that once those markets become tight and in short supply, the ability to bring on new supply is very limited. It really takes almost 10 years to develop a new copper asset. So once prices are stimulating investment, there’s quite a bit of lag time before you can bring on serious amounts of supply. That’s one market in particular that I think could be exciting over the next several years.


KEMMERER: Roland, thank you so much for taking the time to share your outlook for commodities with us here today.


MORRIS: You’re welcome.


KEMMERER: And thank you for tuning in. For more on commodities and other insights from top VanEck strategists, visit vaneck.com/subscribe.


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