By Niels Kaastrup-Larsen, TopTradersUnplugged: Some economists simply label today’s rollercoaster commodities markets as merely volatile. Granted, after several years of pandemic-driven upheaval, markets like oil and copper seem to have settled down a bit. But we’re a long way from stability.
“I believe we are in a supercycle,” says Tor Svelland, explaining that under-investments in the oil market in the mid-2010s became an unintentional backdrop for the volatility of 2020 and 2021. He compares those tumultuous years to the dot-com bubble bust of the late 1990s.
“It was completely out of control,” he says of the pandemic era. “During that period, the shipping, metals and oil markets were even more out of favor. And that’s the reason why we are now in a supercycle.”
With over 30 years of experience investing in commodities, Tor has seen plenty of market cycles. The founder and CEO/CIO of Svelland Capital says that for the last decade-plus, the copper market has been “trading sideways — we haven’t seen a spike in copper since the early 2010s.”
“What is going to happen in a month’s time or three or six months? I’m not sure,” he adds. “But I’m fairly confident that the supply side will slowly be telling us the situation, and then we’ll have the spike.”
Tor joined host Alan Dunne on a Global Macro edition of Top Traders Unplugged to explore the dynamic forces shaping the global commodity markets. Read on for highlights of their conversation, including Tor’s take on precious metals, oil and renewable energy.
From ‘Anything Goes’ to a New Attitude
Alan notes that in the ’70s and ’80s, the mood in commodity markets was very much “anything goes” — shady deal-making and all. He wonders: Has that atmosphere dramatically changed over the course of Tor’s decades-long career?
Well, yes and no.
When Tor began working in finance back in the ’90s, the commodities space was “very much a people- to-people business,” he says. “And the price setting [took place]thereafter.”
Today, banks like Goldman Sachs and J.P. Morgan aren’t nearly as involved in commodities as they once were, so “the structure of the markets has changed quite a lot,” he adds.
The banks “did a very important job — they were the market makers, they were always there to show liquidity, introducing new players to the market,” he explains. But after the 2010 passage of the Dodd- Frank Wall Street Reform and Consumer Protection Act, the top banks “decided to reduce their exposure,” Tor explains, noting a significant portion of elite financial talent left those banks for trading houses — think firms like Cargill, Vitol and Glencore. Trading houses have a “different attitude” on the market that’s “more about moving cargo from [point]A to B, and actually doing the transaction,” he adds. “Then on top [of that], you have this trade component. It works very differently.”
Tor points out that today, futures trading is particularly susceptible to the whims of the market, “moving on headline news.” In the longer term, “the fiscal market will always be right,” he says. “And all of us will be the final price setters. But before you get to the fiscal delivery, we sometimes have moves that we didn’t have in the past.”
Power Plays
Economists point to a number of structural factors that should support certain commodities markets, metals in particular, over time: defense spending, deglobalization, nearshoring and most of all, the transition between fossil fuels and renewable energy. Alan asks Tor what has been the most significant geopolitical force on commodity markets in recent years.
“I’m a big fan of the renewable market,” Tor replies. “You just have to also be realistic … [about]how much you can expect [in regard to]return on capital.”
Of hydropower, he thinks that although the market is “struggling,” we’ll soon see promising companies in the space. But the “people owning hydropower are just using the market to their advantage, holding back,” he argues. “[They] will try to sell into spikes in the market, like everyone else.”
The solar energy market “has been a fantastic investment case for many,” Tor says. “The price keeps dropping and [technology is]getting better and better usage on electricity.” Wind power is a mixed bag. Offshore facilities are “obviously not working the way people expected,” he points out. “The overrun on cost [as well as]operational problems [have]been more than expected.” But onshore wind power so far has been a great success, particularly in southern Europe. Tor thinks it will be “very exciting to follow” how wind technology develops in Northern Europe and Scandinavia.
“But it all comes down to when they’re producing electricity, when the power grids really need that electricity and when we will have what I call the ‘energy storage batteries’ — the large ones,” he says.
Transitional Tactics
Alan asks: “When identifying investment opportunities, are you looking for the equity stocks that will benefit from the energy transition? Or do you see it more [as]impacting the commodity futures — or how do you tend to take those broad trends and translate that into trades?”
Commodities investment decisions always begin with an examination of the supply/demand dynamics, “whether it’s on natural gas, oil, etc. — then it’s all about how much can they produce, who’s buying it, who’s selling it,” Tor replies. “And then the political landscape, as you can clearly see in Europe, was completely against using natural gas at all. Then after a lot of back and forth, they accepted natural gas to be a transition fuel.” He thinks that is “all wrong” — and we should accept that natural gas pollutes the atmosphere at a rate 50% less than coal.
When it comes to renewable energy companies, Svelland prefers those with a proven track record that are successful and mature enough to pay dividends; they tend to be low volatility stocks that offer a high return. Tor endorses these investments “as long as the management is not being overly keen to expand … and [knows]when to expand and in which countries,” because it’s “always been challenging” in more than a few places for renewable projects to thrive.
A Copper Sunrise
While the future of petroleum is arguably finite, some commodities markets will clearly benefit from the global energy transition.
For Svelland Capital, the most promising one is copper. It’s necessary for the power grid, batteries and much more. The lithium market has been more balanced, although “part of the market has also been oversupplied,” Tor says. “We are more in favor of using copper futures than other companies.”
Down the road, he thinks maybe aluminium will become more sought after for use in electrical applications. “We’re following that closely — and obviously, following the aluminium companies and what they are communicating,” he notes.
From a macro perspective, Alan wonders whether the energy transition will continue to push up demand for commodities and push up commodity prices.
Tor thinks we have been “spoiled with low energy prices” over the last few years. “People take that for granted,” he says. “We will [begin to]slowly face … some spikes. When we see the spikes, then the politicians will start [asking], Why is this happening? … and start doing whatever they can to ‘help out.’” Whether they’re American or European, politicians are “constantly behind the curve,” Tor adds. And that is especially pernicious when we consider that opening a new copper mine takes anywhere from 10 to 20 years.
Long-horizon investments, such as funding new mines, are what’s needed to keep up with the demand for metals like copper. But companies on the NASDAQ (for instance) are “all focusing on the tech side and the capital flow,” he says.
Tor points out that as more capital is invested in technology companies, less investment capital is available for other markets, including commodities. That means less trading volume, lower investments and potentially lower prices. And as we know, the flow of capital between technology and commodities is not a one-way or permanent shift. Instead, it tends to fluctuate over time based on various factors including market trends, economic conditions and investor sentiment.
“But for now, we have had this unbelievable rally in the tech companies. When that takes a breather, we will immediately see capital flow back into the commodity space.” Once the investment frenzy in technology companies dies down (or at least stabilizes), will commodities make a comeback? All signs point to yes. If that’s the case, the time to step up commodities investments — including copper — is now. But if you’re a Top Traders Unplugged fan, you already know that.
This article is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world.
