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Latin America and the commodities supercycle

Commodity prices have been on an upward trajectory in the last few months and Latin America should be a key beneficiary and he is positioning for a long-term trend, writes Ed Kuczma, manager of the BlackRock Latin America Trust.

Technology may have been the most conspicuous winner of 2020, but commodity prices have also quietly been rising for much of the past 12 months. Copper, for example, has almost doubled since its March lows, with aluminium, nickel and lithium also seeing significant rises.

This may be the ‘secret sauce’ in Latin America’s recovery.

There are both cyclical and structural reasons behind the recent rise in commodities prices. Rising prices are a natural response to recovery and higher inflation expectation. Commodity prices tend to do well at times of higher economic activity as consumption increases, energy needs rise and building increases, but there are also structural reasons, as the transition to a carbon-neutral world creates long-term demand for specific metals.

Economic recovery

There are many factors supporting a global recovery. In the US, the vaccine rollout is well underway and a $1.9trn stimulus has passed Congress. The most recent US Composite Purchasing Managers Index data – a forward-looking indicator of economic growth – showed a reading of 63.7. To put this into perspective, a reading over 50 is considered to show economic expansion.

The world’s other major economy, China, is also seeing rapid expansion over the last 12 months, being the only major economy to show growth in 2020 and the International Monetary Fund forecasts 8.3% growth in 2021. With both the world’s largest economies showing encouraging growth at the same time, this optimism is increasingly reflected in commodity markets.

Green infrastructure

However, this is not the whole story, at least for certain commodities. The stimulus packages in the US, Europe and China all have a significant ‘green’ element to them. China has committed to zero net carbon by 2060, while the US has rejoined the Paris Climate Agreement, which commits it to zero carbon by 2050, in line with Europe.To achieve these targets, these countries need to build significant green infrastructure.

This infrastructure development is metals-intensive. The World Bank says over three billion tonnes of metal will be required by 2050 to deploy sufficient wind, solar and geothermal power, plus energy storage, to meet carbon targets.The Bank forecasts significant rises in demand for copper, aluminium, nickel and lithium as part of the energy transition.

The Latin America connection

Many of these metals are to be found in Latin America. Chile is the world’s largest copper producer, with Peru the second largest. Between them, they have around two-fifths of the world’s production. Chile also has over 20% of the world’s lithium supplies and Brazil’s aluminium demand is expected to increase.

Importantly, Latin America is also the lowest cost producer for many of these metals. It has affordable labour, an established distribution infrastructure, and some of the purest products. Its geographic proximity to the US also makes it a natural choice, particularly as the relationship with China evolves.

Latin American countries have much more to their economies than just commodities. They are witnessing many of the same trends that have been seen across the world, from digitisation to ecommerce adoption. However, commodities still play an important role for many economies across the region and we believe the current resurgence should help support economic recovery.

Importantly, this reflation does not appear to be just a cyclical phenomenon. It is not simply because the global economy is recovering from a particularly volatile year, there are structural, reasons that should ensure the longevity of this trend.

This article was written by Ed Kuczma, manager of the BlackRock Latin America Trust.

Ed Kuczma

Part of the Bonhill Group.