Latin America and the commodities supercycle

Commodity prices have been rising fast. Ed Kuczma, Co-manager of the BlackRock Latin American Investment Trust plc, says Latin America should be a key beneficiary and he is positioning for a long-term trend.

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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 lows1, with aluminium2, nickel2 and lithium3 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 is much to support global economic recovery from here. In the US, the vaccine rollout is underway and a new USD $1.9 trillion stimulus newly passed Congress4. The Federal Reserve Chairman Jay Powell has made it clear that interest rates are likely to stay low until employment data improves. The most recent US Composite PMI data – a forward-looking indicator of economic growth – showed a reading of 58.85, a 71-month high. Anything over 50 is considered to show economic expansion.

The world’s other major economy, China, is also seeing rapid expansion. It was the only major economy to show growth in 2020 and the IMF forecasts 8.1% growth in 20216. With both the world’s largest economies showing encouraging growth at the same time, it is increasingly reflected in commodity markets.

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

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 20607, while the US has rejoined the Paris Climate Agreement, which commits it to zero carbon by 2050, in line with Europe8. 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 targets9. 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 largest10. Between them, they have around two-fifths of the world’s production. Chile also has over 20% of the world’s lithium supplies11. Brazil is a producer of aluminium and iron ore.

Importantly, Latin America is also the lowest cost producer for many of these metals. It has abundant cheap labour, an established distribution infrastructure and some of the purest products. Its geographic proximity to the US also makes it a natural trade partner choice, especially given US/China tensions.

Latin American countries have much more to their economies than just commodities. They are seeing 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 does not appear to be just a cyclical phenomenon. It is not simply because the global economy is recovering from a tough patch. There are structural reasons that should ensure the longevity of this trend. In the BlackRock Latin American Investment Trust plc, we positioned the portfolio to ensure that our shareholders benefit from this multi-year shift.

This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are from BlackRock as of March 2021 and may change as subsequent conditions vary.