Friday, March 05, 2021
Wednesday, 13 January 2021 17:40

Seven Capital - Quarterly Reports - 4Q_2020

Commodities are poised for a structural bull market in 2021 and possibly the years ahead

Iron ore, copper, soybeans and industrial commodity prices have already jumped from their low point in the spring of 2020 are surging to new multi-year highs, surpassing their 2016 peak prices. As of today, they have risen to their highest levels in more than six years, spurred by a Chinese buying spree.
But now Chinese importers are being joined by global macro investors, drawn to commodities as a bet on the recovery of the global economy as well as a hedge against the prospect of high inflation.

Ultimately, emerging market demand growth and policies to meet social needs are likely to continue for several years after the pandemic ends, adding to commodity demand at a time when production is limited by years of under-investment in new sources of supply.

According to Bloomberg, many investors very much believe that the fundamentals are now in place for a new, structural, bull market to begin in the commodities sector. Goldman Sachs is now on board, and now sees a new secular commodities bull market that exceeds the 2000-2008 commodities bull market.

Bumpy quarter ahead but we see light at the end of the tunnel

It is expected to be a rough winter no matter what, with a substantial slowdown in economic activity as we wait for the masses to get the vaccine. Setbacks in the vaccine roll-out or wider lockdowns could create big market disappointments in the months ahead but we don't think that any substantial slowdown over the next few months will really become a self-reinforcing recession.

Rates for bulkers are expected to rise in 2021 as the global economy recovers from the Covid-19 pandemic and Chinese economy suggests robust demand. The trend in depreciating asset values coupled with stronger charter rates compared to same period in 2020, creates an attractive investment opportunity where forecast returns reach levels never seen or expected in the last 5 years.

Bleak Oil Price Outlook

The global oil market faces a long and difficult ascent back to its pre-pandemic level which will contain plenty of choppy waters ahead. Globally, we expect oil demand to climb to 96-97m barrels per day in 2021, more than 5m barrels per day higher than 2020, but still 2m barrels lower than during the pre Covid-19 levels.

OPEC members discussed in early January whether to increase production as planned or maintain the cuts that have helped create a rally in oil prices. While some saw the market as still too fragile to accept more barrels, others were keen to ramp up production and make the most of rising prices. Finally, Saudi self-sacrifice to cut its output by 1m bpd in February and March, will rather hurt the already battered tanker market as fewer tanker shipments are likely to be made in the next months.

A barrel of West Texas Intermediate for January delivery finished 2020 at $47 per barrel and brent crude rallied trading at nearly $50 per barrel. Positive news about the recovery in China helped outweigh the IEA's worsening outlook. Optimism that vaccines will soon restore global economic growth supported crude prices in recent weeks but the impact of the contagion on Big Oil is likely to be long-lasting. With European giants Royal Dutch Shell Plc and BP accelerating the pivot to renewables and Exxon locking in drastic spending cuts, capital flows into big, traditional developments are expected to shrink in coming years.

Crude Tankers Outlook

Tankers face a challenging winter with uncertainty dominating the sector as pandemic lockdowns kick in. tanker owners do not expect demand for seaborne oil and refined products to return to pre-pandemic levels over the next 12 months. Spot rates for very large crude carriers that predominantly export crude to destinations in Asia, Europe and the US from the Middle East have flat-lined since August

Coupled with a high orderbook at 10.3% as percentage of the existing fleet, we are not optimistic for the first half of 2021 and we expect that an anemic demand will not be able to drive the freight to recover. This will in turn keep charter rates and market values under pressure for the months to come. We see some light at the end of the tunnel towards the end of 2021 assuming that there will not be another flurry of freshly placed orders for newbuildings in the meantime.

Product Tankers Outlook

The anticipated seasonal boost to tanker markets over the fourth quarter has failed to materialize, as refineries keep throughput at lower levels and inventories drawn.
However, we remain optimistic on the product tanker sector as the global refinery capacity changes and the closure of inefficient older refineries will boost tone-miles demand. On top of it, the extremely low orderbook standing at 5.6% as a percentage of the existing fleet is an encouraging sign for a rate revival when demand returns to pre-coronavirus levels.






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