In recent weeks, the market has undergone a route recalibration. The commodity boom, which started at the end of last year and which propelled companies in the sector to historic results, began to weaken. Since mid-July, the price of iron ore futures contracts traded in Singapore has fallen 29.7%, from US$ 219.67 to US$ 154.31.
Oil followed in the same line, down 11.84%, to US$ 65.04, while agricultural commodities (grains, vegetable oil, sugar and cotton) soured an even more negative outlook. “We are more bearish on agricultural prices and expect a decline of approximately 30% through 2024 from the current price. Bloomberg’s consensus shows a 15% drop, in line with our previous forecast”, says the report by Bradesco BBI e Ágora Investimentos.
According to José Mauro Delella, economic consultant at Alta Vista Investimentos, the strong upward cycle observed between 2020 and the 1st half of this year is not generalized and was motivated by a set of factors that ‘lost strength’ in recent years. days. “What boosted the commodities was Chinese investment in infrastructure, in response to the effects of the coronavirus, which strongly increased demand for basic raw materials, notably metals,” says Delella.
China was also one of the main responsible for the leap in agricultural products, with a very strong import rhythm, while climate problems limited the supply of products. Apart from this issue, in many other countries, especially in the developed ones, quite expansionist fiscal and monetary policies were adopted (reduction in interest rates to stimulate the economy) to circumvent the slowdown caused by the advance of covid-19, which pushed prices up .
“In recent days we have seen questions about these combinations, first with weaker economic activity numbers in China, which signals a lower momentum for Chinese expansion in this part of infrastructure,” says Delella. Another strong point that dampened expectations in relation to commodities was the increased risk that this expansionary monetary policy in the world would have to end sooner than expected, with the escalation of inflation.
The Chinese government has also started to adopt more restrictive measures in the operation of some steel mills, under the justification of reducing pollution and controlling the prices of these inputs. In parallel, fear arose about possible new closures caused by the Delta variant of the coronavirus.
These factors resulted in the slowdown observed in the commodities segment on the Stock Exchange. The shares of Vale (VALE3), for example, registered the biggest drop of the year in a trading session, of 5.89%, on the 30th of July. In that session, iron ore retreated about 8%. However, the scenario remains positive for the sector.
Metals and oil in the long term
Despite recent declines, the outlook for commodities, especially metals and those linked to oil, remains positive. The difference is that gains are now expected in the medium and long term, without the great slingshots observed in the segment’s papers in the last 12 months.
“It is important to emphasize that although prices have retreated, metallic commodities and oil are still traded at very favorable levels for companies,” says Ricardo França, an analyst at Ágora. “Looking at the fundamentals, at the companies’ ability to generate results, we still see a very strong 2021.”
According to França, investors who failed to surf the big upside of commodity-related companies between the end of last year and the beginning of this year can still take the opportunity to buy the shares. “But as long as the return is aimed at more in the medium and long term. As we are entering a new price moment, perhaps in the short term the investor will have more volatility in the shares.”
Currently, Ágora has purchase recommendations for Vale (VALE3), Usiminas (USIM5) and Gerdau (GGBR4), which should benefit from the trillion-dollar package of stimulus to the US infrastructure. The plan was approved by the US Senate last week and should give the steel industry and steel companies a big boost. In the oil sector, France highlights PetroRio (PRIO3) as a good choice, as the vision is for an increase in demand with the return of the circulation of people.
Carla Argenta, chief economist at CM Capital, doesn’t see the commodity cycle coming to an end, despite the slowdown. “Countries carried out expansionist fiscal policies based on changes in the energy matrix, something we did not see when we went through the 2008 crisis. This movement should continue to generate a large demand for commodities linked to infrastructure and energy matrices.”
Declining Agricultural Commodities
The most positive view is not for all types of commodities. Agricultural companies, for example, are experiencing a different dynamic, with more negative perspectives. According to France, in the short term, these inputs should still be priced higher due to unfavorable weather conditions. The next few years will see a gradual retreat.
“China is the world’s largest importer of grains and today they have a problem in pork production. Margins are negative due to the purchase of grains at higher prices”, he says. “China must reduce this grain import and because it is a big player, when this happens, and there is a reduction in demand, it ends up affecting prices.”
The drop in the prices of agricultural goods, on the other hand, should favor companies on the stock exchange that need to buy this type of input. According to market specialists, this is the case of M. Dias Branco (MDIA3), owner of famous brands related to pasta, which has a large part of the cost related to the price of wheat. Ambev (ABEV3) can also be favored by the reduction of costs related to the manufacture of alcoholic beverages.