The ‘Commodities 2021’ outlook has become a key talking point for investors after some strong 2020 rallies.

Broadly speaking, Glyn Lawcock and the UBS commodity team are staying overweight on the sector as the global economy rebounds out of the pandemic next year.

And by sub-category, they highlighted four commodities as their “top picks” to outperform consensus forecasts:

  • 1. Copper
  • 2. Lithium
  • 3. Rare Earths
  • 4. Metallurgical coal

UBS also expects gold to climb back above $US2,000 an ounce, with real interest rates (adjusted for inflation) expected to stay in negative territory while the US dollar remains under downward pressure amid the global economic recovery.

Commodities 2021

For copper, UBS said its medium-term view was in line with the consensus forecast – a widening supply deficit as a result of the “decarbonisation/electrification mega-trends”.

The difference is that UBS thinks investors should be ready for the supply deficit to start manifesting sooner.

As a result, their 2021 price forecast is for copper to reach $3.50 per pound (consensus view: $US3).

Similarly, for lithium “we expect a deficit for the battery-grade compounds required by lithium to come sooner than the market anticipates”, the analysts said.

Notably, UBS recently upgraded its forecasts for lithium and graphite following the bank’s deep dive into the ‘EV mega-trend’.

The bank has a 2021 price forecast of $US8,000/t for lithium carbonate, and $US10,000 for lithium hydroxide.

(For an explainer on the difference between carbonate and hydroxide, click here).

In terms of its metallurgical coal outlook, the analysts highlighted that prices took a beating in the post-Covid slump, falling to levels that put a number of producers under water.

However, its prospects are also tied to the prospects of increased demand in line with the global recovery into 2021.

The UBS team described the pandemic as a “major business cycle reset”, which should allow for outsized growth in the year ahead.

Importantly, they said commodity demand should be underpinned by the strength of China’s economy, which UBS expects to grow by a robust 8.2 per cent this year.

That growth will in turn support a continued uplift in steel output, which “translates into an approximately six per cent lift in metallurgical coal demand”, UBS said.

However, Australian coal is one of a number of exports are that are now on China’s blacklist, as diplomatic relations between the two countries reach a low ebb.

Will the trade spat continue? UBS isn’t alone with its prognosis: “It’s hard to say.”

Overnight, trade tensions continued to worsen as China formally banned in the import of Australian coal.

But on balance, UBS expects coal shipments to resume – largely because China won’t have much choice from a demand perspective.

“The domestic China supply-demand balance is extremely tight with limited domestic production, and so our base case assumes a resumption of trade at some stage in 2021 (although we cede this is far from guaranteed),” the analysts said.

UBS also framed its base-case view with an upside and downside scenario.

In the upside case, copper would push towards $US4/oz and gold would climb to $US2,275 as the global economy executes on a synchronised recovery and a Biden presidency can overcome US-China political tensions.

The downside case is based around the prospect that vaccine rollouts face complications, and different economies experience uneven recoveries as a result of the pandemic.